Value investors may want to keep an eye on the Stockland Corporation Ltd (ASX: SGP) share price as a leading broker reckons the property group is about to re-rate.
The news comes as ASX property shares lag the broader market recovery from the COVID-19 mayhem.
The Stockland share price rallied over 20% from mid-March last year, while the Mirvac Group (ASX: MGR) share price added around 7% and GPT Group (ASX: GPT) share price dipped by 8%.
In contrast, the S&P/ASX 200 Index (Index:^AXJO) has bounced by close to 30% over the same period.
Why the Stockland share price could outperform
But the Stockland could soon play catch-up if Morgan Stanley is on the money.
"We focus on Sydney dwelling price movement vs. SGP's P/E [price-earnings] multiple over a 20-yr history and find SGP generally re-rates and de-rates in line with the residential cycle," said the broker.
Stockland's leverage to the Sydney housing market is fortuitous. The latest housing stats showed that Australia's largest residential market is leading the property boom.
Stockland's share price correlation with Sydney house prices
P/E expansion to drive Stockland's share price higher
What's more, there is lots of room for the Stockland share price to re-rate given that it's trading on a relatively modest P/E.
Using Morgan Stanley's FY22 forecast earnings per share (EPS) for the group, Stockland's P/E stands at around 13.8 times.
If Stockland's P/E were to revisit the peaks in 2007, it would imply a 30% upside for the stock.
Better leverage to Sydney housing market
"Residential development contributes c.35% of SGP's earnings, and SGP is Australia's largest land developer," said Morgan Stanley.
"As such, dwelling price momentum may be supportive of potential re-rating (or in a down-cycle, the de-rating) of SGP."
The broker has yet to factor in the re-rating. It's 12-month price target on the Stockland share price is $5 a share but it recommends investors buy the shares now.
Does Stockland have an edge over its peers?
In case you are wondering, Stockland is more leveraged to the rising Sydney housing market than its peers. Mirvac is largely exposed to apartments in Sydney and this segment of the property market is lagging.
And while GPT is exposed to the housing market, it's significant portfolio of shopping malls is seen as a drag in this current environment.
