The logic is:
- the downside is priced in. I modelled a scenario where avg cap rates rise to 11%. While I think this is realistically conservative - it is a stretch from here. In any event, the conclusion was that a security price of 40 cents was pricing in this type of cap rate.
- major property market wipeout risks are contained. With gearing down, exposure to an even bigger fall in commercial property (to rival that in Japan in the early 90's) is manageable.
- a 10% tax deferred yield is about right. It compares favourably to current long end rates and in a sense implies a 1% management fee is being paid for passive property ownership (plus the developer).
- the development risks are being reasonably managed. This is a little bit of a leap of faith given it is difficult to quantify the risks around this part of the business from a distance (for example, there are $150m of performance guarantees that sit off balance sheet?). So I make the assumption that, at the very least, this part of the business will continue at breakeven. This is fine as at 40 cents, you are not paying for the development capabilities. It is a call option where the premium are the costs of maintaining the development capability for the longer term
As for the AAZPB, they had a good day yesterday (up close to 20%). At a running yield around 11.5%, there is maybe a little but left in them (eg. GMPPA at 10.2%) but most of the juice has been squeezed from this lemon.
Make that two of us :-)
ReplyDeleteI was looking at ALZ yesterday myself and also had in mind a price around 40c. I have a feeling though that it may not get down to that price.
Wishful thinking never hurt anyone...Here's hoping that retail pummels it lower post rights issue...
ReplyDelete