The stock is Mirvac Group (ASX: MGR), which the broker believes could generate a more than 40% return over the next 12-months.
The property developer fell out of favour on worries that the property market will tank due to the government’s harsh restrictions to contain the COVID-19 pandemic.
Housing market trouble ahead
The number of property sales is tipped to collapse over the next several weeks and many economists are predicting a 10% to 20% correction in home values.
This explains why fellow property group Stockland Corporation Ltd (ASX: SGP) is also in the doldrums, along with residential building materials suppliers like the CSR Limited (ASX: CSR) share price and Adelaide Brighton Ltd. (ASX: ABC) share price.
But it seems that Mirvac might be well placed to pull through this bear market. UBS pointed out that the group is lightly geared and is well-diversified.
Well placed to survive the pandemic
“Mirvac remains a preferred A-REIT given low leverage and exposure to preferred subsectors (office, industrial and diversified residential segments),” said UBS.
“Mirvac is well placed to take advantage of any market dislocation and acquire assets and/or development sites opportunistically.
“Further we see potential for the Build to Rent strategy to accelerate towards the target of 5,000 units, possibly with the benefit of government support.”
However, Mirvac isn’t escaping unscathed from the COVID-19 crisis. The broker cut its earnings forecasts on the group to reflect the rebasing of retail rents, lower sales volumes for its residential developments and lower longer-term assumptions on office and hotel income.
The result is a downgrade in UBS’ price target to $2.80 from $3.49 a share. This still leaves plenty of upside given that the Mirvac share price tumbled 6.1% on Friday to $1.99.
Big increase in dividend coming
The interesting thing is that UBS continues to expect a big increase in Mirvac’s dividend in FY21. The broker is forecasting a 6 cents a share full year dividend for the current financial year ending 30th June. This steps up to 10.4 cents the following year.
This gives the stock another 5% upside on top of the broker’s price target. That’s not a bad yield if it can be sustained given the record low interest rate environment we will be stuck with even after we overcome the pandemic.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. 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 Scott Phillips.
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