Watch out below! Shares in one of our largest residential property stocks is likely to underperform the market and its peers as it gears up to report its profit results tomorrow, according to Morgan Stanley.
The broker is referring to Mirvac Group (ASX: MGR), which has already slumped 2.4% over the past 12-months when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up close to 5%.
But there is scope for Mirvac to fall further and investors may not need to wait long to see that as Morgan Stanley estimates that there is a 60% to 70% chance that the stock will underperform the broader market and its peers over the next 60 days.
Mirvac's half year announcement on Thursday could provide the trigger for the sell off as management may not be able to provide a more precise full year guidance of 6% to 8% growth because its residential settlements are heavily skewed to the second half.
Investors do not like uncertainty, especially in this volatile environment. This is why Morgan Stanley thinks fellow developer Stockland Corporation Ltd (ASX: SGP) is a better bet as management is better placed to provide a more exact guidance when it hands in its report card.
Also, Stockland has been sold off harder than Mirvac with the stock down close to 10% over the past year. This puts Stockland on a more attractive valuation, particularly if you consider that it has a less lumpy funds from operations (FFO) growth profile over the next three years.
Mirvac also has a greater exposure to capital city apartment developments. This is the weakest link in the property sector due to ongoing concerns that the market is oversupplied at a time of waning demand.
It also doesn't help that some banks are tightening their lending policies for such apartments and overseas investors are retreating from the market.
"Furthermore, MGR historically underperformed the broader A-REIT sector during periods of falling bond yields," said the broker.
"Although its A$2.00 Jun-17 NTA could provide some support, we see limited scope for capital management over the next 6 months given the ongoing buildout/delivery of its residential pipeline."
The broker has an "underweight" recommendation on the stock with a price target of $2.20.
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