Analyst Research
1 March 2020
Scentre Group Ltd (SCG) reported solid 1H18 result but FFO of 12.38cps came in below market expectation of 13.00cps, which saw the share price marginally decline.
COMPANY DATA
| Date of Report | ASX | Price | Price Target | Analyst Recommendation |
| 22/08/18 | SCG | A$4.15 | A$4.47 | BUY |
| Date of Report 22/08/18 | ASX SCG |
| Price A$4.15 | Price Target A$4.47 |
| Analyst Recommendation BUY | |
| Sector : Real Estate | 52-Week Range: A$3.7 – 4.54 |
| Industry: Retail REIT | Market Cap: A$22,358m |
Source: Bloomberg
INVESTMENT SUMMARY
We rate SCG as a Buy for the following reasons:
- Sustainable distribution yield.
- Strong and experienced management team.
- Highest quality property portfolio of any Australian listed retail REIT with SCG’s portfolio heavily weighted to the growth economies of Sydney, Brisbane, and Melbourne (> 80% of investments in these three cities). SCG’s assets have a cap rate of between 4.25% and 6.25% which is indicative of its quality.
- Expectations of a prolonged low interest rate environment to assist with retail sales and development pipeline.
- Robust development outlook with demand for both retail space.
- Potential recovery in retail sales.
- Potential upside from its >$3bn redevelopment pipeline – if SCG undertakes ~$700m of developments p.a., we expect c$80m of value created per annum. SCG expects in excess of 15% returns (development yields >7.0% and cap rates of ~5.5%; NOI growth with rent escalations of CPI +2% and development yield targets of >7%).
We see the following key risks to our investment thesis:
- Sudden increases in interest rates or deterioration in credit/capital markets.
- Any slowdown in demand and net absorption for retail space;
- Any deterioration in property fundamentals especially delays with developments, declining asset values, retailer bankruptcies and rising vacancies.
- Any delays in developments.
- Lower inflation (and deflation) affecting retailers.
Figure 1: SCG’s Portfolio by geographical location
1. Includes construction in progress and assets held for sale Source: Company
ANALYST’S NOTE
Scentre Group Ltd (SCG) reported solid 1H18 result but FFO of 12.38cps came in below market expectation of 13.00cps, which saw the share price marginally decline.
Funds from Operations (FFO) of $657.2bn equates to 13.38cps, up +3.1%, and a distribution of 11.08cps, up +2%. Comparable net operating income was up +2.5%, with SCG maintaining a strong occupancy rate of 99.5%.
SCG also saw a strong boost to its net asset value, with revaluation uplift of $966m. SCG maintained a strong balance sheet with gearing of 31.9%, liquidity of $2.9bn and interest cover of 3.6x leaves SCG with ample headroom relative to debt covenants.
Moreover, SCG reaffirmed its guidance for FY18, with FFO growth of ~4% and DPS of 22.16cps (up +2% pcp).
We are concerned about the Australian retail environment, overleveraged consumer, and Amazon and other online retailers taking share from bricks and mortar tenants, but given 1. SCG’s solid management team; 2. stable portfolio; 3. dividend yield is still a respectable 5.6%; 4. SCG is currently trading at a discount to its NTA; 5. share buyback of up to $700m (with $30m already purchased) to support the share price.
Reiterate Buy.
- Highlights to SCG’s 1H18 results. 1. Funds from Operations (FFO) of $657.2m, which equates to 12.38cps, up +3.1%, and a distribution of 11.08cps, up +2%. 2. SCG retained its strong balance sheet position with total assets of $37.5bn, gearing of 31.9%, liquidity of $2.9bn and interest cover of 3.6x. 3. SCG recognised a revaluation uplift of $966m, underpinned by, “the completion of developments, growth in NOI and improvement in capitalisation rates for high quality assets.” 4. SCG issued €500m ($800m) of 10-year bonds to refinance the €400m floating rate notes that matured in July 2018. SCG extended $2.4bn of existing loan facilities and established a new $900m syndicated bank loan facility. 5. SCG commenced an on-market security buy-back programme of ~$700m, of which $30m has been repurchased to date.
- SCG property fundamentals remain stable and solid. SCG’s property fundamentals remain strong with 1377 lease deals completed, with total area of 217,610sqm. Comparable net operating income increased +2.5% for 1H18, driven primarily by contracted annual rent escalations and maintaining occupancy greater than 99.5%. SCG increased its exposure to the south-eastern suburbs of Sydney by acquiring 50% stake in Westfield Eastgardens.
- Healthy development pipeline. SCG continues to work on pre-development opportunities with a development program exceeding $3bn. Key developments being; 1. Redevelopment of Westfield Newmarket (SCG share: NZ$400m) which will create the leading lifestyle and fashion destination in New Zealand, has commenced. Management noted that the leasing is progressing well. 2. The Westfield Carousel redevelopment in Perth in which SCG has a share of $350m set to open on 30 August 2018. 3. The projects are expected to yield returns of >7% and IRR>15% with management noting, “All active developments are progressing well, with Westfield Carousel, Westfield Coomera, Westfield Kotara and Westfield Tea Tree Plaza to open during the second half of 2018.”
- FY18 Guidance reaffirmed. SCG reaffirmed its FY18 guidance, with FFO growth of ~4.0% and FY18 distribution of 22.16 cents per security, an increase of +2%. Comparable NOI growth is expected to be +2.5%-3% and weighted average interest rate is forecasted to be ~4.4% for FY18.
SCG’s 1H18 Results Summary
Figure 2: Summary of SCG Results
Source: Company
Figure 3: SCG FY18 outlook
Source: Company
Figure 4: SCG Portfolio Fundamentals
Source: Company
Figure 5: SCG Debt Metrics
Source: Company
Figure 6: SCG Financial Summary 
Source: : Company, BTIG, Bloomberg
COMPANY DESCRIPTION
Scentre Group is an Australia Retail A-REIT. The company derives earnings from operating, managing and developing retail assets. SCG has interests in 39 high-quality Westfield malls across Australia and New Zealand, worth ~$33.6bn. 16 of the top 25 performing centres in Australia, are owned by SCG. SCG earmarked ~$3bn in potential development.
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