Company Overview: HomeCo Daily Needs REIT (ASX: HDN) is one of Australia’s leading Real Estate Investment Trusts, mainly involved in investing in convenience-based assets across the target sub-sectors of Neighbourhood Retail, Large Format Retail and Health & Services. The company was listed on ASX in November 2020.

HDN Details

HDN Rides on Significant Growth Pipeline & Investment Opportunity: Despite the ongoing challenges and uncertainty led by COVID-19, the company’s underlying portfolio exhibited robust quality and strength, backed by strong operating metrics in FY21. Moreover, since the IPO in November 2020, HDN continued to execute its strategy via an active approach to asset management, development, and acquisitions. Notably, the fair value of investment properties now stands at $1,555.5 million, increasing from $854.4 million since its IPO.

Key Discoveries from FY21 Results:

• Total Revenues: In FY21, the company’s actual revenues stood at $45.2 million, compared to the Product Disclosure Statement (PDS) FY21 figure of $38.2 million. The growth was aided by rental income from two main tenants being Woolworths Group Limited and Coles Group Limited.
• Increase in Statutory NPAT and EBITDA: Actual net profit after tax (statutory) stood at $31.3 million in FY21, against a loss of $7.3 million reported as PDS budget for FY21. Actual EBITDA for the period came in at $38.4 million against a PDS loss of $2.5 million. The company remains on track led by positive market conditions and higher funds from operations (FFO).
• FFO Details: In FY21, the company’s FFO came in at $21.4 million, depicting a rise of 14% from PDS FY21 FFO of $18.8 million. Further, FFO per unit in FY21 was 4.1 cents, up from FY21 PDS FFO of 3.9 cents. Since its IPO 20, the company has witnessed an increase of 82% in portfolio value to $1.6 billion.
• Operational Highlights: The company has retained a high exposure across its target sub-sectors and has attained 99% unadjusted cash collection since IPO. In June 2021, the company achieved 99.3% occupancy and 97.8% trading occupancy, compared to 98.7% and 96.7% as of 31 December 2020, respectively. During the period, the company’s leasing spreads stood at 4.4% across 20 new leases and 2% across 12 renewals in FY22.
• Liquidity Position: The company recorded $5 million cash at the end of FY21, with total debt amounting to ~$425.8 million (including lease liabilities). HDN generated $22.9 million net cash inflows from operating activities from 15 October 2020 to 30 June 2021. The gearing ratio as of 30 June 2021, stood at 15.1%.

The below picture depicts HDN’s track record of occupancy since IPO.

Occupancy Highlight; Analysis by Kalkine Group

HDN Rides on Merges & Acquisitions:

• In September 2021, the company informed the market regarding the acquisition of 100% interest in 6 daily needs assets for a total consideration of $222.0 million. The move aids the company with an 80% exposure to major national tenants, which includes Coles, JB Hi-Fi, Spotlight & Super Retail Group. HDN also undertook a fully underwritten placement to raise $88.3 million at an issue price of $1.61 per unit. The funds generated will be used to finance the acquisitions and associated transaction costs. the purchases and placement align with the company's strategy to secure high-quality daily needs focused assets to build a model portfolio and provide stable and growing distributions.
• On 18 October 2021, HDN stated that together with Home Consortium (ASX: HMC), it had inked a binding Scheme Implementation Deed (SID) with Aventus Group (ASX: AVN). Under the SID, both the companies will acquire all AVN securities via schemes of arrangement, subject to market conditions. The merger is supported by both HDN and AVN’s boards unanimously and represents an exciting opportunity to generate substantial value for both HDN unitholders and AVN security holders. The merger will create Australia’s leading Daily Needs REIT, with a collective portfolio size and market capitalisation of $4.1 billion and~$3.2 billion, respectively, thus bringing HDN and AVN’s highly complementary portfolios with a significant growth pipeline investment opportunity.

Key Metrics: For FY21, the company reported a net margin of 69.2%, higher than the industry median of 49.8%.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 42.15% of the total shareholdings, while the top 4 constitutes the maximum holding. Di Pilla (David) held the maximum number of shares with a percentage holding of 29.21%, followed by The Vanguard Group, Inc. holding 5.43%, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: The company is exposed to the threats of the COVID-19 Pandemic, as it could impact the operating environment and the company’s tenant base. The company is exposed to stiff rivalry from competitors developing similar product lines and services. Further, foreign currency fluctuation risks, low demand and prices for property, and changes in government regulations might hinder the company’s business model.

Outlook: The acquisitions of 6 daily needs assets, placement, and merger with AVN are expected to be 3% accretive to FY22 FFO per unit. Additionally, the company has raised its FY22 DPU guidance from 8.0 cents to 8.25 cents. Also, these acquired assets are located in key growth areas with low site coverage, which offers further upside possibility from future accretive brownfield development. The merger with AVN would create Australia’s leading Daily Needs REIT with significant scale and enhanced capability and make the merged company eligible for the inclusion in the S&P/ASX200 index with a pathway towards the S&P/ASX100 index over time.

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: The company’s stock went down by ~15.71% in the past three months. Currently, the stock is trading below the average of its 52-week high and low levels of $1.7 and $1.19, respectively. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount as compared to its peers, considering the impact of the COVID-19 outbreak, deferred government programs, delays in the deal closures, foreign currency fluctuation risks, changes in government regulations, etc. For the purpose of valuation, peers such as Waypoint REIT Ltd (ASX: WPR), Charter Hall Long WALE REIT (ASX: CLW), Centuria Industrial Reit (ASX: CIP), and other have been considered. Considering higher revenue base, acquisition synergies, capital management program, positive outlook, projects and pipeline development, indicative upside in valuation, and current trading level, we recommend a ‘Buy’ rating on the stock at the current market price of $1.38, as on 07 December 2021, 11:30 AM (GMT+10), Sydney, Eastern Australia.

HDN 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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