Supermarkets Stand SCA Property In Good Stead

This story features WOOLWORTHS GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: WOW

Resilient supermarket tenant income stands Shopping Centres Australasia in good stead as the Covid-19 pandemic impacts retail activity.

-Gearing remains low following re-capitalisation
-Earnings growth could be limited in current environment
-Minimal impact expected from second lockdown in Victoria
 

By Eva Brocklehurst

Expectations vary widely for Shopping Centres Australasia ((SCP)) as it negotiates the retail minefield caused by the Covid-19 pandemic. Will the supermarkets that predominate across the company's portfolio provide a safe haven?

While electing not to provide guidance for FY21 the company has indicated there is no discernible difference between the sales growth experienced by Woolworths ((WOW)) and Coles ((COL)). Sales are expected to remain robust although the effect of the pandemic on shopper behaviour "will linger".

The stock is defensive as a result, several brokers assert, with Ord Minnett pointing to a 75% weighting to neighbourhood centres, valued at a 6.35% capitalisation rate (the ratio between an asset's operating income and market value), which offers secure income.

The impact of the pandemic remains hard to predict but Moelis assesses that once it passes, Shopping Centres Australasia will experience only a moderate reduction in longer-term net operating income.

Goldman Sachs, too, expects the low exposure to discretionary goods combined with the ongoing cash collection process means the rental shortfall should improve. That said, the broker anticipates earnings growth is likely to be limited because of the difficult trading environment for specialty tenants and few acquisition opportunities.

There was a rent shortfall through to June of -$22.7m because of the pandemic but UBS agrees the resilient income and under-geared balance sheet should mean the company can withstand the impact. FY20 free funds from operations (FFO) of 14.65c per unit were down -10.3% and Macquarie notes the distribution was not covered by the cash-adjusted FFO, with a pay-out ratio after adjustments of 106%.

Meanwhile, occupancy is stable at 98.2% with specialty vacancies up slightly to 5.1% from 4.8% as of December. Leasing volumes were strong with 39 new leases and 55 renewals signed between March and June. Gearing is low at 25.6%, following the completion of an institutional placement in April, which raised $250m, and a unit purchase plan in May.

Macquarie suggests that while this equity raising was designed to protect the balance sheet, if there is no deterioration in the macro environment the company could look to acquire assets. One new property was acquired for $33m, Bakewell in Northern Territory, on a 7% yield.

The company is well within debt covenants and Credit Suisse envisages the risk of any short-term breaches is low. The broker calculates $300m in acquisitions could be funded through debt and gearing still remain below 32.5%, although acknowledges the company does not intend to stretch the balance sheet at this point in time

Leasing Strategy

While there is merit in continuing the current leasing strategy of accepting lower rents and higher incentives to lift occupancy, this may cause difficulties to re-accelerate comparable income growth. Hence, Goldman Sachs does not allow for any potential reversal of expected credit loss provisions in future.

On the other hand, Morgan Stanley assumes 85% of rent will be collected in the December half and then 90% from January 2021 onwards. The broker finds the stock attractive in a relative sense because of the 48% of rents mostly derived from supermarket anchors. Incentives in new deals are now running at 13.8 months compared with 11 months in FY19.

Victoria

Rent collections in July improved to the mid 80% levels but are expected to deteriorate again with the renewed lockdown in Melbourne. However Macquarie calculates the impact is likely to be minimal, estimating a 5.4% income exposure to closed stores in that state and, allowing for a six-week impact from lockdowns, a -0.6% headwind to earnings.

Citi remains bearish on the retail outlook and envisages scope for the pandemic to lead to a structural re-setting of rents and property values. While there may be potential upside from accretive acquisitions these are likely to take longer to eventuate previously expected.

Yet, the stock trades on in FY21 distribution yield of 5.4%, Moelis points out and it should remain well supported because of its defensive characteristics and conservative balance sheet.

Outside of the seven stockbrokers monitored daily on the FNArena database, Moelis expects a slight improvement in the first half and has a Hold rating and $2.44 target while Goldman Sachs has a Sell rating and $2.00 target. The database has one Buy (Morgan Stanley), four Hold and one Sell (Citi). The consensus target is $2.29, signalling 3.2% upside to the last share price.

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