In today’s daily we have covered stock research on Scentre Group (HOLD).









 
The S&P 500 was down by 21.14points or 1.04%on Wednesday to 2001.89 points. U.S. stocks pared losses in late afternoon trading on Wednesday, led by a bounceback in energy shares as U.S. oil prices settled more than 5 percent higher. S&P 500 materials and financial sectors were the day's worst performers. Copper a key industrial metal, touched its lowest level since July 2009, weighing on shares of producers, after the World Bank cut its growth forecasts for this year and next.

U.S. consumer spending in December disappointed, with retail sales registering their biggest drop in 11 months. The Commerce Department said on Wednesday retail sales fell 0.9 percent, the biggest decline since last January, after increasing 0.4 percent in November. The CBOE Vix index, often described as Wall Street’s “fear gauge”, was up 7 per cent at 22 — above its long-term average of about 20.



VIX Daily Chart (Source – Thomson Reuters)
S&P ASX 200was down by 51.1 points or 0.95%on Wednesday and closed at 5353.6 points. Australia’s biggest oil producer Woodside Petroleum fell 0.5 per cent to $35.54. The big four banks were all lower also. Commonwealth Bank of Australia came down 1.9 per cent to $83.68, while Westpac Banking Corporation fell 0.81 per cent to $33.13. ANZ Banking Group was down 1.52 per cent to $31.67 and National Australia Bank was down 1.52 per cent to $31.67.

Harvey Norman was the biggest ­winner among the ASX 200, jumping almost 7 per cent in price. Resources giant BHP Billiton was down 2.75 per cent to $27.20, main rival Rio Tinto fell 3.34 per cent to $55.54 while iron ore miner Fortescue Metals Group was down 8.24 per cent to $2.34. Iron ore was down 44 US cents at $US68.30 a tonne. SPI is down 33 points at 5270.

Harvey Norman Daily Chart  (Source – Thomson Reuters)
 
Top Performers on the ASX 200 were :-


 
 
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Stock of the Day - Scentre Group (HOLD)

Scentre Group (SCG) which has been a merger of Westfield Retail Trust and Westfield Group’s ANZ business (48.6%), owns $28bn of super regional retail with a $4.9bn development pipeline and AUM of $38bn. The portfolio possessed by the Company appears to be of high quality and SCG is the largest Real Estate Investment Trust (REIT) in Australia, with a market cap over $18 billion. As per its September 2014 quarter updates, Westfield malls in Australia relished 15 consecutive months of improvements in retail sales with comparable specialty sales 4.2% higher than a year ago.


Specialty Retail Sales by Region (Source – Company Reports)

SCG’s management reported to have a long-term focus on value maximisation. The current pricing suggests a 6.0% cap rate and EBIT multiple of 10.8x. The payout ratio is expected to return towards 90% with DPS growth lower still which is contrary to consensus showing two-year EPS & DPS CAGR into 2016 at 3.7% & 3.6%, respectively. Interest expenses have been pointed out to be around 5% cost of debt. Then, development announcements entail SCG having $100mn of development spend identified on balance sheet assets. It is also noted that NZ assets have only traded at a 4% premium to book value whereas there is a potential for Australian disposals to outdo book values. GIC’s acquisition of a 49% interest in SCG’s top-five NZ shopping centres (three having medium term redevelopment opportunities) at a 4% premium to book value was reported to facilitate SCG receiving ~$930mn in proceeds. This has been expected to drive a ~210bp pro-forma gearing reduction from 37.6% at 30 June to 35.5% by year end. The sale price indicated an 8.2% premium to the June 2014 book values in NZD and 4.4% in AUD. Further, SCG will have the full management and development rights over the five assets.

The Company has refinanced most of its $5 billion bridge facility. With this little smoothness, SCG may take some time to decide for selling of any further assets and may also align such an approach with development redeployment.


Facility Maturity Profile (Source – Company Reports)

Work at Miranda, which is a $475 million project positioned to yield 6.5% to 7% return, by SCG and its partner DEXUS Property Group looks to be an important development effort. The Company’s areas of focus for acquisitions include SW Sydney, NW Melbourne and SE Queensland. Holding 100% stakes in Sydney, Bondi Junction, Chermside and the like, is optimal for the Company. With regards to the partial disposal of Bondi Junction, there is potential to find a co-investment partner and the opportunity may help SCG to re-rate the entire portfolio further reducing leverage.


Westfield Warringah Mall – Northern Beaches (Source – Company Reports)

We also note that 2015 development efforts include Chatswood, Warringah, Kotara, Hurstville and North Lakes. However, coupled with the development efforts few trends in global retail that SCG may consider include captivating ecommerce, convenience and destinational shopping segments under retail; adopting online strategies; having larger store formats given varied internet strategies, and so forth.

The Company appears to have a greater share of gross property income than its peers as it has an internal property management capability. Improvement expected in retail sales alongside low interest rates and house price growth also appear to be a good indication although occurring at a slow pace. The Company’s premium malls are expected to benefit from the continuing tenant demand which indicates superior positioning, higher sales productivity and exposure to higher-income demographics. However, pressures owing to consumer deleveraging and sales outflow to online platforms (though not necessarily leading to demise of shopping malls) are being felt by the Company. There is a chance that growth in rents and operating income may trend lower over the medium term owing to the fact that SCG charges premium rents.


Comparable Change Retail Sales by Category – Australia (Source – Company Reports)
One also needs to be wary of the aspects that asset sales approach may sometimes prove to be dilutive to short-lived earnings. Three assets with specialty sales of <$7,000psm have a weighted average yield of 7.3%, versus a cost of debt <5%. There are also risks associated with immediate occupancy on completion of various developments. Although, the market senses that the business will generate growth given the ~$3bn property management business merging into the fold, uncertainties do revolve around operating real estate investment/management environment, development projects, and interest expense profile and payout ratio. For instance, a subdued environment for the landlords is expected in view of continued negative reversions on re-lease and risk to returns from development. Submissive earnings growth outlook and lower rate of growth in distributions lead us to think for a wait-and-watch approach.


SCG Daily Chart (Source - Thomson Reuters)

Based on the foregoing, we put a HOLD recommendation for this stock at the current price of $3.69.



 
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