Company Overview: Vicinity Centres (ASX: VCX) is a leading retail property group in Australia that has a Direct portfolio with interests in 59 shopping centres. The company has a fully integrated asset management platform and ~$22 billion in retail assets under management across 61 shopping centres. From its Property Investment segment, VCX earns net property income, which comprises revenue less expenses derived from investment in retail property. From its Strategic Partnerships segment, it earns fee income from property management, development, leasing and management of wholesale property funds.

VCX Details

Improving Retail Sales and Centre Visitation to Assist VCX in Recovery:

Due to the impact of the COVID-19 pandemic, the company’s financial performance was severely impacted during H1FY21. However, despite the challenges, the company was able to maintain its corporate overheads and robust balance sheet. With the easing of COVID-19 restrictions and decent consumer sentiments, the company believes it is on track to recovery.

• Witnessing Signs of Recovery: VCX is witnessing signs of recovery from the impact of COVID-19 pandemic, as its average centre visitation and retail sales were improved during Q3FY21.
• Ratings Improved by Moody’s and S&P: In June 2021, Moody’s Investor Services changed VCX’s A2 issuer rating and VCX’s outlook from ‘negative’ to ‘stable’. Earlier, Standard & Poor had also changed VCX’s rating from ‘negative’ to ‘stable’.
• Track Record of Paying Regular Distribution: Despite financial performance being impacted during H1FY21, VCX paid distribution of 3.4 cents per share, representing pay out of 62.4% of 1H21 AFFO (Adjusted Funds from Operations.
• Improving Centre Visitation: Due to the easing of social restrictions, reduced COVID-19 outbreaks and growing consumer confidence, VCX expects centre visitation to improve further.

5-Year Financial Summary (Source: Analysis by Kalkine Group)

Key Takeaway from Q3FY21:

• Rise in Supermarket Sales: Supermarket sales grew by 1.5% YoY in Q3FY21, benefited from hyper-local shopping, increased cooking at home and some panic buying during lockdowns.
• Maintained Occupancy Rates: As at 31 March 2021, VCX’s portfolio occupancy rate stood at 98.0%, in line with the previous three months.
• Decent Cash Collection: Average cash collection for Q3FY21 was 82% of gross billings, slightly higher than 80% collected to date for 2QFY21.
• Solid Deal Activity: During the quarter, VCX completed 328 leasing deals, resulting in a leasing spread of -13.5%.

H1FY21 Result Highlights:

• Improvement in Corporate Overheads: Gross corporate overheads during H1FY21 stood at $69.7 million, down by 8.9% on pcp, as cost savings achieved across most discretionary expense categories.
• Income Impacted by COVID-19 Pandemic: Total income for H1FY21 stood at $365.7 million, down by 22.3% on pcp, impacted by the COVID-19 restriction.
• Decline in FFO: Funds from operations (FFO) stood at $267 million in H1FY21, down from $337 million in H1FY20.
• Decent Balance Sheet: At the end of H1FY21, the company had a decent balance sheet with liquidity of $2.4 billion and gearing of 24.5%.

Key Metrics:

Gross Margin in H1FY21 stood at 76.3%, up from 73.7% in H1FY20. EBITDA margin in H1FY21 stood at 52.4%, down from 63.1% in H1FY20. Current ratio in H1FY21 stood at 0.35x, up from 0.17x in H1FY20, demonstrating that the company has improved its ability to pay short-term obligations. Debt to equity ratio for H1FY21 stood 0.37x, down from 0.42x in H1FY20.

Liquidity Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 31.25% of the total shareholding, while the top four constitutes the maximum holding. Vanguard Investments Australia Ltd. and Unisuper Limited are holding a maximum stake in the company at 8.56% and 5.91%, respectively, as also highlighted in the chart below:                            

      

(Source: Analysis by Kalkine Group)

Track Record of Paying Distribution: VCX has a decent track record of paying regular distributions to its shareholders.  Due to the impact of the COVID-19 pandemic, the company’s distribution during FY20 was lower than the distributions in the previous five years. On 21 June 2021, VCX announced the proposed final distribution per security of 6.6 cents. The final distribution includes distribution of 4.1 cents in relation to the second half of FY21 and 2.5 cents attributable to several one-off items recognised during the full year FY21. The dividend has a record date of 30 June 2021 and payment date of 31 August 2021. The proposed final distribution will take the total full-year distribution to 10.0 cents per security, which is a significant improvement over the distribution paid in FY20. At the CMP of $1.555, the company’s annual dividend yield stood at 6.43%, higher than the 5-year average dividend yield of 6.05%, demonstrating the company’s focus on rewarding the shareholders through dividends.

5-Year Distribution Trend (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19 Uncertainties: The company is exposed to the risks and uncertainty surrounding the impacts of the COVID-19 pandemic, as it causes lockdowns, travel restrictions and several other disruptions.
• Loss of Talent: The company’s ability to attract and retain its people and top talent may limit to achieve operational targets. Recently, VCX announced the resignation of Chief Financial Officer (CFO), Mr Nicholas (Nick) Schiffer as he wished to pursue other opportunities.
• Changes in Macro Economic Trend: Macro economic trends like consumer sentiments, residential dwelling values, unemployment rates, household savings also plays an important role in driving the performance of the company.

Outlook: Looking ahead, the company is focused on maintaining high occupancy across the portfolio. Moreover, it is focused on navigating the risks and uncertainties whilst managing the business for the long term. In Q4FY21, the company expects improvement in cash collections, supported by improved trading conditions and completion of outstanding COVID-19 support agreements. VCX intends to leverage data and technology platform to drive insights and create value for its stakeholders and its retail partners.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation:  Over the last six months, the stock has corrected by 8.52% and is currently trading higher than the average 52-week price level band of $1.205 and $1.778. We have valued the stock using P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe that the company can trade at a slight discount to its peer average P/E (NTM trading multiple), considering the week H1FY21 financial performance, impact of COVID-19 pandemic, negative net margin, and also taking into account that the company has been trading at a discount in the past 3-years over its peer average. We have taken peers like Shopping Centres Australasia Property Group Re Ltd (ASX: SCP), Charter Hall Retail REIT (ASX: CQR), Scentre Group (ASX: SCG), etc. Considering the improved trading conditions, signs of recovery from COVID-19 pandemic, decent performance in Q3FY21, improving centre visitation, decent capital structure, and valuation, we give a “Buy” rating on the stock at the closing price of $1.555, down by 0.956% as on 8 July 2021.

VCX Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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