Two underperforming large cap property stocks may find support after JP Morgan flagged them as potential takeover targets.
But the news is yet to fire the imaginations of investors as the Lendlease Group (ASX: LLC) share price and Vicinity Centres Re Ltd (ASX: VCX) are trading at or just above breakeven in late afternoon trade.
In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is rallying 0.9% at the time of writing and has jumped above the psychologically important 6,300 level.
Why Lendlease and Vicinity lost favour
Both Lendlease and Vicinity have lagged the market in recent times. Lendlease was hit hard on a profit warning late last year due to issues with its engineering business. The property and construction group is currently trying to sell its engineering arm.
Vicinity Centres, which part owns Australia's largest shopping mall Chadstone in Melbourne, has also been left behind with the stock trading flat since the start of the year when the ASX 200 has chalked up its best run in a decade.
Investors have lost their taste for shopping malls on concerns that the growing popularity of online shopping will hurt foot traffic.
From zeros to heroes?
But there's a silver lining. The underperformance of these stocks mean they are trading at a big discount to their assets and that makes them attractive targets, according to a survey of global property stocks by JP Morgan that was reported in the Australian Financial Review.
The broker noted that Vicinity Centres is trading at around a 15% discount to its net tangible assets while the Lendlease share price will have to jump by 18% to remove its discount to its net asset value.
Lendlease is also encumbered by a shareholder class action lawsuit relating to its shock profit downgrade but JP Morgan doesn't think this will be much of a deterrent to potential suitors.
If anything, a successful divestment of its engineering division could unlock value in Lendlease's share price, which is probably something that isn't lost on would-be acquirers.
Good appetite from bidders
Perhaps just as importantly, the global real estate investment trust (REIT) sector has performed strongly over the past year and that could make these trusts keener on making an acquisition to maintain growth and maybe use scrip to fund any deals.
On the downside, this also means the sector on the whole (including Australia) may have reached or exceeded fair value.
This means REIT investors will have to start looking at embattled underperformers as the better performing REITs are likely to struggle to make further meaningful gains this year.
However, buying problem plagued stocks is a risky endeavour – and the risks go up even further if you are banking on mergers and acquisitions (M&A) for your payday.
I would personally be staying away from these stocks regardless of their takeover potential as there are probably better risk-adjusted alternatives on the ASX.
