GPT Group provides diversified exposure to a $14.8bn property portfolio, weighted 41% to office, 16% to industrial and 43% to retail, with a majority geographic weighting to NSW and Victoria. GPT is also a high-margin funds management business with $13.3bn of assets under management.
In Ord Minnett’s view, the stock is trading at a deeply discounted valuation that more than compensates for the COVID-19 related downside risks to asset values. It is also buttressed by above-average asset quality and has a balance sheet that is stronger than most Australian large-capitalisation property trusts.
We acknowledge the risks of COVID-19, i.e. disrupted earnings, asset impairments and the risk of a ‘double dip’, but we see Australia as better placed than most jurisdictions – social distancing restrictions are starting to ease and visibility on occupational markets is improving. Our valuation, based on written-back asset values, implies 20% total return in the next 12 months.
GPT has the balance sheet strength to continue to pay its dividend after raising $867m last year at a premium to net tangible asset value, which reduced look-through gearing to 25%, and on our estimates, increased interest cover to 5.9x and reduced the net debt to operating earnings ratio to 5.4x. We forecast a 75% payout ratio of funds from operations for 2020 and beyond, down from 80%, and stabilised earnings of 30–31cps in FY21–22.
An ongoing but manageable risk remains GPT’s $4bn unlisted retail fund, the GPT Wholesale Shopping Centre Fund (GWSCF), of which GPT holds a 29% share. GWSCF is geared at the upper end of its 10–30% target level, has suspended its dividend and will likely sell assets over the next three years, including a part-share of Highpoint which comprises 45% of its asset portfolio.
GPT is our preferred A-REIT and one of our top ideas. We maintain our Accumulate recommendation, while our target price has increased to $4.70 from $4.60.