Company Overview: Scentre Group (ASX: SCG) owns and operates an extraordinary platform of 42 Westfield Living Centres with 37 assets located in Australia and five in New Zealand. It is engaged in ownership, development, design, construction, asset management, leasing and marketing activities with respect to its Australian and New Zealand portfolio of retail properties. Scentre Group operates as a co-ordinated economic entity to Scentre Group Trust 1 (SGT1), Scentre Group Trust 2 (SGT2) and Scentre Group Trust 3 (SGT3).


SCG Details  
 

Decent Financial Results with Competitive Advantage: Scentre Group (ASX: SCG) owns and operates an extraordinary platform of 42 Westfield Living Centres with 37 assets located in Australia and five in New Zealand. It is engaged in ownership, development, design, construction, asset management, leasing and marketing activities with respect to its Australian and New Zealand portfolio of retail properties. As on 16 April 2020, the market capitalization of the company stood at ~$11.06 billion. During FY19, the company delivered decent financial results with a focus on changing expectations of customers. In the same time span, Funds from Operations (FFO) of the company stood at $1.345 billion, and FFO per security witnessed a slight increase of 0.7% on the prior period to 25.42 cents. During FY19, Operating earnings stood at $1.287 billion, up by 1% per security and statutory profit was $1.180 billion. SCG has assets under management of $56 billion with total assets of $40 billion. During the year, the company grew its network and introduced 344 new brands with 279 existing brands. During 2019, Scentre Group’s annual customer visits across its platform increased by more than 548 million and occupancy of the company was high at 99.3%. The potential of the company’s portfolio and competitive advantage of Westfield Living Centres is implementing a strategy which is focused on its customers and hence, is consistently delivering results. In the same time span, retail partner in-store sales within SCG’s portfolio went up by $1 billion to $25 billion, reflecting total retail sales of over 7.5% in Australia. Scentre Group is an organized economic entity to Scentre Group Trust 1 (SGT1), Scentre Group Trust 2 (SGT2) and Scentre Group Trust 3 (SGT3). During FY19, comprehensive revenue of the trusts stood at $600.6 million with profit after tax of $519.1 million. The company witnessed an ongoing increase in investment in the click and collect as retailers enhanced their store networks and proximity to clients. With a view on this opportunity, the company remains a central part of the retailer’s sales and distribution strategy.

The company has a strong financial position with interest cover of 3.6 times and FFO to Debt of 10.3%. SCG retains a gearing of 33% and has ‘A’ grade credit ratings from Moody’s, Fitch and S&P. The company also has undrawn committed facilities and cash of $1.8 billion and hence maintains a high level of liquidity. 

The approach of the company is to maintain a long-term focus on improving its earnings, assets and Return on Equity through economic cycles within a framework of low tolerance for risk. SCG has a long-term goal to create organic and sustainable returns for its shareholders and has a steady approach with responsible and sustainable business. 


FY19 Financial and Operational Highlights (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Scentre Group. Unisuper Limited is the largest shareholder in the company, with a percentage holding of 9.78%. 


Top 10 Shareholders (Source: Thomson Reuters)

Well Management of Costs and Stability in the Balance sheet: During FY19, gross margin of the company witnessed a slight increase over the previous period and stood at 69.3%, up from 68.5% in FY18. In the same time span, EBITDA margin of the company went up to 66% from 65.2% in FY18. The improvement in gross margin and EBITDA margin indicates that the company is managing its costs well and is capable of converting its revenue into profits, further implying increased profitability. During FY19, net margin of the company was 45.4%, and Return on Equity stood at 5%. Over the span of two years, current ratio of the company witnessed an increase to 0.25x from 0.18x in FY17. This indicates that the company is increasing its liquidity levels and is capable of paying off its current liabilities using its current assets. During FY19, Assets/Equity Ratio and Debt/Equity Ratio went down to 1.71x and 0.63x from 1.73x and 0.65x, respectively. This indicates that the business is financed with a more significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet.


Key Margins (Source: Thomson Reuters)

Dividend Distribution Policy: During FY19, the company gave a decent financial and operating performance with increasing Fund from Operations. This enabled the Board to declare a final dividend of 11.3 cents per share, bring the total dividend for the year ending 31 December 2019 to 22.60 cents per share. Over the past years, SCG has provided consistent dividend payments. While the current dividend yield of 10.61% for SCG looks a bit inflated, given the steep price correction lately; the stock still seems to be holding decent fundamental value in the long term.

Dividend Distribution (Source: Company Reports)

Scentre Group Acquires 50% Interest in Booragoon: The company has recently announced that it has acquired a 50% interest in Garden City Booragoon, Perth for an acquisition price of $570 million, symbolizing a stabilized economic yield of ~5.5%. This acquisition will expand the company’s operating business because of the strong trading area of Westfield Booragoon and is expected to be marginally accretive to Scentre Group’s earnings from 2020. The company has also announced that it has obtained additional unsecured bank facilities which resulted in the increased liquidity position to $3.1 billion as of 1 April 2020. These additional facilities have a duration of two years and hence will offer additional funding flexibility over the coming years.

Future Expectations and Growth Opportunities: The company has an ability to accustom itself to an ever-changing environment and offers a solid foundation for earnings growth and distributions for its shareholders. Despite the volatility and upheaval in markets, the financial strength of the group was demonstrated with its ability to arrange additional facilities that increased the available liquidity position of the company. SCG is engaged in debt investors globally and might enter into long term bonds at the appropriate time.

The company is focusing on maintaining business operations and continuity within the government guidelines. SCG is continuing to work its way through the economic shock of a global pandemic. The company has a resilient financial performance despite challenging times. It has also launched a new drive-through Click and Collect service called Westfield Direct, providing another opportunity for its retail partners to connect with the customer. The company has reinvested in several portfolios and has started various projects which are likely to enhance the offer and experience of the customers.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/EBITDA based relative valuation method (Illustrative)

EV/EBITDA based relative valuation approach (Source: Thomson Reuters)

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

Stock Recommendation: As per ASX, the stock of SCG is trading close to its 52-week low level of $1.350, proffering a decent opportunity for accumulation. The company has a competitive strength and is a leading platform with a focused strategy. SCG has provided consistent results over the period and is a central part of the retail ecosystem. To reiterate, the financial position of the group remains strong and is maintaining high levels of liquidity. It is targeting long term sustainable returns for its securityholders and has an ability to respond to rapidly changing customer expectations. Considering the trading levels, resilient financial position, adaptive nature of the business towards changing environment and decent outlook in the long run, we have valued the stock using EV/EBITDA based relative valuation approach and have arrived at an indicative target price offering an upside of lower double-digit (in percentage terms). We see a potential in the stock and hence recommend a ‘Buy’ rating on the stock at the current market price of $2.06, down by 3.286% on 16 April 2020. 

 
SCG Daily Technical Chart (Source: Thomson Reuters)

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