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

Maintaining decent occupancy levels and return on equity: Scentre Group (ASX: SCG) is the owner and operator of many valuable retail real estate properties and popular shopping centers; and operates through activities including construction, development, leasing and marketing for Australian and New Zealand portfolio of properties. The company has a market capitalization of $21.48 billion and is trading at a low level in terms of price to earnings ratio. Occupancy Level that shows the percentage of leased space occupied by tenants, as at the end of year 2017 has been maintained at 99.5% through to the latest interim period while annual return on equity has also been at 20.1% which is way above the industry level. However, the group’s ROE as at June 2018 (interim) has been 6.4% against industry standard of 7.2% with some amount of growing challenges in the sector; while earnings retention has been reduced to 0.60x as at June 2018 against 0.79x reported as at December 2017.


Financial and operating Parameters (Source: Company Reports and Thomson Reuters)

Officially Opens Westfield Carousel’s $350 million Redevelopment: The company is now starting the next generation of retail in Western Australia (WA), after getting nod for the Westfield Carousel’s $350 million redevelopment project. Westfield Carousel is known to be the largest living centre in WA, and it is said that the same will have a David Jones department store. The idea is to have a fashion mall with an open air rooftop dining and entertainment precinct, for new format retailers. The opening of the redevelopment of Westfield Carousel reflects the company's strategy to redevelop shopping centres into living centres. SCG has planned opening of new 70 stores from 30^th August, that comprises of 20 restaurants and 50 stores in the fashion mall. With this and post the completion of redevelopment, about 330 retailers comprising of fashion, food, lifestyle, dining and entertainment will be accounted for. It is also to be noted that the redevelopment will provide a new-look of Westfield Carousel for the people of Cannington, along with an aim to bring together the customers from across Perth. The project’s renowned retailer mix now comprises of a variety of first-to-WA retailers, such as JD Sports, TGI Friday's, Vans, Criniti's, Café63 and China Bar; and other stand out retailers include Mecca Maxima, Sheike, Seed, G-Star, Wheel&Barrow, Endota Spa, Platypus, and more to come after the launch including H&M, Bardot and Strike Bowling. Moreover, as part of the entertainment offering, Westfield Carousel features a fully refurbished HOYTS, that includes a 14-screen complex and an upgraded LUX. Westfield Carousel is one of SCG's three WA centres; and the group recently redeveloped Westfield Whitford City with an $80 million transformation of its dining and entertainment facilities. Along with Westfield Carousel's redevelopment and plans for Westfield Stirling (Innaloo), SCG's total investment in WA during the time frame 2017 - 2022 is projected to be approximately $1 billion.

Pre-Eminent Portfolio Delivers Growth of 3.1% FFO Supported by Strong Demand: 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%. Additionally, 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.


1H 18 Financial Performance (Source: Company Reports)

Development pipeline of more than $3 billion: SCG is developing projects of more than $3 billion and the company is continuously working on the pre-development opportunities. During the first half 2018, SCG has secured further growth at Barangaroo Central, 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. 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 of 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 have 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 expected to open during the second half of 2018. SCG has development target returns of more than 7% yield and more than 15% internal rate of return.


Active Developments (Source: Company Reports)

Capital Management: During the first half to 30 June 2018, the Group has issued €500 million ($800 million) of 10 year bonds. The funds raised from the issue of bonds will be used mainly to refinance the €400 million floating rate notes that matured in July 2018. The company has more recently extended $2.4 billion of existing loan facilities and has also undertaken a new $900 million syndicated bank loan facility. Moreover, the Group has commenced an on-market security buy-back programme of up to $700 million, which is in line with its strategic focus to actively manage the Group's capital structure of which $30 million has been repurchased to date. Additionally, the holders of SCG’s stapled securities have the right to receive declared dividends. The distributions from SGT1, SGT2 and SGT3 and, at the time of winding up SGL, SGT1, SGT2 and SGT3, will participate in the fund realised from the sale of all surplus assets according to the proportion to the number of and amounts paid up on SCG stapled securities held. The holders of the company’s stapled securities have the power to vote their shares and units according to the Corporations Act, either in person or by proxy, at a meeting of any of SGL, SGT1, SGT2 and SGT3 (as the case may be).

Outlook for FY 18 Stood Reconfirmed: 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)

SCG’s Strategy: High quality retail space that attracts high traffic flow is still in demand with occupancy across the company’s portfolio to be above 99.5%. The physical store is influencing sales across all channels including in-store, online and marketplaces as well as enabling 'click and collect' and last mile distribution. This reinforces the pivotal role that physical stores play in the retail ecosystem. Meanwhile, SCG’s leasing spreads, which is the difference in rent between old and new lease agreements, showed two distinct movements, that include the new rents for existing tenants increased by 4 per cent while new rents for new retailers declined 3.8 per cent. This is a trend that SCG follows when trying to attract the best retailers. Additionally, as per the latest Nielsen report, more than half of Australians aged over 18 are prepared to buy from Amazon Australia but SCG is ready to provide spaces that would attract shoppers like the largest lifestyle space of any shopping centre in Australia.

Stock Performance and Analysis: Meanwhile, SCG stock has fallen 7.34% in three months as on September 21, 2018 and is trading at a low P/E of 5.03x. The company has immediate support at $3.99 and resistance at $4.48 level. The company’s portfolio now has 16 of the top performing 25 shopping centres by sales in Australia and has managed to avoid struggling retailers such as Rhodes & Beckett. Solid tenant demand can boost sales while some sluggishness may be witnessed owing to household indebtedness and shift to online platforms. Nonetheless, the trends are expected to be rebounding in long term and FY19 growth is expected to be better with over $900 million of about 7% yielding developments. The group is also keeping a check on gearing (down 20 bps to 31.9%) while latest acquisition may impact it slightly. Based on the foregoing, we give a “Buy” recommendation on the stock at the current price of $ 4.08 (up about 1% on September 24, 2018).
 

SCG Daily Chart (Source: Thomson Reuters)

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