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Scentre Group

May 29, 2017

SCG:ASX
Investment Type
Large-cap
Risk Level
Action
Rec. Price ($)

Company overview - Scentre Group Limited is the parent company of Scentre Group Trust 1 (SGT1), Scentre Group Trust 2 (SGT2) and Scentre Group Trust 3 (SGT3). The principal activities of the Company include the ownership, development, design, construction, asset management, leasing and marketing activities with respect to its Australian and New Zealand portfolio of retail properties. Its segments include Property investments segment, which includes net property income from shopping centers, and Property and project management segment, which includes external fee income from third parties, primarily property management and development fees, and associated business expenses. The Company manages, develops and has an ownership interest in Westfield branded shopping centers in Australia and New Zealand. It manages every aspect of its portfolio, including from design, construction and development to leasing, management and marketing.

 

SCG Details

Decent First Quarter Performance: Scentre Group (ASX: SCG) has reported a 2.4% growth in comparable Specialty sales for 12 months ended March 31, 2017 leading to an average of $11,230 per square meter. The Specialty and Mini-Major sales grew 2.1% for the first quarter, with Specialty sales up by 1.8% and Mini-Majors up by 3.5%. The increase in goods were seen in the fashion, food retail, food catering, retail services and technology categories. The company has opened the first stage new fashion precinct of the $355 million redevelopment at Westfield Chermside in April. This comprises launching of Zara, H&M, Sephora and more than 50 fashion, home and lifestyle retailers broadening the range and depth of the centre’s offer. In June 2017, the final stage of the Westfield Chermside redevelopment would open and this will include the largest lifestyle, dining and entertainment precinct in an Australian Shopping Centre. The overall redevelopment would add 33,000 square meters of retail space, bringing the total size to more than 156,000 square meters on completion, which is the largest in Queensland. Further, SCG finished two new redevelopments at Westfield Carousel in Perth and Westfield Plenty Valley in Victoria during the first quarter. SCG share in redevelopment at Westfield Carousel would comprise the introduction of a David Jones department store, which is an expanded fashion range including international mini-majors, new entertainment, dining and leisure precinct, as well as an upgraded Hoyts cinema and additional parking. The group’s $40 million share of redevelopment at Westfield Plenty Valley adds a new nine screen Village cinema complex and a new dining and entertainment precinct including 11 restaurants.
 

Performance as of March 2017 (Source: Company Reports)
 
High Quality Portfolio:The group’s portfolio consists of the highest quality shopping Centre portfolio across Australia and New Zealand. This includes many of the best centres in both markets, including 16 of the top 25 shopping centres in Australia and 4 of the top 5 in New Zealand by annual sales as of December 31, 2016. The group finished $665 million worth of redevelopments while started another $605 million worth of projects. Over 50% of the company’s portfolio is in Sydney and 85% located in the capital cities of Sydney, Melbourne and Brisbane. Around 98% of SCG’s portfolio is invested in regional and CBD shopping centres, with more than 80% of the portfolio generating an annual sales in excess of $500 million, with three centres, Westfield Bondi Junction, Sydney and others. Recently, Fountain Gate generated annual sales in excess of $1 billion. SCG’s centres are present at strategic locations, with high population density growth. More than 85% of new household formation over the past 5 years was in the trade areas of the group’s shopping centres. Therefore, the company has the opportunity to grow the market share and the quality of the portfolio reinforces its resilience in the face of any market fluctuations and retail change. Overall, the group has built a development pipeline of more than $3 billion.
 

Property Portfolio (Source: Company Reports)
 
Capital Management Highlights: SCG has priced US$500 million (A$650 million) ten-year fixed rate senior guaranteed notes with a coupon of 3.75%. The proceeds of the issue would be used to repay borrowing under the group’s revolving bank facilities. Moreover, during 2016, SCG jointly with Cbus Property, has purchased the David Jones Market Street building in Sydney’s CBD. On completion, SCG would own the retail component which would add around 10,000 square meters of luxury retail space to Westfield Sydney. Additionally, SCG has divested Casey Central in Victoria for $221 million and WestCity in New Zealand for $147 million. In the last 18 months, the group made sale of 7 centres in Australia and New Zealand which were not meeting their long term strategic objectives. The group has redeemed over $600 million of property linked notes, effectively increasing SCG’s economic interest in 4 high quality regional shopping centres in Australia. In addition, SCG has refinanced $3.3 billion of debt comprising the extension of $2.6 billion of bilateral bank loans and the issue of €500 million ($745 million) of bonds to fund the redemption of $900 million of domestic bonds, during the year. The group has no debt maturities until July 2018. Overall, SCG’s balance sheet consists of $2.8 billion of available liquidity, a long debt maturity profile and gearing at 33%. The group has high investment grade credit ratings from major ratings agencies, Moody’s and S&P.
 
Maintained FY 17 Outlook:The group’s $80 million redevelopment at Westfield Whitford City (wherein their share is $40 million) is expected to open in September 2017. This will include an Event cinemas complex, including Gold Class, restaurants, cafes and family entertainment precinct. Moreover, SCG maintained its guidance for full year growth in funds from operations (FFO) of approximately 4.25%. The group expects an underlying FFO growth of over 5% excluding the impact of transactions. The 2017 distribution is forecasted to be 21.73 cents per security, which is an increase of 2%. In 2016, SCG had delivered funds from operations of $1.238 billion or 23.3 cents per security, representing an increase of 3.2%, which was higher than the guidance. The FFO growth would have been over 5% if not for the impact of dilutive asset sales. SCG has continued to witness growth in specialty sales, high specialty sales productivity and continued growth in comparable net operating income, while reported a profit of $2.991 billion for the year, including property revaluations of $1.6 billion.
 
Maintaining Strong Portfolio Leasing Despite Volatile Property Market Scenario: Theconcerns over Australian property market have been rising which led the federal government to take steps to stabilize the scenario. The Property prices lost about 1% in Melbourne in the week to May 21 while lost 0.4% in Sydney (CoreLogic estimates). Despite the volatility, SCG is making efforts to enhance their retail product by launching more on-trend and desirable brands. As a result, these brands are driving their retail space, and accordingly, the group has been able to maintain more than 99.5% of portfolio leased. The group’s portfolio included 39 shopping centres spread across Australia and New Zealand as of FY16 including ownership interests valued at $32.3 billion.
 


Project Details (Source: Company Reports)
 
Stock Performance: The shares of SCG have lost over 9.2% this year to date (as of May 26, 2017). Particularly, headwinds in the real estate and retail sectors have been weighing on the stock to some extent. On the other hand, we believe that the group has been trying its best to position itself in prime locations as compared to the peers. The group also has an easy access to potential customers, with over 65% of the Australian population within a 30-minute drive of a Westfield shopping Centre. Around 525 million customers visited a Westfield shopping Centre in 2016, spending more than $22 billion. The group witnessed around 30 Australian growth retailers enhancing their store network to 438 stores from 151 during the last five years, while 100 stores were leased last year. The group also manages the sale of centres that fail to meet SCG’s long-term strategic objectives. The group has started developments worth $430 million in FY17 while targeting more than 7% development yields and >15% returns. With decent dividend yield, trading scenario, strong portfolio with better productivity than many competing portfolios, and strong and low-risk earnings outlook, we give a “Buy” recommendation on the stock at the current price of $ 4.21
 

SCG Daily Chart (Source: Thomson Reuters)


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