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 Growth in Distributions: Scentre Group (ASX: SCG) is a large-cap real estate management company with the market capitalisation of ~$20.54 Bn as of 23 January 2020. The company has two operating segments, i.e., property investments, and property management and construction, which contributed ~84.9% and 15.1% revenue in total revenue respectively, in 1HCY19. During Q3 CY19, the company experienced continued growth in customer visitation, which reflects its focus on delivering what customers want. The customer visits stood at more than 535 million. Total in-store sales witnessed a growth of 2.4% for the three months to 30 September 2019. Also, the specialty in-store sales grew by 2.9% for the 3 months and 1.8% for the year. The average specialty store in portfolio of group generates annual in-store sales of more than $1.52 million.

For the half-year ended 30^th June 2019, the company reported funds from operations (FFO) amounting to $676.2 million. FFO, on a per security basis, stood at 12.75 cents reflecting a rise of 3.0%. As per the key personnel of SCG, results for the half-year reflect the long-term growth and sustainability of its business. Considering the decent performance in 1H CY19, the distribution for the period stood at 11.30 cents, with a rise of 2.0%. Notably, the distribution of the company and FFO (per security basis) stood in line with the expectations. It was also mentioned that the group possesses a strong financial position with FFO to Debt at 11.3% and interest cover stood at 3.5 times. At the end of 1H CY19, the net cash inflows from the operating activities stood at $629.1 million after making payments in the course of operations (including GST) of $510.6 million. As per the recent release, the company advised the market that it would be conducting its 2019 Annual General Meeting on 8^th April 2020. By looking at the decent financials over the past few years, paying dividend consistently, and long-term business prospects, we have valued the stock by using a relative valuation method, i.e., Price to Earnings multiple, and arrived at a target price of high single-digit upside (in % term). 


Key Financial Highlights (Source: Company Reports, Thomson Reuters)

Top 10 Shareholders: The following table gives the broader picture of SCG’s top 10 shareholders:


Top 10 Shareholders (Source: Thomson Reuters)

Decent Position of Key Margins: Gross margin and EBITDA margin of the company stood at 70.3% and 67.0%, respectively in 1H CY19. Current ratio of the company stood at 0.43x in 1H CY19 as compared to 0.22x in 1H CY18. Thus, it can be said that the company has improved its position to address its short-term obligations. Return on equity of the company stood at 3.1% in 1H CY19 as compared to the industry median of 3.6%. Therefore, it can be said that the company has delivered better returns to its shareholders as compared to the broader industry.


Key Metrics (Source: Thomson Reuters)

Acquisition of Interest in Booragoon: The company has updated the market that it has acquired a 50% interest in Garden City Booragoon for an amount of $570 million, which includes long-term property management, brand and development rights. Previously, AMP Capital Diversified Property Fund was 100% owner of Booragoon. Post-acquisition, AMP Capital Diversified Property Fund would be 50% joint venture partner of Scentre Group. The acquisition price reflects a stabilised economic yield of around 5.5%. In addition, the current income of Booragoon has been affected by preparations for the previous redevelopment plans.

As per the key personnel of the company, SCG has made a decision to defer the expansion of Westfield Stirling as a result of the change to Perth portfolio of the company, and future development opportunities of Booragoon. Moreover, the transaction is anticipated to be marginally accretive to earnings of the group from 2020 and would also increase the gearing to 31.7%.

A Quick Look at Past Performance of SCG:  During CY18, total receivables (net) of the company stood at $279 million reflecting a YoY growth of 27.3%. Also, the company witnessed a CAGR of 10.67% in total receivables (net) over the time period of CY14-CY18. Thus, it looks like the cash levels of the company might witness a rise moving forward. This might support the company in experiencing decent levels of growth. The total revenues of the company witnessed a CAGR of 5.04% during the FY14-CY18. This indicates that the company possesses decent capabilities to generate revenues which might help SCG in further improving its financial standing. During the time period of FY14-CY18, Scentre Group witnessed a CAGR of 8.90% in gross profit, which indicates that the company has been managing its direct costs effectively.

Introduction of New Brands- Support Top-line Growth: For the six months to 30^th June 2019, the occupancy of the company remained high at 99.3% and the comparable net operating income witnessed a rise of 2.3%. During the same time period, it introduced 118 new brands and 117 existing brands increased their store network with the company. This reflects the central role of highly productive physical stores in acquiring and retaining customers, building brand advocacy as well as influencing sales in-store and online. Moreover, the company released a capital amount of $2.1 billion from the divestment of the Sydney Office Towers and the joint venturing of Westfield Burwood. It added that the capital realised as a result of the transactions would be deployed into the business by providing additional financial capacity for future activities and the security buy-back program of up to $800 million.


Financial Performance for 1H CY19 (Source: Company Reports)

Decent Dividend Policy: During 1H CY19, the company reported a distribution of 11.30 cents, with a rise of 2.0%. During CY18, the company declared a distribution of 22.16 cents per stapled security, which comprised of final dividend/distributions and interim dividend/distributions of 11.08 cents per stapled security each. The annual dividend yield of the company is about 3.39% on a five-year average basis (2014-2018). The company has a decent track record of consistent dividend payments over the last five years and expects the trend to be continued in the future. The phenomenon of consistent growth in dividend payments might attract the attention of risk-averse investors.


Consistent Dividend Payment (Source: Company Reports)

What to Expect From SCG: SCG anticipates FFO growth per security of around 0.7%, which includes the impact of the transactions announced in the first half. It added that the forecast does not consider the anticipated positive earnings impact of up to $800 million security buy-back program. Scentre Group reiterated the distribution forecast for 2019 which is 22.60 cents per security, with a rise of 2%. The company would continue to make an investment in deepening its understanding of the customer.

For 2019, the company is anticipating FFO per security growth of around 3% excluding transactions (divestment of the Sydney Office Towers and the 50% joint venture of Westfield Burwood) and around 0.7% including transactions. Moreover, comparable NOI growth is expected to be in the range of 2%-2.5%. 


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: P/E Based Valuation

P/E Based Valuation (Source: Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months


Historical P/E band (Source: Thomson Reuters)

Stock Recommendation: The company has a dynamic portfolio of Westfield Living Centres with interest in 41 centres, consisting of around 11,500 outlets and total assets under management of ~$54.6 Bn. Going forward, the company expects to grow for property income through active curation of retail & services, and the rise of contractual annual rent. During 1H CY19, the company possessed a strong financial position with FFO to Debt at 11.3% and interest cover at 3.5 times. The group received “A” grade credit ratings by S&P, Fitch and Moody’s. It has a unique operating platform, which attracts and engage with high-demand retailers and generate new income opportunity. As at 30 June 2019, the operating platform generated approximately 16% of FFO. Also, return on contributed equity (ROCE) has experienced a rise of over 172 basis points since the establishment of the company. During 1H CY19, the company has started the $30 million expansion and refurbishment of the level 2 dining precinct at Westfield Doncaster, which would introduce 12 new restaurants. During the span of three months and six months, the stock of SCG has provided returns of 1.29% and 0.77%, respectively. By looking at the decent financials over the past few years, paying dividends consistently, and long-term business prospects, we have valued the stock using a relative valuation method, i.e., Price to Earnings multiple, and arrived at a target price of high single-digit upside (in % term). Hence, we give a “Buy” recommendation on the stock at the current market price of A$3.920 per share.
 
 
SCG Daily Technical Chart (Source: Thomson Reuters)

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