- Mirvac interim result better than expected - Forecasts lifted in line with guidance update - Recommendation upgrades on relative value

By Chris Shaw

Property development group Mirvac ((MGR)) delivered an interim operating profit of $200.1 million, a result boosted by higher net operating income and lower interest charges and showing better than expected numbers from the investment management and hotel management divisions.

The result was well above market expectations, as Macquarie had been forecasting an operating profit of $169 million and JP Morgan $162.7 million. While earnings will be skewed to the first half, management at the company now expects a result at the top end of previous guidance, which implies an earnings per share (EPS) outcome of 10.4-10.6c for the full year.

Forecasts have been adjusted to reflect this, Macquarie making minor increases to its estimates and BA Merrill Lynch and UBS following suit. Consensus EPS estimates according to the FNArena database now stand at 10.3c for both FY11 and FY12.

More important than the earnings in the period, BA-ML viewed Mirvac's result as a turning point given the period delivered strong investment performance, improved visibility with respect to a residential recovery and an increased focus from management on achieving higher returns on assets and for shareholders.

In BA-ML's view, this means Mirvac can be expected to execute more capital management strategies that are accretive to earnings, with a recycling of capital likely to be part of any strategy. Management also plans to close the current share price discount to Net Tangible Assets (NTA) and JP Morgan suggests one required step to achieve this is to sell trust assets at book value and buying back stock with the proceeds.

As well, JP Morgan suggests there would be benefits for Mirvac from introducing third party capital in new developments, as this would help realise inventory value and so bring forward a recovery in earnings.

A benefit should also come from improved cyclical conditions, as Macquarie notes Mirvac's property portfolio is heavily weighted to the office sector where a recovery is anticipated. As the residential market improves over the medium-term, this should also drive earnings growth in the broker's view.

While viewing the interim result as a good one, UBS suggests a key issue remaining for Mirvac is to regain market confidence. This can be achieved by delivering on a number of high profile projects such as Green Square and Harold Park without suffering significant margin erosion.

UBS notes these projects won't begin to settle until 2014, so it will be some time before the market has the margin evidence the broker suggests is needed.

Assuming earnings normalise as expected in coming years, JP Morgan sees significant upside given Mirvac currently trades at a 19% discount to the stockbroker's $1.60 estimate for net tangible asset backing. Improving development returns should close this gap in coming years, an expectation that supports the broker's Overweight rating.

JP Morgan has been joined at a Buy rating by both Macquarie and BA-ML, who have upgraded from Neutral ratings post the interim result. Relative value is behind both upgrades, as both brokers see Mirvac as offering a better total shareholder return than peers at current levels.

For UBS it is the fact it will take some time for earnings growth to really pick up that sees no change to its Neutral rating, while Citi also rates Mirvac as a Hold. One reason is while there is potential for some capital management moves, Citi sees a buyback as unlikely given a currently unfavourable valuation/return balance.

Overall, the FNArena database shows Mirvac is rated as Buy five times and Hold twice, with a consensus price target of $1.43. This is up from $1.42 prior to the interim result and reflects the increases to market earnings estimates.

Shares in Mirvac today are little changed and as at 12.00pm the stock was up 0.5c at $1.295. The market overall is slightly negative. Over the past year the stock has traded in a range of $1.18 to $1.60 and at current levels it implies upside of about 10% to the consensus price target in FNArena's database.

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