what Pengana, PM Capital say about the stock’s valuation

PM Capital portfolio manager John Whelan said the market can sometimes struggle with the valuation as Howard Hughes is part residential land developer, commercial property developer, and commercial property owner. “Thus, they are quite unique and run a hybrid model,” he said, where the market generally prefers pure-play businesses.

PM Capital estimates the business is worth $US100 to $US120 a share in its current state, “albeit they should continue to increase in underlying intrinsic value as they build out their master planned communities”.

Because cash flows are reinvested in the business to build commercial property within the master planned communities, “the value of this capital expenditure may not be appreciated until the assets are completed and generate cash flow in their own right”, Mr Whelan said.

A presence in states that have strong demographic trends, such as Texas which is enjoying an energy renaissance, is advantageous to Howard Hughes, Pengana’s Mr McDonald said.

“Overall, the US has an undersupply of houses which is very different to the period following the GFC when there was substantial oversupply. This gives us confidence that land sales may slow due to high mortgage rates but will not totally stop.”

The part of its business that operates the mature property assets has steady income generation, “which also supports the debt profile,” Mr McDonald added.

Last week, Howard Hughes reported third-quarter net income of $US108.1 million, or $US2.19 a share diluted, from $US4.1 million, or US7¢, a year ago. The business itself repurchased $US25.4 million of stock at an average price of $US68.98.

The nature of US fixed-rate lending on 30-year mortgages means most borrowers are resistant to refinancing at the present lending rate of around 7 per cent. This makes new homes the preference of buyers who are relocating, as the stock of available housing remains abnormally low.

As its CEO David O’Reilly told analysts last week: “Those people that are sitting in their home locked into a 3 per cent mortgage aren’t in a rush to trade out to 7 per cent. So, new buyers coming into this market [are] really left with new homes as their choice.”

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