Stockland share price outlook: Sydney’s impact on the stock examined

'SGP generally re-rates and de-rates in line with the residential cycle.’

A logical correlation

It makes sense that the share price of Australia’s largest land developer – Stockland Corporation Limited (ticker: SGP) – would be sensitive to price increases or decreases of the property market.

This was the conclusion at least, that analysts from Morgan Stanley made in a recent research note. After analysing the correlation between Sydney dwelling price fluctuations and SGP's earnings multiple over a 20-year span, the investment bank said that they found 'SGP generally re-rates and de-rates in line with the residential cycle.’

This makes sense given Stockland’s earnings profile, which has historically being residentially weighted, with Morgan Stanley analysts pointing out that:

‘Residential development contributes c.35% of SGP's earnings, and SGP is Australia's largest land developer.’

Stockland’s latest quarterly (Q3) results also highlighted the continued strength of Australia’s residential property market, with the company reporting quarterly net sales of 1,891 lots, an increase of 69% from the prior corresponding period.

That performance helped the property group narrow their full-year lot sales guidance, now expected at 6,300 lots.

Overall, management spoke positively of the current market conditions, saying 'low interest rates, government incentives and credit available have created new demand which Stockland has been able to meet with activated projects and our ability to scale production quickly.'

So what’s all this data telling us?

According to CoreLogic, Sydney property values rose 2.97% in May, on a month on month basis, ahead of the five capital city aggregate growth rate, which stood at 2.29%.

On a more granular level, Sydney house values increased 3.47% in May while unit values rose 1.76%.

Analysts from Morgan Stanley said that this latest growth rate suggests 'continued support for SGP's multiple.'

After witnessing sharp multiple contraction in March 2020, SGP's earnings multiple has sharply rebounded since, with SGP trading on a forward earnings multiple of ~13.9x according to Morgan Stanley estimates.

The residential frenzy we are currently seeing is also something reflected in Stockland’s recent quarterly results. Besides bumper lot sales figures, the property group also said that it has witnessed significant enquiry volumes, well-above historical levels.

‘Sales enquiry levels reached 33,000 in the Quarter, which is approximately 40% above the long term average, as the market shows continuing demand for our quality brand and customer preference shifts towards community living.'

Stockland share price

Likely reflecting the robust gains currently being made in Australia property market, Stockland has performed well in 2021, with the stock up approximately 10% year-to-date, to last trade at $4.71 per share.

Morgan Stanley has a price target of $4.90 on SGP, suggesting analysts expect some upside from current price levels.

Finally, and besides Dexus Property Group which is up 10.84% YTD, Stockland has outperformed its peers Scentre Group and GPT Group since January, on the basis of share price performance, at least.

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