All eyes on 4Q

3Q23 MARKET UPDATE

Need To Know

• Commercial properties and Communities performed well within the quarter. 
• Balance Sheet strengthened with an additional hedging.
• Guidance re-affirmed. Settlements to meet ~5500 guidance (large 3000+ 4Q skew)

SGP came out with its 3Q23 market highlighting the resilience in residential property over the past 3-6 months. New information to add includes the; 1) balance sheet; 2) new housing sales improving (but still relying heavily on 4Q to meet guidance). 

An additional A$600m was added to the groups hedging (~75% hedged for 2H23) along with a A$250m of medium-term note issuance. Group gearing stands at ~22%. 

The group achieved 1049 sales over the period which reflected stronger performance qoq (959 in 2Q23).

Management have maintained the groups FY23 guidance of ~26% development operating profit margin and ~5,500 Master Planned Communities (MPC, proxy for residential lot sales) settlements (implying a ~3000+ skew for 4Q). ~1800 out of the ~5,500 settlements occurred in the 1H23.

Investment View

A solid market update from SGP. We expect it’s likely that guidance will be met for FY23 given that its once again re-affirmed. Whilst it does imply a large skew for 4Q, its not completely out of the realm of possibility due to the timing of projects. Enquiries have also recovered over the quarter, rising above the 10-year average range.

Shortages in labour as well as weather impacts has put some strain on SGP’s supply capability through FY23. There remains some risk that these issues still impact 4Q23 settlements. Importantly, these should be less of headwind for FY24. 

Despite the share price outperformance over the past 6 months, we are still hesitant on getting overly positive. The multiple has expanded far quicker than expected during a period of what was expected to be much worse residential property conditions. This leaves the price to funds from operations (P/FFO) at close to a ~1 std premium to the long-term average.  

The dividend yield of +6% should hold strong through the next quarter, which we believe may come as some appeal to shareholders looking to jump into housing. 

Overall, all eyes are on 4Q. The market is watching closely on the ability for SGP to meet settlements guidance for FY23 and to avoid a downgrade for FY24 settlement guidance in August. If bond yields spike again, we believe this may provide a renewed opportunity to play into Australian residential exposure but at these levels we re-iterate our Hold rating.

Figure 1: SGP PRICE TO FUNDS FROM OPERATIONS (P/FFO)

Figure 2: SGP 12MTH FORWARD DIVIDEND YIELD