Stock Review

Westfield feels the pinch

28/01/2009

  • Company: Westfield Group (WDC)
  • Recommendation: Long Term Buy
  • Price at Review: $11.59
  • Current Price: $12.17
  • Fundamental risk: 2
  • Share price risk: 2.5
  • Category: PROPERTY TRUST

Yesterday’s profit downgrade wasn’t a shock, but it does prove even the best businesses aren’t immune from this downturn.

We love it when great businesses generate bad news. That might seem a bit negative at first glance, but we’re actually hoping for stock price overreactions rather than the bad news itself.

Westfield Group is certainly a great business. And yesterday it delivered some bad news. Higher funding costs, caused by the credit market woes, and tough retail conditions in the United States, United Kingdom and New Zealand are hurting earnings.

So while Westfield will pay the expected distributions of $1.065 for calendar year 2008, with the final payment of 53.25 cents going ex-distribution in early February, its forecast for 2009 distributions has been cut to between 97 and 100 cents per security. And that’s predicated on ‘a continuation of the strong performance of the Group’s Australian portfolio’, so there’s some scope for further disappointment.

And it should be noted that half of Westfield’s distribution reinvestment plan (DRP) is underwritten until August 2010. While we’ve been vocal critics of underwritten DRPs, it cuts both ways because we quite like the idea of Westfield accessing extra capital at a time when new opportunities are becoming plentiful.

Property valuations take a beating

An upward movement in capitalisation rates, leading to reduced property valuations, means the upcoming results will include a $3bn hit to accounting profits. We explained the concept of capitalisation rates in a Bristlemouth article of 8 Aug 08, titled Property Trust Losses Should Top $30bn. But as we ignored the ‘profits’ when capitalisation rates were being pushed down, we’re comfortable ignoring this ‘loss’ as rates return back towards sanity.

The stockmarket’s reaction to yesterday’s announcement has been rather uneventful – the stock is down just 4% today. But it is down 33% since 29 Aug 08 (Long Term Buy – $17.29), as much of the bad news had already been factored in.

Given the lower stock price, and our desire to back this high-quality management team during an industry slump, we’re getting close to upgrading our recommendation. But the turnaround is not likely to be quick, and there could be more bad news on the way.

We think this situation warrants a detailed review. That’ll be top of Nathan Bell’s ‘to do’ list when he returns from his honeymoon on Monday. So keep an eye out for something meatier in the weeks ahead. For now, we’re sticking with LONG TERM BUY.

Disclosure: Staff members own shares in Westfield Group, but they don’t include the author, Gareth Brown.


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