Recentering Scentre
Recommendation
With Scentre Group being focused on shopping centres, it's clear the threat that e-commerce poses. As we've outlined in the past, though, we feel these risks are being overstated. Premium retail sites should be less exposed to online shopping and Scentre should be able to repurpose some of its floor space towards entertainment and services and continue to attract foot traffic one way or another. It might mean a move towards boutique stores, restaurants or service-based businesses. Big brands like Apple and Tesla also appear keen to take up premium space to showcase their wares. All up, we've continued to expect Scentre to grow at around GDP growth over the long term.
When going against the grain, it's important to have conviction, but it's also important to assess the evidence as it comes in, and lately the operating metrics have looked a little ugly. With re-leasing spreads (the difference between rent on a new lease, compared to the previous rent earned on the same space) turning negative and specialty store sales growth averaging around 2% per year over the past four, our long-term growth assumption is looking a little optimistic.
As a result, we're notching it down a little - to around 2-4% - in line with our estimate for Scentre's cousin Unibail-Rodamco-Westfield. Whilst URW currently trades on a sustainable yield of around 7%, Scentre's current AFFO yield of 6% is lower. It's also potentially a little inflated, as its maintenance capital expenditure for FY18 is guided to $110m, or around 0.3% of the $35bn its properties are carried at. That's only a bit more than the $90m forecasted by Vicinity Centres - but their properties are only carried at $15.9 bn.
So if we assume a yield of 5.5%, and add growth of 2-4%, our long-term expected return gets to around 7.5-9.5%. That's not bad for a business with some of the best properties in Australia - and it may be attractive to more income-focused members - but it's not enough for us to upgrade the stock. We're lowering our Buy price to $3.50, and our Sell price to $5.50. HOLD.