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Mirvac Perseveres in Rough Patch for Residential and Office; Long-Term Outlook Remains Strong

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We maintain our AUD 3.10 fair value estimate for no-moat Mirvac Group MGR, as we update our earnings forecasts following fiscal 2023 results. Mirvac securities screen as substantially undervalued despite improving since October 2022. We assume fiscal 2024 operating earnings of AUD 14.1 cents per security, in line with management guidance of AUD 14.0-AUD 14.3 cps, below our prior AUD 15.5 cps estimate. We assume distributions equal guidance of AUD 10.5 cps, below our prior AUD 10.7 cps estimate.

We expect lower residential gross development margins of 19% for fiscal 2024 given cost pressures and longer construction times. That’s down from our prior 21% estimate and below the 26% margin achieved in 2023. We assume gradual recovery, steadying at long-term margins of 22% by 2026. That negative is largely offset by slightly higher residential sales volume assumptions near term and long term. We estimate 2,750 settlements in fiscal 2024, above our prior 2,400 estimate as some settlements are carrying over from delays in 2023, and Mirvac continues to post reasonable sales which bodes well for future settlements. We assume similar annual volumes for our 10-year forecast period, below the peak of 3,400 settlements Mirvac achieved in the 2018 residential construction boom, but above the trough of 1,800 settlements in 2012. As less-equipped rivals exit, Mirvac is one of few large developers capable of end-to-end design, construction, and development in-house, and offers build-to-sell apartments and houses, land-lease, and build-to-rent. We think this flexibility helps to navigate supply-chain, government policy, and market challenges.

Mirvac’s other substantial exposure is in office, where its average 5.7-year lease means the current headwinds don’t undermine much of its income. While hybrid working has hit office demand, 86% of Mirvac’s office assets are in Sydney or Melbourne, and we think the central business district recovery should continue in those cities.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Alexander Prineas

Equity Analyst
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Alex Prineas is an equity analyst for Morningstar Australasia Pty Ltd, a wholly owned subsidiary of Morningstar, Inc. He covers real estate companies and developers in Australia and New Zealand.

Before joining Morningstar's equity research team in 2019, Prineas was an associate director in Morningstar's manager research division, leading Morningstar's research on Australian and global property funds and on passive and exchange-traded funds. He spent a decade in manager research and investment consulting in Australia and the United Kingdom with Morningstar and Old Broad Street Research (now a Morningstar company). Before that, Prineas spent six years with Mercantile Mutual in client and advisor services, marketing, product development, and advice research.

Prineas holds a Bachelor of Commerce with a double-major in accounting and finance from the University of New South Wales. He also holds a graduate diploma in applied finance and investments from the Financial Services Institute of Australasia.

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