Company Overview: One of Australia’s leading real estate Investment Trusts, HomeCo Daily Needs REIT (ASX: HDN), invests in convenience-based assets across the target sub-sectors of Neighbourhood Retail, Large Format Retail and Health & Services. The company was listed on ASX on 23 November 2020.

HDN Details

Mergers & Acquisitions Aids HDN with Significant Growth Opportunities:

HDN’s Merger Deal with Aventus Group:

On 19 January 2022, HDN got confirmation from the Commonwealth Government, that it has no objection regarding the proposed Merger between HDN, Home Consortium (ASX: HMC), Aventus Capital Limited (in its capacity as responsible entity of the Aventus Retail Property Fund) and Aventus Holdings Limited for the purposes of the Foreign Acquisitions and Takeovers Act 1975. Under the proposed merger deal:

• HMC Funds Management Limited, as the responsible entity of the HomeCo Daily Needs REIT, would be acquiring 100% of the Aventus Units under the Trust Scheme; and
• Home Consortium Limited would be acquiring 100% of the Aventus Shares by way of a scheme of arrangement.

• The merger will create Australia’s leading Daily Needs REIT, with a collective portfolio size of $4.4 billion with more than 1,200 tenants, thus bringing HDN and AVN’s highly complementary portfolios with a significant growth pipeline investment opportunity.
• The Merger is expected to deliver a massive rise in FY22 FFO accretion of ~4.0%. The combined entity is expected to have a gearing ratio of ~32.6%, well within the target gearing band of 30-40%.

• The merger has been approved by Aventus shareholders and seems to be beneficial for both entities. It is currently expected that the final draft of Australian Taxation Ruling (ATO) ruling will be received on 18 February 2022.
• From FY23 onwards, the merged HDN Group plans to target over $60 million of annual development capital expenditure. The targeted return on invested capital (ROIC) is expected to be more than 7%.

Acquisition of Daily Needs Assets:

• The merger will bring HDN and Aventus Group's highly complementary portfolios with a significant growth pipeline and investment opportunity.
• 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.

Post-Merger Snapshot; Analysis by Kalkine Group

Sneak Peek at FY21 Key Highlights: In June 2021, the company achieved 99.3% occupancy and 97.8% trading occupancy, compared to 98.7% and 96.7% as at 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.

FY21 Snapshot; Analysis by Kalkine Group

Key Metrics: For FY21, the company reported a net margin of 69.2%, higher than the industry median of 49.4%. The company has retained a high exposure across its target sub-sectors and has attained 99% unadjusted cash collection from IPO to June 2021. 

Cash Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 42.51% 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 risks and uncertainties caused by the COVID-19 pandemic. The company’s results can be impacted by the changes in the valuations of its assets. HDN is also exposed to the risk of vacancy and low occupancy. Further, foreign currency fluctuation risks, soft demand, and government regulations change the woes.

Outlook:

• 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, and expects the same to continue in FY22 & beyond.
• Further, the company remains on track to execute its strategy via an active approach to asset management, development, and acquisitions.
• The company has reaffirmed merged HDN group proforma FY2022 FFO/unit guidance of 8.9 cents as well as standalone FY 2022 DPU guidance of 8.25 cents.
• Notably, including the revaluation gains separately announced by Aventus, the combined portfolio is anticipated to increase by $346 Mn (+9%) on a net basis, which would result in increasing HDN’s proforma NTA per unit from $1.24 to $1.41.
• The company expects to report its 1HFY22 results on 22 February 2022.

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 ~7.64% 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 $1.23, 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, pending ATO ruling, 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 others have been considered. Considering the above-mentioned factors, merger & acquisition synergies, capital management program, encouraging outlook, projects developments, indicative upside in valuation, and current trading level, we recommend a ‘Buy’ rating on the stock at the current market price of $1.325, as on 15 February 2022, 10:50 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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