NEW ZEALAND KPG NZ Price (at 08:19, 07 Apr 2017 GMT) Outperform NZ$1.43 Valuation NZ$ 1.53 - DCF (WACC 6.9%, beta 0.6, ERP 7.0%, RFR 3.5%, TGR 2.0%) 12-month target NZ$ 1.53 12-month TSR % +11.8 Volatility Index Low GICS sector Real Estate Market cap NZ$m 1,858 30-day avg turnover NZ$m 2.9 Number shares on issue m 1,299 Investment fundamentals Year end 31 Mar Revenue m 157.0 182.5 195.5 205.6 EBIT m 138.5 160.4 173.5 183.5 Reported profit m 84.8 93.4 101.5 105.7 Adjusted profit m 84.8 93.4 101.5 105.7 Gross cashflow m 84.8 93.4 101.5 105.7 CFPS 6.8 7.3 7.9 8.3 CFPS growth % -9.4 7.5 8.7 4.2 PGCFPS x 21.0 19.5 18.0 17.3 PGCFPS rel x 1.86 1.77 1.73 1.75 EPS adj 6.8 7.3 7.9 8.3 EPS adj growth % -9.4 7.5 8.7 4.2 PER adj x 21.0 19.5 18.0 17.3 PER rel x 0.99 0.95 0.97 1.01 Total DPS 6.6 6.8 6.9 7.1 Total DPS growth % 2.2 2.3 2.2 2.2 Total div yield % 4.6 4.7 4.8 4.9 FFO yield % 21.0 19.5 18.0 17.3 Franking 1 % 67 73 74 78 ROA % 5.5 5.7 5.7 5.9 ROE % 5.5 5.3 5.7 5.9 EV/EBITDA x 20.0 17.2 16.0 15.2 Net debt/equity % 47.1 57.7 62.4 62.4 P/BV x 1.1 1.0 1.0 1.0 1 NZ imputation credits are only able to be used by shareholders to offset NZ income tax liability. KPG NZ vs NZSE50, & rec history Note: Recommendation timeline - if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, April 2017 (all figures in NZD unless noted) 7 April 2017 Macquarie Securities (NZ) Limited Land banking for the future Event KPG announced the acquisition of strategic land for a future town centre. Impact The land acquired is in Drury, approximately 35km south of Auckland. The acquired land is across three greenfield sites comprising 51.3 hectares. KPG have acquired two land parcels of 42.7ha for $39.8m, with the third parcel of 8.6ha being secured via right of first refusal with the purchase price to be determined at market when the right is exercised. We note that 30.6ha of the land acquired is subject to OIO approval. The land is currently zoned as Future Urban under the Auckland Unitary Plan and will be capitalised on continued growth of Auckland and intensification of transport nodes. KPG will work with the Council on rezoning this land with the vision of developing a town centre as population in the area grows. We note that strategic land acquisition and rezoning was similar to what KPG undertook in order to develop Sylvia Park, which is now KPG s flagship asset. The acquisition price represents a little under $100/sqm, with KPG taking the cost and risk around rezoning, holding costs and future growth of the area. With it being debt-funded, KPG will have ~$2m of holding costs p.a, which will drag a little on underlying cash earnings, albeit only ~1.5% to FY18E AFFO. This strategic acquisition is the first step in what could be a twenty-year development of the town centre in Drury for KPG. We think that there will be limited activity over the next five years on the site, other than the usual master planning activity. Assuming that KPG start to build this out in ten years, the land would owe KPG around $60m based on capitalised holding costs. Given the value uplift on rezoning approval, this should quite easily sustain the holding costs, while we think KPG are likely to pay the land back through potential divestment of residential sites that will be surrounding the planned retail and commercial developments that KPG would like to undertake. Our guess is that around 30ha of the site could be sold as residential over time (i.e. leaving enough for a large town centre), and such residential land could be valued at $500/sqm or higher (as a guess), leaving a healthy margin. Separate to this announcement, Augusta announced that it had increased its stake in NPT to ~19%, which could make it more challenging for KPG s proposal to be approved by NPT s shareholders. We note that prior to this, KPG had an offer over North City, so it would likely find buyers for its assets. Earnings and target price revision Minor EPS impact and PT unchanged. While buying land is DCF-dilutive in itself, we have offset this with future residential land sales (FY25) as we haven t assumed any development on the site in our forecast period. Price catalyst 12-month price target: NZ$1.53 based on a DCF methodology. Catalyst: FY17 result in May, pre-leasing of Sylvia Park retail development Action and recommendation Maintain OP. KPG is well positioned to deliver EPS growth and we like the Sylvia Park retail development, which we think will be committed to shortly. Please refer to page 4 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures.
Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09 Sep-09 Mar-10 Sep-10 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 Sep-15 Mar-16 Sep-16 Sep-05 Feb-06 Jul-06 Dec-06 May-07 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09 Apr-10 Sep-10 Feb-11 Jul-11 Dec-11 May-12 Oct-12 Mar-13 Aug-13 Jan-14 Jun-14 Nov-14 Apr-15 Sep-15 Feb-16 Jul-16 Dec-16 (Last price:$1.430) Interim Profit & Loss 2H/16A 1H/17A 2H/17E 1H/18E Annual Profit & Loss Net property income $m 80.5 87.3 95.1 96.9 Net property income $m 157.0 182.5 195.5 205.6 income income Total operating revenue $m 80.5 87.3 95.1 96.9 Total operating revenue $m 157.0 182.5 195.5 205.6 Management fees Management fees Corporate costs Corporate costs expenses $m 8.1 9.2 9.3 9.4 expenses $m 16.1 18.5 19.0 19.6 adjustments $m -1.1-1.9-1.7-1.5 adjustments $m -2.3-3.6-3.0-2.5 Net op. profit before interest & tax $m 71.3 76.2 84.1 85.9 Net op. profit before interest & tax $m 138.5 160.4 173.5 183.5 Net interest expense $m 16.4 20.0 22.4 23.0 Net interest expense $m 33.3 42.3 45.5 48.2 Distributable income before tax $m 54.9 56.3 61.8 62.9 Distributable income before tax $m 105.3 118.0 128.0 135.3 Cash tax expense $m 12.4 12.1 12.6 13.0 Cash tax expense $m 20.4 24.7 26.5 29.6 Distributable income after tax $m 42.5 44.2 49.2 50.0 Distributable income after tax $m 84.8 93.4 101.5 105.7 Valuation Ratios Total Value of Assets 2930.2 TGR 2.0% EPU c 6.8 7.3 7.9 8.3 Net Debt 995.7 Risk free rate 3.5% EPU growth % -10.0% 7.5% 8.7% 4.2% Value of Equity 1934.5 Asset beta 0.58 Cash DPU c 6.6 6.8 6.9 7.1 Number of shares 1266.0 Post-tax MRP 7.0% DPU growth % 1.5% 2.3% 2.2% 2.2% Value Per Share* 1.53 WACC 6.9% Cash DPU yield % 4.6% 4.7% 4.8% 4.9% *Before 3cps upside from Sylvia Park Payout ratio % 97.0% 92.3% 86.8% 85.1% Cashflow Analysis Pre-tax EPU x 8.6 9.4 10.0 10.6 EBIT $m 141.0 164.0 176.4 186.0 Diluted EPU c 6.8 7.3 7.9 8.3 Net interest paid $m 34.7 42.8 45.5 48.2 Effective tax rate % 19.4% 20.9% 20.7% 21.9% Tax Paid $m 14.5 28.0 26.5 29.6 PE x 21.0x 19.5x 18.0x 17.3x Gross cashflow $m 91.9 93.2 104.4 108.2 EV/EBIT x 21.2x 18.3x 16.9x 16.0x Changes in working capital $m -5.5-4.6 0.1 0.0 $m -2.0 0.6-3.0-2.5 Balance Sheet Ratios Operating cashflow $m 95.4 98.5 101.3 105.7 NTA per share c 1.345 1.390 1.394 1.401 Net payment for acquisition/(divestment) $m 77.9 162.2 39.8 0.0 Price/NTA x 1.06x 1.03x 1.03x 1.02x Capital expenditure $m 133.1 82.7 58.0 20.1 Net debt (excl. MCN) $m 808.0 1,023.8 1,110.5 1,116.3 $m -4.0 2.2-3.2-2.4 Net debt/equity % 47.1% 57.7% 62.4% 62.4% Investing cashflow $m -215.1-242.7-101.0-22.5 Net debt/total assets % 29.9% 34.4% 36.1% 36.0% Distributions $m 64.1 71.0 87.1 89.0 Net debt/investment properties % 30.3% 34.7% 36.4% 36.3% Issue of Units $m 147.4 0.0 0.0 0.0 Net interest cover x 4.2x 3.8x 3.8x 3.8x ROE (average balance) % 5.5% 5.3% 5.7% 5.9% Financing cashflow $m 83.2-71.0-87.1-89.0 ROA (average balance) % 5.6% 5.8% 5.8% 6.0% Net change in cash/debt $m -36.4-215.1-86.8-5.8 EFPOWA m 1,247.8 1,277.2 1,277.2 1,277.2 Balance Sheet Portfolio Summary 2014 2015 2016 2017* Cash $m 6.2 8.5 8.5 8.5 Investment properties $m 2102.6 2275.8 2670.0 2879.0 Investment property $m 2,669.9 2,950.9 3,051.9 3,074.4 Number of properties # 12 12 14 14 Assets $m 22.4 18.1 18.6 19.1 Average property size $m 175.2 189.6 190.7 205.6 Total Assets $m 2,698.4 2,977.5 3,079.0 3,102.0 Occupancy % 97.1% 98.4% 98.7% 98.6% Payables $m 44.0 46.8 47.1 47.6 Weighted average lease term yrs 4.7 4.5 5.1 5.5 Borrowings $m 814.2 1,032.3 1,119.1 1,124.8 Average capitalisation rate % 7.2% 6.9% 6.6% 6.6% Liabilities $m 123.5 124.9 133.3 141.0 Commercial % % 31.7% 29.6% 31.0% 29.0% Total Liabilities $m 981.7 1,204.0 1,299.5 1,313.4 Retail % % 65.2% 67.3% 67.0% 69.0% Unit Holders Funds $m 1,241.1 1,254.9 1,254.9 1,254.9 % % 3.1% 3.1% 2.0% 2.0% Reserves Total shareholders equity $m 475.6 518.7 524.6 533.7 $m 1,716.8 1,773.6 1,779.5 1,788.6 *As at 1H17 Historic Premium/Discount to NTA 30% 20% 10% 0% -10% -20% NTM Div Yield and Spread to 10-Year Bond 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% -30% 0.0% -40% KPG NZX Property -2.0% Source: FactSet, RBNZ, Company Data, Macquarie Research, April 2017 Selected Comparable Company Analysis Type Recom. Price P. Target Mkt Cap Assets P/NTA NTM P/E NTM Yld STM Yld Growth Leverage NZ Ret/Off Outperform 1.43 1.53 1,851.6 2,880.0 5.9% 18.3 4.8% 4.9% 1.2% 34.7% NZ Ind/Off Outperform 1.24 1.32 1,542.7 2,475.5 1.3% 15.6 5.6% 5.6% 0.6% 32.2% Precinct Properties New Zealand Ltd. NZ Off Neutral 1.22 1.23 1,477.6 1,844.0 3.8% 19.4 4.9% 5.0% 2.3% 20.1% Limited NZ Div Underperform 0.99 1.06 798.2 1,404.0-4.8% 14.9 6.3% 6.3% 0.8% 35.5% Stride Property NZ Div Neutral 1.74 1.90 631.2 878.0 7.4% 16.3 5.8% 5.9% 1.4% 38.5% Vital Healthcare Property Trust NZ Healthcare Neutral 2.08 2.16 879.1 1,068.4 24.3% 18.0 4.2% 4.3% 2.4% 24.4% Limited NZ Ind Underperform 1.57 1.54 730.7 1,083.0 1.7% 20.4 4.5% 4.7% 3.6% 30.1% Investore Property NZ LFR Outperform 1.31 1.55 348.2 641.4-10.9% 16.3 5.9% 5.9% 0.4% 40.6% Average 4.6% 17.4x 5.2% 5.2% 1.6% Source: Company data, Macquarie Research, April 2017 NTM DPS Yield NZ 10 Year Bond Yield Spread Sector NTM DPS Yield 7 April 2017 2
Macquarie Quant View The quant model currently holds a marginally negative view on Kiwi Property Group. The strongest style exposure is Valuations, indicating this stock is under-priced in the market relative to its peers. The weakest style exposure is Price Momentum, indicating this stock has had weak medium to long term returns which often persist into the future. 548/1034 Global rank in Real Estate % of BUY recommendations 20% (1/5) Number of Price Target downgrades 1 Number of Price Target upgrades 0 Fundamentals Attractive Quant Local market rank Global sector rank Displays where the company s ranked based on the fundamental consensus Price Target and Macquarie s Quantitative Alpha model. Two rankings: Local market (Australia & NZ) and Global sector (Real Estate) Macquarie Alpha Model ranking A list of comparable companies and their Macquarie Alpha model score (higher is better). Factors driving the Alpha Model For the comparable firms this chart shows the key underlying styles and their contribution to the current overall Alpha score. 0.5 0.2 0.0 0.0-0.2-0.2-3.0-2.0-1.0 0.0 1.0 2.0 3.0-100% -80% -60% -40% -20% 0% 20% 40% 60% 80% 100% Valuations Growth Profitability Earnings Momentum Price Momentum Quality Macquarie Earnings Sentiment Indicator The Macquarie Sentiment Indicator is an enhanced earnings revisions signal that favours analysts who have more timely and higher conviction revisions. Current score shown below. Drivers of Stock Return Breakdown of 1 year total return (local currency) into returns from dividends, changes in forward earnings estimates and the resulting change in earnings multiple. 0.4 1.0 1.4 0.1-0.5 0.7-3.0-2.0-1.0 0.0 1.0 2.0 3.0-20% -10% 0% 10% 20% Dividend Return Multiple Return Earnings Outlook 1Yr Total Return What drove this Company in the last 5 years Which factor score has had the greatest correlation with the company s returns over the last 5 years. Price to Cash LTM Price to Earnings NTM Dividend Yield NTM Dividend Yield FY1 Return on Equity FY0 ROIC FY0 RNOA PE Growth FY1-27% -31% Negatives Positives -23% -23% -40% -20% 0% 20% 40% 25% 24% 23% 28% How it looks on the Alpha model A more granular view of the underlying style scores that drive the alpha (higher is better) and the percentile rank relative to the sector and market. Alpha Model Score Valuation Growth Profitability Earnings Momentum Price Momentum Quality Capital & Funding Liquidity Risk Technicals & Trading Normalized Score -0.21 0.03-0.22-0.07 0.01-0.43-0.40-0.47-0.08 0.69 0.67 Percentile relative to sector(/1034) Percentile relative to market(/420) 0 50 100 0 50 100 0 0 1 1 Source (all charts): FactSet, Thomson Reuters, and Macquarie Research. For more details on the Macquarie Alpha model or for more customised analysis and screens, please contact the Macquarie Global Quantitative/Custom Products Group (cpg@macquarie.com) 7 April 2017 3
Important disclosures: Recommendation definitions Macquarie - Australia/New Zealand Outperform return >3% in excess of benchmark return Neutral return within 3% of benchmark return Underperform return >3% below benchmark return Benchmark return is determined by long term nominal GDP growth plus 12 month forward market dividend yield Macquarie Asia/Europe Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie South Africa Outperform expected return >+10% Neutral expected return from -10% to +10% Underperform expected return <-10% Macquarie - Canada Outperform return >5% in excess of benchmark return Neutral return within 5% of benchmark return Underperform return >5% below benchmark return Macquarie - USA Outperform (Buy) return >5% in excess of Russell 3000 index return Neutral (Hold) return within 5% of Russell 3000 index return Underperform (Sell) return >5% below Russell 3000 index return Volatility index definition* This is calculated from the volatility of historical price movements. Very high highest risk Stock should be expected to move up or down 60 100% in a year investors should be aware this stock is highly speculative. High stock should be expected to move up or down at least 40 60% in a year investors should be aware this stock could be speculative. Medium stock should be expected to move up or down at least 30 40% in a year. Low medium stock should be expected to move up or down at least 25 30% in a year. Low stock should be expected to move up or down at least 15 25% in a year. * Applicable to Asia/Australian/NZ/Canada stocks only Recommendations 12 months Note: Quant recommendations may differ from Fundamental Analyst recommendations Financial definitions All "Adjusted" data items have had the following adjustments made: Added back: goodwill amortisation, provision for catastrophe reserves, IFRS derivatives & hedging, IFRS impairments & IFRS interest expense Excluded: non recurring items, asset revals, property revals, appraisal value uplift, preference dividends & minority interests EPS = adjusted net profit / efpowa* ROA = adjusted ebit / average total assets ROA Banks/Insurance = adjusted net profit /average total assets ROE = adjusted net profit / average shareholders funds Gross cashflow = adjusted net profit + depreciation *equivalent fully paid ordinary weighted average number of shares All Reported numbers for Australian/NZ listed stocks are modelled under IFRS (International Financial Reporting Standards). Recommendation proportions For quarter ending 31 December 2016 AU/NZ Asia RSA USA CA EUR Outperform 57.53% 50.72% 45.57% 42.28% 60.58% 52.79% (for global coverage by Macquarie, 8.71% of stocks followed are investment banking clients) Neutral 33.90% 33.97% 43.04% 50.11% 37.23% 35.62% (for global coverage by Macquarie, 8.05% of stocks followed are investment banking clients) Underperform 8.56% 15.30% 11.39% 7.61% 2.19% 11.59% (for global coverage by Macquarie, 4.63% of stocks followed are investment banking clients) KPG NZ vs NZSE50, & rec history (all figures in NZD currency unless noted) Note: Recommendation timeline if not a continuous line, then there was no Macquarie coverage at the time or there was an embargo period. Source: FactSet, Macquarie Research, April 2017 12-month target price methodology KPG NZ: NZ$1.53 based on a DCF methodology Company-specific disclosures: Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/research/disclosures. Date Stock Code (BBG code) Recommendation Target Price 20-Mar-2017 KPG NZ Outperform NZ$1.53 14-Sep-2016 KPG NZ Outperform NZ$1.58 16-May-2016 KPG NZ Outperform NZ$1.55 08-Apr-2016 KPG NZ Outperform NZ$1.50 18-Mar-2016 KPG NZ Outperform NZ$1.45 22-Jan-2016 KPG NZ Outperform NZ$1.40 19-Nov-2015 KPG NZ Neutral NZ$1.39 15-Oct-2015 KPG NZ Outperform NZ$1.37 04-Aug-2015 KPG NZ Underperform NZ$1.36 03-Jul-2015 KPG NZ Neutral NZ$1.33 06-Mar-2015 KPG NZ Underperform NZ$1.30 13-Nov-2014 KPG NZ Underperform NZ$1.21 25-Jul-2014 KPG NZ Underperform NZ$1.16 20-May-2014 KPG NZ Outperform NZ$1.19 Target price risk disclosures: KPG NZ: Any inability to compete successfully in their markets may harm the business. This could be a result of many factors which may include geographic mix and introduction of improved products or service offerings by competitors. The results of operations may be materially affected by global economic conditions generally, including conditions in financial markets. The company is exposed to market risks, such as changes in interest rates, foreign exchange rates and input prices. From time to time, the company will enter into transactions, including transactions in derivative instruments, to manage certain of these exposures. Analyst certification: 7 April 2017 4
This publication was disseminated on 07 April 2017 at 10:43 UTC. We hereby certify that all of the views expressed in this report accurately reflect our personal views about the subject company or companies and its or their securities. We also certify that no part of our compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. The Analysts responsible for preparing this report receive compensation from Macquarie that is based upon various factors including Macquarie Group Limited (MGL) total revenues, a portion of which are generated by Macquarie Group s Investment Banking activities. General disclosure: This research has been issued by Macquarie Securities (Australia) Limited ABN 58 002 832 126, AFSL 238947, a Participant of the ASX and Chi-X Australia Pty Limited. This research is distributed in Australia by, a division of Macquarie Equities Limited ABN 41 002 574 923 AFSL 237504 ("MEL"), a Participant of the ASX, and in New Zealand by Macquarie Equities New Zealand Limited ( MENZ ) an NZX Firm. Macquarie Private Wealth s services in New Zealand are provided by MENZ. Macquarie Bank Limited (ABN 46 008 583 542, AFSL No. 237502) ( MBL ) is a company incorporated in Australia and authorised under the Banking Act 1959 (Australia) to conduct banking business in Australia. None of MBL, MGL or MENZ is registered as a bank in New Zealand by the Reserve Bank of New Zealand under the Reserve Bank of New Zealand Act 1989. Apart from Macquarie Bank Limited ABN 46 008 583 542 (MBL), any MGL subsidiary noted in this research,, is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Australia) and that subsidiary s obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that subsidiary, unless noted otherwise. This research contains general advice and does not take account of your objectives, financial situation or needs. Before acting on this general advice, you should consider the appropriateness of the advice having regard to your situation. We recommend you obtain financial, legal and taxation advice before making any financial investment decision. This research has been prepared for the use of the clients of the Macquarie Group and must not be copied, either in whole or in part, or distributed to any other person. If you are not the intended recipient, you must not use or disclose this research in any way. If you received it in error, please tell us immediately by return e-mail and delete the document. We do not guarantee the integrity of any e-mails or attached files and are not responsible for any changes made to them by any other person. Nothing in this research shall be construed as a solicitation to buy or sell any security or product, or to engage in or refrain from engaging in any transaction. This research is based on information obtained from sources believed to be reliable, but the Macquarie Group does not make any representation or warranty that it is accurate, complete or up to date. We accept no obligation to correct or update the information or opinions in it. Opinions expressed are subject to change without notice. The Macquarie Group accepts no liability whatsoever for any direct, indirect, consequential or other loss arising from any use of this research and/or further communication in relation to this research. The Macquarie Group produces a variety of research products, recommendations contained in one type of research product may differ from recommendations contained in other types of research. The Macquarie Group has established and implemented a conflicts policy at group level, which may be revised and updated from time to time, pursuant to regulatory requirements; which sets out how we must seek to identify and manage all material conflicts of interest. The Macquarie Group, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. The Macquarie Group may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. The Macquarie Group s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. Important disclosure information regarding the subject companies covered in this report is available at www.macquarie.com/disclosures Macquarie Group 7 April 2017 5