Westfield loses its sparkle

If there was any doubt that shopping centre giant Westfield has lost its sparkle of yesteryear, its latest results - a loss of $457 million - signal a stock that is trading on falling earnings growth for 2010 and has too few new property developments.

The overall result, including its Australian, United States and European operations, was a disappointment to investors and will force analysts back to their drawing boards to downgrade their 2010 forecasts.

Westfield's lack of big new developments was in sharp contrast to arch rival Simon Property Group which came out overnight and launched a hostile $US10 billion ($11 billion) takeover bid for America's second biggest shopping centre group General Growth Properties.

Westfield has always declined to comment on whether it has any stake in General Growth (GGP) equity or debt. It refused to comment today on the bid by Simon for GGP but there is talk that this bid could lay the gauntlet down for Westfield to do something to regain its supremacy in deal making.

One possibility is that Simon could invite Westfield to join forces. Simon and Westfield previously joined up to bid for Taubman Centers in the US.

Shell-shocked analysts

While Westfield didn't didn't give a specific forecast, it did give a dividend per unit guidance of 64 cents a share. If this is grossed up to a 70 to 75 per cent payout ratio, it translates into an earnings per share (EPS) forecast of 85 cents to 91 cents EPS for 2010, which is less than the EPS of 94 cents reported in this set of results. Put simply, instead of expectations of flat growth, the market now has to digest a stock with negative earnings growth that is trading at a premium to its net tangible assets.

With so much bullishness coming out of the analyst fraternity in the past month, it is no surprise that investors came away a little shell shocked. The result was at the low end of guidance for 2009 and no new development projects were announced, except for $300 million of new projects in Australia later in 2010.

Westfield posted a $457.8 million loss for the 2009 financial year, an improvement on the $2.2 billion loss it recorded for the previous year. Operational earnings rose 6.2 per cent to $2.06 billion, with Westfield giving a distribution forecast of 64 cents per security for this year.

There is little doubt that in the next few days earnings downgrades will pour in, mainly driven by sluggish rental growth. Australia is slowing down a little and US and UK still negative. Indeed, continued rental declines in the US and UK, a significant drop in project management fees and rising interest costs, don't conjure up feelings of excitement.

In the words of Morgan Stanley: ''Overall, we believe the recovery in earnings and NTA will be slow and while the 64 cents dividends look like a cyclical trough, we are not convinced the 5.3 per cent dividend yield is enough to get the market excited in the short term and retain our Underweight rating.''
 
aferguson@fairfaxmedia.com.au