Shares in Australia's largest housing developer Stockland Corporation Ltd (ASX: SGP) have started the day poorly and are now trading in the red at $4.37.
Across most timeframes, the Stockland share price is swimming in a sea of red. The exception is its return from January 1, where it has climbed just over 4.5% at the time of writing.
Stockland shareholders have been on a wild ride these past 3 months. The ASX share has closed as high as $4.77 and as low as $4.34 in that time.
And right now as we speak, the Stockland share price is continuing a massive slight from its former highs. It has tanked over 8% since 26 October in an almost vertical fashion.
Why then, is the team at broker Morgan Stanley still bullish on the outlook for Stockland investors?
Let's take a closer look.
Stockland can still unlock capital
According to Morgan Stanley, investors aren't factoring in the point that Stockland can use an unlisted fund to reduce its total retail exposure.
In a scenario analysis, the broker submits that Stockland could transfer its mall assets – that are worth $1.1 billion – into an unlisted vehicle, whilst keeping a 50% stake in doing so.
It could also charge a management fee of 45 basis points per annum on this asset base, Morgan Stanley reckons.
Presuming Stockland goes down this path, the broker says "it could unlock $825 million of capital whilst minimising dilution to just 1% of funds from operations [FFO] per share".
This equates to a $10 million net impact, according to the broker, and compares to a fall of 3–4% in FFO/share if Stockland were just to sell off the assets individually.
The firm also notes that Stockland wants to rebalance its property portfolio with less exposure to retirement assets as well.
If Stockland can find a "capital solution" to its retirement division, then Morgan Stanley sees a minimal effect on the company's earnings moving forward.
This could also involve transferring its retirement assets to a separate fund, the broker reckons. Regardless of the structure, it sees "the scale being just circa 1–2% dilutive, given that retirement is only yielding circa 5–6% versus Stockland's cost of debt at 3.5%".
The broker maintains an overweight/in-line rating on the Stockland share price, and it is not alone in its viewpoint.
Its $5 price target is reflected alongside analysts at fellow broker Jefferies, who assign a $5.05 price target with a similar outlook.
In fact, out of the 13 analysts covering Stockland, 6 have buy ratings with an average valuation of $5.17, implying an upside potential of 18% at the time of writing.
Stockland share price snapshot
The Stockland share price has fallen over 3% in the red over the last 12 months, after falling a further 5.5% in the past month.
Each of these returns has lagged the benchmark S&P/ASX 200 Index (ASX: XJO)'s return of almost 15% in that time.
