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Scentre Group Video



 

Stock Of The Day - Scentre Group (HOLD)

Today we touch upon Scentre Group (SCG) that recently witnessed a boost in sales environment in Australia and New Zealand with strong specialty sales productivity, and growth in average rents and comparable net operating income. Solid sales from specialty tenants were noted in the month of March 2015 particularly. This is indicative of growth based on lower debt costs easing out a bit.

 
Results Summary (Source – Company Reports)

The Company reported the six months results for the period ending 31 December 2014 with Funds from Operations (FFO) of about $578 million consistent with its forecast. The balance sheet stands solid with a gearing of 34.9% as at 31 December 2014 and strong credit ratings of ‘A1’ from Moody’s and ‘A’ from Standard & Poors. The Company expects the FFO to grow by 3.5% to 22.5 cents per security with distribution forecast to increase to 20.9 cents per security in 2015.

Australian Portfolio (Source – Company Reports)

In Australia, average specialty store sales rose to $10,200 per square metre with a comparable growth of 3.6% for 12 months ending 31 December 2014. 3% growth in Fashion, 3.9% growth in footwear, 9.7% growth in jewelry, and 3.1% and 2.8% growth in leisure and retail services, respectively, were noted. However, there was a 3.5% dip in discount department stores although slight improvement was noted in last quarter. Better results were seen for supermarkets in the fourth quarter as well.


Portfolio by Asset Value (Source – Company Reports)

In New Zealand, there was a 2.3% growth in specialty retail sales for the 12 months to 31 December 2014. The portfolio was more than 99.5% leased.
Redevelopment at Westfield Garden city, openings at Westfield Miranda, and $440 million third party design and construction project at Macquarie Centre in Sydney for AMP Capital were other highlights for the year. Two new developments at Westfield North Lakes in Brisbane with $190 million as cumulative value have been commenced in 2015. The project with regards to $110 million development at Chatswood (mall with dining food market and other mini-majors) is expected for completion in 2015. The Company plans to expand the Coles to a big trade area by 2016. $80 million development at North Lakes will have an entertainment and dining zone.  The $670 million third-party design and construction project at Pacific Fair for AMP Capital is also expected to be through by 2016.

The Company has also been in the news for raising $1.3 billion in two tranches through a $US1 billion debt issue in the US market. Out of this, the first tranche of $US500 million six year fixed rate guaranteed notes has been attributed with a coupon of $2.375 per cent; and the second $US500 million has been kept for 10.5 years with a coupon of 3.25 per cent.


Portfolio Summary (Source – Company Reports)

The recent surge in sales was known to have key contribution from the food category. Further, plummeting petrol prices has helped in enhancing the shopping momentum. Pressure for Australian consumer has otherwise been existing given the rise in unemployment. The comparable net operating income growth figures have been encouraging nonetheless.


SCG Daily Chart (Source - Thomson Reuters)

Higher interest costs along with longer stabilization periods at Miranda and Mt Gravatt reflected slight lowering in FY15 guidance of 22.5cps. The distribution growth outlook appears to be submissive as the FY15 distribution guidance of 20.9cps indicates a 2.5% growth on the 2H14 DPS. Given the fact that the Company expects to achieve an FFO payout ratio of 90% over the next few years versus a 2H14 payout ratio of 93.7%, DPS growth is expected to be about 1% only over the next four years. We do expect further reduction in gearing given the sale of NZ$760m of non-core assets. The Company may also seek for selling out of lower quality Australian assets in case better opportunities to invest-in can be figured out. There has been easing of the negative leasing spreads with positive turn-up of revenues and lower occupancy costs. Overall, a complete mix of strings is found to be attached to SCG.

Based on the above, we put a HOLD recommendation for this stock at the current price of $3.74.