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Should you buy Scentre Group ?

November 10, 2014 | Team Kalkine
Should you buy Scentre Group ?

Stock of the Day - Scentre Group (HOLD)

Scentre Group (SCG), the owner and operator of 47 Westfield shopping centres in Australia and New Zealand, reported encouraging and positive operational results for FY14. As per the June 2014 operating updates, strong levels of occupancy with growth in comparable property net operating income and specialty sales for the 6 months to June 2014 was witnessed. Comparable net operating income growth in Australia / New Zealand was +2.3%. The specialty retail sales growth in Australia has been +3.3%. Annual specialty retail sales in Australia has been in excess of $10,000psm.

The latest updates ending September 2014 also look promising.


Shopping Centre Operating Performance (Source – Company Reports)

In the development area, the Company started a $0.7bn third party project in 1H14, and is expected to initiate development projects of between $500m and $1bn in 2015. These projects include Chatswood and Warringah. Also, about $3.0bn pipeline of development work including major projects at Chermside and Marion exists. 


Development and Construction Activity (Source – Company Reports)

Overall, $2.0bn of projects are currently under construction (SCG share $0.6bn, of which $0.5bn incurred to date by 30 September 2014). The $2.0bn of current development projects includes Miranda in Sydney and Mt Gravatt in Brisbane with project stages more or less scheduled as per the expectations. The Company expects to commence between $1.5bn and $2.0bn of developments over the next 3 years.


Major Development Opportunities (Source – Company Reports)

As part of the restructure financing package, the Company entered into $5bn three year bridge finance facility with $3bn being repaid in July 2014 from proceeds of debut EUR and GBP bond offer. The restructure financing package includes $4bn of new bilateral bank facilities. The Company has a weighted average debt maturity of 4.9 years with extended maturity profile from 2016 to 2026, based on its June 2014 updates.


Portfolio Summary (Source – Company Reports)

As per the forecast for half year to December 2014, funds from operations of 10.88 cents per security and distribution of 10.2 cents per security have been announced and reconfirmed recently. Further, the comparable property net operating income growth for Australia and New Zealand has been estimated to be 2.0% -2.5% for the year.

SCG has the largest vertically integrated retail property operating platform in Australia and New Zealand with ownership, shopping centre management, leasing, marketing, development, and design and construction as key attributes. SCG’s growth drivers entail thorough management of existing portfolio, better quality of the portfolio to adapt to the next generation of retail, structuring of majority of specialty leases, and recycling of capital into development projects.


Gross Lettable Area and Asset Value (Source – Company Reports)

Financial position as at 30 June 2014 indicates a strong balance sheet and liquidity position. In view of the required accounting treatment of the restructure, SCG’s income statement includes the earnings of the former Westfield Group.

The Company showcased sustained improvement in retail sales growth with comparable specialty store sales rising by 3.3% for the six months to 30 June 2014 and up over 5% in the month of July 2014. Comparable monthly sales for specialty stores witnessed positive increases for the past 13 months.


Retail Sales (Source – Company Reports)

SCG recently announced for a joint venture with GIC, Singapore’s sovereign wealth fund, in the ownership of five shopping centres located in New Zealand with a combined gross value of NZ$2.1 billion. GIC will acquire a 49% ownership interest from Scentre Group in the Westfield Albany; Westfield Manukau; Westfield Newmarket; Westfield Riccarton and Westfield St Lukes. SCG will own 51% interest in above shopping centres while providing property management, development, design and construction services, post the transaction which is still subject to the approval from the Overseas Investment Office, New Zealand. SCG will initially repay debt from the proceeds of ~NZ$1,036 million ($930 million) to be obtained by virtue of this transaction. Closing is expected prior to 31 December 2014. This is estimated to help reduce the pro forma gearing from 37.6% (as at 30 June 2014) to about 35.5%. 


Shopping Centres –Australia and New Zealand (Source – Company Reports)

Factors such as leasing shortfalls, development cost over-runs and interest rate movements, coupled with any delays in development projects remain a threat to SCG.


SCG Daily Chart (Source - Thomson Reuters)

Nonetheless, we may expect to witness gains in near future given the increase in comparable specialty sales and other positives. Accordingly, we put a HOLD recommendation for this stock at the current price of $3.55.

 
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