Last week saw a number of fourth quarter and half year results from the materials space and analysts were not only met with below expectation reports, but also the need to rebase estimates in the face of still falling prices for most commodities. Thus, the list of downgrades reads like a who’s who of the materials sector. Upgrades were dominated by Commonwealth Bank’s proposals for its retail trusts.
In the good books
CFS Retail Property Trust (CFX) was upgraded to Neutral from Underweight by JP Morgan. Commonwealth Bank (CBA) has a proposal, incomplete, to internalise the management of both CFS Retail and Commonwealth Property (CPA). There's no word on the obvious question of price, but JP Morgan estimates the entire platform generates $70 million in annual earnings and could sell for $650 million. JP Morgan said this is step one. Step two would be for CBA to sell out of the real estate investment trusts. For the broker, this is game-changing news. M&A activity is not seen likely for CFX, given four interested parties control 34%.Commonwealth Property Office Fund (CPA) was upgraded to Neutral from Underperform by Macquarie and to Overweight from Underweight by JP Morgan. Macquarie noted Dexus Property (DXS) has acquired a 14.9% interest in CPA by way of a forward contract. This revealed corporate appetite for CPA sooner than expected, after the announcement of a planned internalisation of management. The broker said that, whilst it could be difficult for competing bidders to enter the playing field and generate pricing tension, Dexus won't necessarily be limited to paying the value of net tangible assets for CPA if it has the backing of a wholesale capital provider.
Stockland (SGP) was upgraded to Buy from Neutral by UBS. The broker is expecting 8% EPS growth in FY14, which should flow through to an improving DPS payout ratio. The broker also noted low interest rates are starting to feed housing activity, and a resilient retail portfolio. Non-discretionary retail and residential are now preferred by the broker going into reporting season, with SGP seen as a key pick in the AREIT sector.