Westfield Group (WDC) Update

Submitted by Jim Thesiger on 4 June, 2008 - 15:45

Westfield Group (WDC) is upgraded to Buy from Hold and it's target share price has downgraded to $18.50 from Australian stockmarket analysts from Citi.

Westfield Group (WDC) : Playing Hide and Seek

With the recent share price decline, we upgrade Westfield to Buy from Hold. Westfield represents good value compared to Australian REIT peers given its relatively lower earnings risk, good valuation discount, quality assets, and low re-financing risk. Westfield is also attractive relative to Global peers.

With direct real estate values under pressure, we take a more cautious approach on valuation, downgrade our target price to $18.50. With development upside valued conservatively at ~$1.50 per share, Westfield is trading at an attractive implied portfolio cap rate of 6.3%.

With specialty rents growing at CPI +2% and portfolio occupancy >99%. High recent SSNOI will moderate, however Citi still expects 3-5% retail sales growth in FY08e and FY09e, boding well for Westfield’s NOI growth. Occupancy declines are unlikely to hit NOI, given the Australian portfolio maintained >99% occupancy throughout the previous economic downturn in the early 1990s.

As outlined in our note Westfield Group (WDC.AX): Don't WACC my IRR, we still expect the Westfield development pipeline to create high shareholder value even in the current environment. Westfield’s 12-15% project IRRs assume a project’s end value is capitalised on the project yield, not on a lower end value cap rate.

Our target price decline is based on both a higher beta (0.80 versus 0.75 previously) and higher terminal yield in our DCF. Also, we have increased the average ge NAV cap rate to 5.90%, up from 5.75%.