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

SCG Plans to Develop $500 Million Parramatta Skyscraper: Scentre Group (ASX: SCG) is engaged in ownership, designing, development, construction, asset management, leasing and marketing activities portfolio of retail properties in Australian and New Zealand. The company was formed after the merger of Westfield Retail Trust and Westfield Group's Australian and New Zealand management business in June 2014. SCG has built a decent brand name in the last few years and now submitted revised plans for a 42-storey tower to be built on top of Westfield Parramatta. The company has submitted this new plan to Parramatta Council lately, which shows a taller tower that will have larger floor plates spanning 3,025sq m and will create a total of 112,000sq m of office space. Westfield Parramatta is one of the strongest performing centers in SCG’s portfolio. The company already has plans for further investment in infrastructure and education. On the other hand, SCG has completed a $80 million redevelopment at Westfield Plenty Valley in Melbourne, which will add more than 100,000sq m of space to the company's portfolio.

Strong First Half 2018 Financial Performance: SCG for the first half 2018 has reported 3.1% rise in Funds From Operations (FFO) to $657 million and profit for the half year of $1.46 billion. The company’s distribution is up 2% to 11.08 cents per security. The company has delivered 2.5% growth in comparable net operating income (NOI) for 1H 2018. Moreover, due to the completion of developments, growth in NOI and improvement in capitalisation rates for high quality assets, the company has witnessed a revaluation uplift of $966 million across the portfolio at the 1H 2018. For the first half 2018, SCG has total assets of $37.6 billion and posted 3.5% increase in assets under management to $52.8 billion.  Gearing at end of 1H 2018 is 31.9%.


1H 18 Financial Performance (Source: Company Reports)

Acquisition of 50% interest in Westfield Eastgardens: SCG has recently acquired 50% interest in Westfield Eastgardens in Sydney’s southeastern suburbs for total consideration of $720 million, from the Terrace Tower Group. This transaction was in the top five largest single-asset retail transactions to occur in Australia, as per a market assessment. Westfield Eastgardens is considered to be one of the top 30 shopping centres in Australia with total retail sales of over $600 million; and is known to provide substantial redevelopment potential for retail expansion as well as mixed?use development. This comes at the back of location advantage within an area that is undergoing significant renewal. As per the planning authorities, Westfield Eastgardens is considered to be one of Sydney’s strategic centres with a trade area having good projection of population growth and exposed to investment in infrastructure like enhanced public transport. Many redevelopment opportunities exist with the introduction of local and international fashion retailers and expansion of the dining, entertainment and lifestyle offering. In addition, Westfield Eastgardens can create value through mixed?use development including commercial, accommodation and education facilities. Overall, SCG has increased the company’s exposure to the south-eastern suburbs of Sydney after the acquisition of 50 per cent of Westfield Eastgardens.

Development program in excess of $3 billion: SCG has a development program in excess of $3 billion and continues to work on pre-development opportunities. During the first half 2018, SCG has secured further growth at Barangaroo Centralin, which is a strategic location by being part of the successful consortium that is expected to deliver and operate the retail component. Further, SCG has commenced the redevelopment of Westfield Newmarket (SCG share: NZ$400 million) that is expected to create the leading lifestyle and fashion destination in New Zealand. The company’s interest in the development is strong across all categories and the company is well progressed for leasing. The company had opened Westfield Plenty Valley in Melbourne, which added 10,300 square metres of additional lettable area. The Westfield Carousel redevelopment in Perth, in which SCG share is $350 million, is to open from 30 August 2018, and will comprise a David Jones department store, a new fashion mall,  the establishment of a new ‘urban oasis’ rooftop entertainment, dining and leisure precinct, an upgraded HOYTS Cinema and additional car parking with the latest technology. Moreover, Westfield Coomera (SCG share: $235 million) on Queensland’s Gold Coast is SCG’s first greenfield development. This new 59,000 square metre centre will comprise Coles and Woolworths supermarkets, an Event Cinema complex including Gold Class, Kmart and Target discount department stores and approximately 140 specialty stores including an alfresco dining and leisure precinct. Westfield Kotara’s redevelopment (SCG share: $160 million) is on track to create the fashion, dining and lifestyle capital of the Hunter Valley as per the plan. This centre will comprise of the introduction of H&M, Zara, the reintroduction of a new Kmart and JB Hi Fi, and approximately 30 new specialty retail stores. Additionally, Westfield Tea Tree Plaza’s redevelopment in Adelaide (SCG share: $25 million) is expected to include a new dining and leisure precinct that has a selection of new restaurants, including a mix of first-to-market and local favourites. The redevelopment of this centre is also expected to include an expanded, upgraded 12 screen cinema offering. Overall, the company’s all active developments are progressing well, with Westfield Carousel, Westfield Coomera, Westfield Kotara and Westfield Tea Tree Plaza slated for opening during the second half of 2018. SCG has development target returns of more than 7% yield and more than 15% IRR.


Active Developments (Source: Company Reports)

Comparable in-store sales growth in 1H 2018: For the first half 2018, SCG has witnessed 2.1% growth in total specialty in-store sales and 1.6% for the year. Majors in-store sales rose 0.7% for the first half 2018  and 0.3% for the year. The total stable portfolio in-store sales grew 1.3% for the half year and 1.1% for the year 2018.

Capital Management: The company has recently announced the dividend of A$0.1108, to be paid on 31 August 2018 to the investors of record on 15 August 2018. During the first half of 2018, the Group has issued €500 million ($800 million) of 10 year bonds. The funds raised from the bond issue were used mainly to refinance the €400 million floating rate notes that had matured in July 2018. Moreover, SCG has very recently extended the $2.4 billion of existing loan facilities and also has established a new $900 million syndicated bank loan facility. Furthermore, SCG has commenced an on-market security buy-back program of up to $700 million, which is in line with the company’s strategic focus to manage the Group’s capital structure actively of which $30 million has been repurchased to date.

Reconfirmed the FY 18 Outlook: SCG has reconfirmed FY 18 FFO growth outlook, expected to be now of approximately 4%. The distribution for 2018 is projected to be 22.16 cents per security, which is a rise of 2%.The comparable NOI growth for 2018 is expected to be in the range of 2.5% to 3%. The weighted average interest rate for 2018 is expected to be approximately 4.4%.


FY 18 Outlook (Source: Company Reports)

Stock Recommendation: Meanwhile, SCG stock has fallen 3.08% in three months as on August 24, 2018  and is trading at a low P/E of 5.09x. Due to the company’s high quality retail space, SCG witnesses high traffic flow in demand with occupancy across the company’s portfolio at more than 99.5%. The physical store has influenced sales across all channels, that includes in-store, online and marketplaces along with enabling ‘click and collect’ and last mile distribution. As a result, SCG looks to be well placed to combat the threat from online retail, and its shopping centres are performing well. Moreover, Westfield Newmarket and four other malls half-owned by Scentre Group have increased in value by $43 million in the first half of 2018. SCG’s next big project is at Barangaroo Central in Sydney, which is expected to see the company deliver and operate the retail component.

The group has maintained the earnings per share over the last two years and is expected to witness a surge in next financial year based on revenue growth in view of key developments. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 4.110.
 

SCG Daily Chart (Source: Thomson Reuters)

 
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