A stronger Australian dollar has been impacting on earnings for Westfield Group ((WDC)) but a quarterly trading update yesterday suggests this is being countered by lower debt costs.

This is noted by Macquarie, who post the update has lifted earnings estimates by 2-3% through FY13 to reflect interest cost savings from lower US dollar denominated interest rates and a reduction in debt liquidity.

The move by Macquarie has largely been matched by Deutsche Bank, which has also lifted forecasts by 2-4% in coming years to reflect lower US interest rates as well as an upgrade to expected development starts in FY12 and FY13.

Starts of $1.25-$1.50 billion are now forecast for both FY12 and FY13, Macquarie noting this is well up from previous market expectations of annual starts of $750 million to $1.0 billion. This is the fourth time in the past 18 months Westfield has lifted expected development commencements.

Others have gone the other way with respect to earnings forecasts, with Citi trimming estimates by 3-4% to factor in more conservative growth assumptions and recent currency movements. Post the trading update consensus earnings per share (EPS) forecasts for Westfield now stand at 71.3c in FY11 and 66.8c in FY12.

Forecasts range from 57.9c and 63.9c in FY11 and FY12 respectively from Credit Suisse to 74c and 78c for Deutsche Bank for the same periods.

One key for Citi is Westfield has only moderate sensitivity to both occupancy declines and negative leasing spreads. What this means is Westfield is relatively shielded from what remains a soft retail leasing environment in Australia. As evidence, Citi points out the quarterly update shows specialty rents rose by 4.2% during the period.

The higher development starts mentioned previously should translate into a boost to earnings for several years. On Deutsche Bank's numbers, a $500 million increase in starts translates to around a $39 million boost to earnings before interest and tax.

The higher expected starts should be split between Australia and the US, the increases for the latter implying Westfield's strongest US malls are generating solid growth at present. Management fees offer leverage to higher development starts, as Deutsche notes around 60% of developments are expected to be funded by co-owners.

This leverage, along with a sell-down of less productive US assets and the re-investment of these funds into higher return opportunities, should generate an increase in return on equity according to Deutsche Bank.

This is enough for Deutsche to rate Westfield as a Buy, given upside to a price target of $10.50. Most in the market agree, as the FNArena database show Westfield is rated as Buy five times, compared to one Neutral and one Underperform rating.

Two of the Buys, those of Macquarie and Citi, are upgrades from Hold recommendations previously. Valuation is the driver in both cases, especially as Macquarie notes Westfield shares have lost some ground in recent trading.

BA Merrill Lynch is also positive, seeing upside from the Stratford project in the UK as well as improving conditions in the US and Australian markets.

JP Morgan in contrast retains a Neutral rating on Westfield, suggesting the potential for further big-ticket changes in capital structure justifies a more cautious stance. As well, the current environment of a stronger Australian dollar is likely to limit the scope of any outperformance in the broker's view.

The FNArena database shows a consensus price target for Westfield Group of $10.13, down slightly from $10.23 previously. Shares in Westfield Group today are slightly higher, up 2c at 1.40pm to $9.07.

The quarterly update also covered Westfield Retail Trust ((WRT)), resulting in minor changes to earnings estimates across the market. The consensus price target for Westfield Retail according to the FNArena database falls 1c to $2.92, while ratings are unchanged at five Buys, one Hold and one Sell. Westfield Retail shares today are down 2c as at 1.40pm to $2.61.

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