- Mirvac update reiterates full year guidance - Residential sales targets a challenge, nonresidential improving - Uptick in earnings not anticipated until FY14

By Chris Shaw

Property development group Mirvac ((MGR)) updated the market yesterday and maintained previous guidance for FY11 of a profit in the range of $356-$365 million. The other positive was with the exception of Tennyson, no additional provisions are likely to be required against the current carrying value of assets.

Tennyson was impacted by the recent floods in Brisbane and here Deutsche Bank expects a write-down from the current carrying value of $81 million. Any write-down may not be too significant, as Credit Suisse notes the book value of the project equates to only around 2.4c per share in net tangible asset terms.

According to Credit Suisse, while the market update from Mirvac saw earnings guidance reiterated, it also showed a slowing in residential lot sales. Full year guidance assumes residential lot sales of around 1,700, which is solidly above the broker's forecast of sales of 1,508.

Guidance therefore implies a strong kick higher in settlements across May and June, so even with a number of these lots being pre-sold, Credit Suisse suggests achieving expected volumes will be a tough task.

Deutsche Bank agrees, seeing some near-term downside risk to residential earnings given slower sales rates in both the Queensland and Western Australian markets. Mirvac hopes to counter this with an increase in non-residential contributions, Deutsche noting the target is for non-residential projects to eventually contribute 20% of development earnings.

On the passive side of Mirvac's portfolio, Credit Suisse notes occupancy remains steady across both retail and office assets. JP Morgan viewed the office portfolio performance as particularly strong, especially with lease-up well underway at 20 Bond Street in Sydney. Total lease-up of the building may now occur by the end of this year, which would be six months ahead of schedule.

Beyond the next year or so UBS notes Mirvac has four new projects underway in Sydney, including Circular Quay, Chatswood, Harold Park and Green Square. Of these, the greatest scope for upside comes from the first two projects in UBS's view.

These projects support UBS's view Mirvac is set for a substantial boost to earnings from FY14, as by this time residential profits should have normalised, impairments will have rolled off and stronger margin projects will be under way.

Macquarie agrees, expecting improving margins from new projects will drive an almost four-fold increase in development earnings over the next four years.

To offset what is likely to be lower growth through FY13, UBS notes management is looking to a share buyback using asset sale proceeds. This could act as something of a near-term catalyst for the stock in UBS's view.

Post the update from Mirvac there have been relatively minor changes to earnings forecasts across the market, as witnessed by Macquarie trimming its FY11 estimate by 0.4% but lifting FY12 numbers by 1.5%. Consensus earnings per share (EPS) forecasts for Mirvac according to the FNArena database stand at 10.6c this year and 10.7c in FY12.

Ratings for Mirvac are unchanged, the database showing Mirvac is rated as Buy five times and Hold twice, with a consensus price target of $1.41. JP Morgan is one to rate Mirvac as a Buy, taking the view the current discount to an estimated valuation of $1.60 is simply too large.

UBS is less positive and rates Mirvac as Neutral, with a valuation of $1.35. The big issue according to UBS is Mirvac needs to get through to the uptick in earnings from FY14 without facing any major project specific problems in the interim.

Shares in Mirvac today are slightly higher and as at 11.55am the stock was up 2c at $1.245. The compares to a range over the past year of $1.16 to $1.435, the current share price implying upside of around 14% to the consensus price target according to the FNArena database.

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