Bunnings Trust: No price guarantee

The real estate play in a trading halt may still be at more of a premium than a discount.

It’s unfortunate that Bunnings Trust (ASX: BWP) can’t offer something like the price guarantee touted by its market-leading hardware store tenants: find a stocked item at a lower price and they’ll beat it by 10%. In fact, even after recent falls, the Wesfarmers (ASX: WES) 1998 property spin-off (formerly Bunnings Warehouse Property Trust) seems to coming at a premium of greater that margin.

That’s because investors have seen it as such a great stock, offering potential price growth, a handsome dividend yield (currently at 6%) and providing exposure to some of Australia’s best quality commercial real estate. Still, after a meteoric rise from mid-2011 and at a current price earnings ratio of 16.9, it doesn’t seem the bargain it once was.

Yesterday afternoon Bunnings went into a trading halt until tomorrow because news of an imminent cash raising somehow seeped into the market. In its request to the ASX the company said a media inquiry had indicated “that confidentiality may have been breached in relation to an incomplete proposal involving a potential equity raising”.

The Australian Financial Review was reporting a $150-$200 million raising to purchase properties controlled by Wesfarmers worth more than $300 million. The newspaper added that the company’s high share price made an equity raising the best option and that the proposal was in line with the trust’s sale and leaseback strategy.

The last time Bunnings raised funds was in mid-February 2011, when it made a 1:4.84 fully underwritten non-renounceable entitlement offer at an issue price of $1.70 to raise $150 million. That didn’t greatly affect it share price in the short term, with it struggling to get past $1.80 in ensuing weeks, but it did crash to $1.546 in early that August.

Before trading was halted yesterday Bunnings was around $2.41, up 0.42%, an excellent performance in a market that fell by 1.8%. And it’s currently trading ex-dividend with 7.1 cents per share to be paid on August 28.

But it’s still hard not to view the stock as expensive. Its rolling year price is up about 25%, easily outpacing the S&P/ASX 200 Index (ASX: XJO). It looked a lot more attractive when it was barely over $1.90 just a year ago. Investors piled on board to push it as high as $2.79 mid-May. In hindsight its June 26 $2.17 low was a good opportunity. It still managed $2.64 less than a month ago before pulling back to more reasonable levels.

So is it a buy or not? Morningstar has maintained its reduce rating on it and has its intrinsic value at $2.10. Investors love this stock enough to make it unlikely it will revisit those levels in the current market, and anyone convinced by its story would probably have to look at paying quite a bit more than that.

How will the market react to the capital raising and today’s results? Probably not in a way that would make you want to rush out and buy it, but if things cool off later this is still a good defensive stock, as the market has been judging for quite some time.

Foolish takeaway

Bunnings has been very popular and that reflects in it looking overvalued, but it’s still a worthwhile consideration for a long-term portfolio if it can be bought at a good enough price.

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Motley Fool contributor Andrew Ballard owns shares in Bunnings Trust and Wesfarmers. 

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