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06, December 2017
Weed out the false narrative


Humans love stories and we ascribe them to everything to make sense of the world. The stock market is the perfect environment for narratives because we innately try to make sense of why stock prices change. The trouble with stories is that it can get out of hand and stock prices may not represent the underlying truth. In other words, a stock price may substantially deviate from its fundamental value.

Westfield is a classic example of how false narratives can push stock prices to extremes.

In early 2007, Westfield Group, which at the time combined its global and domestic assets, was extremely expensive trading about a 70% premium to net tangible assets (NTA). With such a premium price, the market was implying either the NTA was extremely undervalued or the development assets were worth about 70% of the NTA. The NTA was about right, but the prevailing narrative at the time focused on Westfield’s large development pipeline. Yet, to have that much value ascribed to the development assets defied logic because the underlying NTA took the Lowy family about 50 years to build. Further, for the development assets to be realised, it was going to need a lot of capital, something that was going to be difficult with an elevated gearing level of 40%.

However, over the course of a few years, the stock market went from loving it to hating it. In 2011, Westfield had split up its global assets (Westfield Corporation) and domestic assets (Westfield Retail Trust). In subsequent years, Westfield Retail Trust was extremely cheap with the stock trading at a 15% discount to NTA because the prevailing narrative at the time focused on why the Lowy family sold down a portion of their shareholding.

Again, the market forgot it took five decades to create one of Australia’s largest property portfolios. To trade at such a discount, the market was implying the development book was free and the balance sheet was under stress, which was unlikely given its very low gearing level of 11%.

In recent months, the share prices of Westfield Corporation and Scentre Group (formerly known as Westfield Retail Trust) have hit 12-month lows. As Amazon enters Australia, we again have a compelling narrative. But this time it’s about the demise of bricks and mortar retail.

Another false narrative? You decide.

As featured in Livewire

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