Scentre Group

Fat Prophets

Friday 12th June 2015

Sharechat.co.nz Hot Stock: Scentre Group

Rate cuts are a win-win for SCG

What’s new?

Scentre Group recently released to the market a trading update for the three months ending 31 March 2015. In our view, the most striking aspect to the release was the fact that the Westfield shopping centre operator’s asset base has continued to benefit from above-average growth in retail sales. While the broader retail category has been generally subdued, Scentre Group reported 1Q15 comparable specialty sales up 5.8 percent on the previous corresponding period and 4 percent on a rolling 12 month basis.

Importantly for the Australasian focussed group, the combination of positive retail sales growth across its portfolio (Australia and New Zealand experienced similar levels of like-for-like growth in sales per square meter) and high occupancy rates (i.e. in excess of 99.5 percent) has continued to underpin growth in rental income. For the 12 months to 31 March 2015, Scentre Group’s comparable speciality store rent increased by 2.4 percent in Australia and 1 percent in New Zealand.

Having presided over 21 consecutive months of positive specialty retail sales growth, it is also encouraging to note that Scentre Group’s operating momentum appears to be accelerating. While Scentre Group’s retail sales growth for the 12 months to 31 March 2015 was 1.7 percent in Australia and 2.1 percent in New Zealand, retail sales growth for the three months to 31 March 2015 was 3.8 percent in Australia and 5.1 percent in New Zealand.

Another interesting observation, in our view, is the fact that the key pockets of strength in Scentre Group’s retail sales growth coincide with the hot residential property markets of New South Wales and Victoria, and to a lesser extent New Zealand. Whether this region-specific increase in retail consumption is due to the wealth effect of higher property prices is not known. At any rate, it is worth noting that these three regions account for around 68 percent of Scentre Group’s GLA.

Outlook

While Scentre Group’s trading performance for 1Q15 has been positive, it is also encouraging to note that management have been actively building on this momentum. We note (i) the commencement of $505 million of developments YTD, including $105 million on a project in Hurstville, $55 million on a project in Kotara, and a $155 million project Casey Central in Victoria, and (ii) the issue of around $2 billion in fixed rate bonds.

In terms of management’s explicit guidance for CY15, Scentre Group has reiterated “its forecast for Funds from Operations (FFO) to grow by 22.5 cents per security, with the distribution forecast to increase to 20.9 cents per security”. Based on Scentre Group’s current share price, this implies a prospective dividend yield of 5.4 percent, which compares favourably to the broader market and highlights in our view why the company’s share price has been a relatively strong performer.

Price

Based on current market estimates, Scentre Group is trading at around 17.4 times CY15 earnings, 1.2 times NAV and offering a dividend yield of 5.4 percent. While these fundamental metrics appear reasonable, the picture is enhanced by a positive technical overlay. In particular, we note that prices are challenging resistance at $4, and the pressure appears to be building for a break out to the upside in the near-term.

Worth buying?

Scentre Group has the highest quality shopping centre portfolio in Australasia. While the operating environment for retailers in general remains challenging, we believe Scentre Group’s recent trading updates highlights the company’s strong fundamentals and management team. With the Reserve Bank of Australia likely, in our view, to lower the cash rate further in the months ahead, we believe Scentre Group is well positioned to benefit given its relatively high yield and exposure to retail sales.

Disclosure: Scentre Group is held within the Fat Prophets Australian Share Income Model.

James Lennon is an Analyst at Fat Prophets share market research. To receive a recent Fat Prophets Report, call 0800 438 328 or Click here.

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