Why this top broker just slapped a buy rating on Westfield Corporation Ltd

Financial news wires are reporting that research analysts at Swiss investment bank UBS have a buy rating on US-focused shopping centre operator Westfield Corp Ltd (ASX: WFD).

The Westfield shopping centres will be familiar to almost every Australian, although the ASX-listed Westfield Corp business only contains overseas property assets mainly in prime locations in major U.S. and European cities.

Westfield’s management team taking the decision to focus on “flagship” assets (shopping centres) in response to the rising threat of online competition and tough times for bricks-and-mortar retail chains around the world.

Sales growth per square metre at its flagship shopping centres continues to heavily outpace the growth at its regional centres and the group’s medium-term development strategy is to invest more in new flagship centres or re-developing existing centres in prime locations.

Westfield Corp currently has around $3.7 billion of projects in development with an estimated investment yield range of 7% to 8%, while it also plans to invest a further $5.8 billion in residential and commercial property developments.

It is the potential of this development program to deliver sustainable profit growth to Westfield that is partly encouraging the analysts at UBS to slap a $9.80 share price target on the group. That’s around 11% above the $8.62 price that shares change hands for today and I agree with UBS’s analysts that shares could be good value thanks to a recent pull back in their price.

Westfield also remains a well-run business that offers Australian investors defensive profit streams, solid dividends, and exposure to the strength of the U.S. economy and dollar.

Westfield reports on a calendar year basis and for 2017 is forecasting it will post US34 cents in earnings per share, which is around 45 cents on an FX-adjusted basis. That result would be almost flat on the 2016 year, which goes a long way to explain why the share price has dropped 8 % over this calendar year.

UBS’s forecasts for earnings per share are in line with Westfield’s, which should be reasonably accurate given this is a defensive business where rental income from tenants at its shopping centres is generally locked in over medium-term time periods.

Still, the group still trades on around 20x forecast earnings per share, which is expensive for a real estate investment trust, even if it does have a big pipeline of development projects.

I would rate the shares as a hold on current valuations and would be an interested buyer if they were to get 10% or so cheaper all else being equal.

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Motley Fool contributor Tom Richardson owns shares of Westfield.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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