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

Scentre Group is the parent company of Scentre Group Trust 1 (SGT1), Scentre Group Trust 2 (SGT2) and Scentre Group Trust 3 (SGT3). Scentre Group’s (SCG) portfolio includes many of the largest and best shopping centres in Australia and New Zealand, including 16 of the top 25 shopping centres in Australia by annual sales. Group’s portfolio continues to be the first choice for both new and established retailers to grow their brand and business. It is this demand for high-quality retailer space that enables Scentre Group to consistently deliver strong long?term risk-adjusted returns. To ensure that its business has a sustainable long-term future, all its actions are viewed through multiple lenses that are community, people and fiscal performance, with an enduring responsibility to deliver growth and leave a positive legacy. The Group is extremely well?placed with its unique platform of high?quality centres, to become the ecosystem driver that connects customers with retailers, products, services and experiences. The recent reaffirmation of its FY18 guidance and continued growth in distribution at a rate below the earnings growth with potential to help fund SCG’s development pipeline, are some key positives. The group has the most productive retail portfolio in Australia and the recently announced on-market buy-back program of up to $700m is expected to add value.


Scentre Group’s Assets’ Locations (Source: Company Reports)

Healthy Financial Performance: The Group released its financials for 12 months period ending on 31 December 17 and reported $1.290 billion of Funds from Operations (FFO), representing 24.29 cents per security (up by 4.25% as compared to prior year) and a distribution of 21.73 cents per security (up by 2% as compared to prior year). The Group delivered $4.2 billion of profit for the year, including property revaluations of $3.2 billion. These revaluations reflect strong net operating income growth across the portfolio. Since the establishment of Scentre Group, the Group has grown the value of its portfolio by more than 30% to $36.2 billion. The Group has a strong financial position with total assets of $37.5 billion, gearing of 32.1% and liquidity of $2.7 billion as at 31 December 2017. During 2017, the Group issued US$500 million ($650 million) of bonds and refinanced and extended $3.7 billion in committed bank loan facilities. In 2017, the Group announced that it will continue growing distributions at approximately 2% until it reaches a pay-out ratio of 85% of FFO. Once this target is achieved the distribution is expected to grow in line with FFO growth. For 2017, the Group retained $136 million which equates to a pay-out ratio of 89.5%.


Maturity Profile Trend (Source: Company Reports)

Operational Performance:  During the year 2017, the Group commenced over $1.1 billion (SCG share: $810 million) of developments including projects at Westfield Carousel in Perth, Westfield Plenty Valley in Melbourne, Westfield Kotara in Newcastle and Westfield Coomera on Queensland’s Gold Coast. In 2017, the Group successfully added more than 38,000 square metres of lettable area to the portfolio through the completion of redevelopments at Westfield Chermside and Westfield Whitford City, further highlighting the strong demand for high-quality retail space. Both centres are trading strongly. The Group recently announced NZ$790 million (SCG share: NZ$400 million) of the redevelopment of Westfield Newmarket, which will create a world-class retail and lifestyle destination unparalleled in the New Zealand market. The Group reported 530 million of the customer visit across its portfolio, an increase of 5 million from last year and occupancy was maintained at more than 99.5 per cent.


Funds from Operations Performance (Source: Company Reports) 

Key Updates: The Group released and adopted a new Constitution and will comply with all its terms and conditions. Scentre Group priced €500 million ($800 million) of ten-year fixed rate guaranteed notes with a coupon of 1.75% under its Euro Medium Term Note Programme on April 05, 2018. Proceeds of the issue will be used to repay borrowings under the Group’s credit facilities and for general corporate purposes. The Group announced that one of its directors, Aliza Knox has an indirect interest in the Company (through J.P Morgan Nominees Australia Limited) and initially used to hold 34,900 shares and now holds 60,400 shares since 16 April 2018. She acquired 25,500 shares at an average price of $3.875per security through an on-market trade and now she holds significant holdings in the Company.


Lease Expiry Profile (Source: Company Reports)

The Group issued a notice for the purpose of Subdivision 12?H of Schedule 1 of the Tax Administration Act for the distribution for the six months ending on 31 December 17, for Scentre Group Trust 1 and Scentre Group Trust 2 in respect of ordinary units that is 2.60 cents per unit (Trust 1) and 5.92 cents per unit (Trust 2).The Group announced a buy-back programme of up to $700 million which was in line with its strategic focus to actively manage the Group’s capital structure. The buy-back programme will be managed in a manner consistent with the Group’s current long-term credit ratings, and Credit Suisse Equities (Australia) Limited and J.P Morgan Securities Australia Limited will be acting as broker on the behalf of the Group in relation to the buy-back.
 

Outlook: The Group forecasted FFO growth of 4 per cent (approximately) for the 12 months ending 31 December 2018. The distribution for 2018 is forecast to be 22.16 cents per security, an increase of 2%. Current developments are all progressing well. Westfield Plenty Valley, where the Group is adding 10,300 square metres of additional lettable area, is fully leased and was slated for opening in March 2018. The Group is expanding Westfield Kotara ensuring that it is the leading centre for Fashion and lifestyle in the Hunter region and is adding a restaurant precinct and a newly refurbished cinema at Westfield Tea Tree Plaza in Adelaide. The Group continues to proactively curate a unique retail mix at each one of its centres to meet the needs of its customers. Scentre Group moved to managing its financial ratios consistently with what the Group understood to be required for a Moody’s “A2” long-term rating and now Moody’s Investor Services assigned “A2” rating that is stable from “A1” (review for possible downgrade) and this will still not have any adverse impact on its cost of funds.

2018 Forecast (Source: Company Reports)

Stock Performance: The retail landscape continues to evolve at an increasing pace. It continues to see structural changes in consumer behaviour, their expectations and the options that are presented are making it more important to create a compelling reason for customers to visit, stay and engage. Its ability to innovate, adapt and respond with agility to customer tastes is an organisational imperative. The Group has worked hard in the past few years to establish a workplace culture that is meaningful and productive, and it has been rewarded with achieving a level of staff engagement and this has put Scentre in the top 2% of companies globally. The Group recently achieved endorsement by the Workplace Gender Equality Agency as an Employer of Choice, one of 120 organisations in Australia, and as a WGEA pay equity ambassador, and the Group ensures that it has equitable pay for male and female employees. The Group’s portfolio has a long track record of delivering strong operating metrics, and the portfolio has remained more than 99% leased for over 20 years. The Group reported 20.1 per cent of ROE for December 2017 against 16.1 per cent for December 2016. The stock prices have shown a downward trend for past one year and were down by 12.61 per cent while the same witnessed a marginal decline in the past one week. After looking at the overall performance and the current retail landscape, we give a “Buy” recommendation on the stock at the current market price of $ 3.89
 

SCG Daily Chart (Source: Thomson Reuters)

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