Mirvac (ASX:MGR): Things are set to get worse before they get better

Founded in 1972, Mirvac (ASX:MGR) is Australia’s largest listed developer of residential, commercial and industrial property. Arguably, it is one of the most unique, being the first in Australia to be “carbon positive” and the first on the ASX to offer Built to Rent (BTR) apartments. But it has never reached its pre-pandemic highs, and admitted to investors last week that FY25 would be another difficult year.

All about Mirvac (ASX:MGR)

Mirvac has Assets Under Management totalling over $22bn, including office, industrial, retail, residential and built to rent properties across Australia – mostly in Australia’s major cities. It has a further $15bn in third party capital under management and a $29bn pipeline.

The Built to Rent (BTR) apartments are arguably the best thing to like about the company. We don’t want to get ahead of ourselves but in a space that has seen little innovation since the early 1960s when the concept of strata was born, we think BTR could have a similar impact on the market. It took a while for Mirvac to get off the ground but it hit the ground running. The company expects over 3,000 residents to call one of MGR’s BTR apartments across Sydney, Melbourne and Brisbane home by the end of this year. It is a small player, but the sector is small too, with BTR making up less than 1% of Australia’s housing stock. In the UK, it is over 5% and in the US, 12%. Just increasing the BTR pipeline to just 3% of Australia’s housing stock would make it a $290bn sector with 350,000 units. Mirvac is remaining cautious, planning an expansion to 5,000 homes over the next 5 years, and currently sticking too the premium end of the market.

ESG investors would be pleased to know that this company achieved carbon positivity back in 2021, nine years ahead of its original 2030 target, becoming the first Aussie property company to be able to say it was ‘carbon positive’. To be carbon positive is better than being ‘carbon neutral’ because then you eliminate more carbon than you emit. For Mirvac this has been done by relying on renewable energy and optimising asset performance.

A tough 2 years

Each of Mirvac’s sectors went through different conditions in the past few years. For some, it was just a case of rising interest rates and the same supply chain issues plaguing the rest of the construction sector. Other had their own difficulties, most notably the office space has (and continued to be) impacted by people working from home. Overall its NTA (Net Tangible Assets) has fallen from $2.79 to $2.36 in the last 2 years, a decline of 15% and putting the company at a P/NTA discount of 19%. Despite offices being the most troublesome sector, Mirvac is doubling down on offices, buying AMP’s Capital office fund, boosting its FUM by $7.7bn. The Residential end of the sector has been hit by inclement weather and subcontractor insolvencies. Mirvac still made a profit margin of 17%, but below the 18-22% long-term average.

It made 14c per share in operating earnings and has told investors to expect 12.3c in FY25. So far as dividends are concerned, it intends to pay out 10.5c per share for FY24, but only 9c per share in FY25. Despite telling investors it was setting itself up for recovery, it admitted conditions would be ‘challenging’ in FY25. CEO Campbell Hanan blamed a lower contribution from the development business and higher net interest costs related to development activities but said better times were ahead.

‘There is significant value to play for and multiple drivers of earnings growth in FY26 and beyond,’ he said noting there were some green shoots in market activity, particularly higher pre-sales.

Analysts covering Mirvac expect a 10% boost in earnings to 16c per share in FY26, but 16c again in FY27. Estimates for revenue are flat for FY25, at $908.4m as opposed to $911m in FY24, but to $981.3m in FY26 and $1.2bn in FY27. Their mean target price is $2.22, up 15% from the current price.

Conclusion

We think it isn’t the right time to buy Mirvac. Even if you disagreed with the outlook for property development and investment in FY25, we think it’d be better to invest in Dexus that is trading at 11x and analysts expect just over 10% earnings growth in FY25.

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