Ord Minnett maintains its bullish medium-term view on Westfield Corp, despite its underperformance since July 2016, with the company's investments improving the quality of its portfolio and setting the scene for material growth in net tangible assets and funds from operations over the next three years. In addition, Westfield has a healthy medium-term retail and apartment development pipeline.
Since hitting $11.00 in July last year, Westfield lagging the A-REIT sector by around 11 percentage points to 24 March 2017, and the S&P/ASX 200 Index by 29 percentage points over the same period. This was driven by rising US interest rates, US department store closures, sterling depreciation in sterling and uncertainty around the company’s earnings growth.
Ord Minnett estimates an earnings uplift of 15–20% between FY18–20, the bulk of which comes from debt funding the development book. Other positive earnings drivers include the expected 30% uplift at the Stratford rent review, new fees from residential developments and new fees expected at Milan post the assumed sell-down to a new joint-venture partner. This all adds to Westfield's organic growth rate of 3.5-4% per annum.
Westfield is also trading on a low price-to-book ratio at a time when its asset value growth should be strong from circa 50% returns from its developments. We highlight that Westfield's book value also excludes its US$12 billion in third-party assets under management, its US$10 billion development pipeline and the opportunity for 8,500 residential apartments on excess land the company already owns.