Today we will look at why Scentre Group shares ((ASX:SCG) is looking like a good growth and dividend opportunity with a new strategy in our SCG share price forecast and analysis.
Scentre Group is one of Australia’s largest operators of large-scale retail centers.
The company houses some of the country’s biggest brands across multiple formats such as supermarkets and high-end specialty retail.
Though the pandemic ravaged footfalls, demand is bouncing back strongly.
Meanwhile, the company is well capitalized and on track for growth via a new strategy and a robust development pipeline.
Scentre Group is down 13.38% YTD, thus underperforming the ASX200 by about 3% YTD.
Table of Contents
- 1 About Scentre Group Shares (ASX:SCG)
- 2 Solid Fundamentals Available At A Discount But Rising Rates May Suppress Margins
- 3 Huge Omnichannel Opportunity But Recession A Serious Threat
- 4 Healthy Balance Sheet With Recovery In-Play
- 5 Scentre Group Shares (ASX:SCG) Valuation
- 6 Scentre Group (ASX:SCG) Is Attractive For Its Growth Metrics And Valuation Discount
Scentre Group was spun off from the multinational retail real estate major Westfield Group and holds all of the latter’s retail assets in the ANZ region.
As of 2022, the company owns 42 shopping centers, either outright or as a part owner.
The current book value of Scentre’s assets stands at A$35.9 billion.
The outlets collectively host 12,000 stores – from supermarkets to ultra high-end fashion.
Scentre’s retail assets also serve as a logistics infrastructure backbone for Westfield’s foray into the e-commerce space.
At the current SCG share price, Scentre Group shares have a market cap of A$14.6 billion and offers a dividend yield of 5.24%.
Source – 1H’22 Results Presentation
Solid Fundamentals Available At A Discount But Rising Rates May Suppress Margins
Scentre Group’s (ASX:SXCG) biggest strength is its strong balance sheet and broad footprint of malls across Australia.
Given the capital-intensive and leveraged nature of its business, balance sheet strength is key.
The company currently has available liquidity of A$4.8 billion, which covers all its debt servicing and repayment requirements till the end of 2025.
The company has also largely hedged its interest rate exposure through swaps to ensure protection against the ongoing rate hike cycle.
The company has 80% hedging in place for the second half of 2022, 70% in January 2023, and 67% in December 2023.
From a valuation perspective, Scentre is trading at a steep discount to the book value of its assets, which stands at A$35.9 billion against a market capitalization of A$14.6 billion.
The bulk of the disparity has been driven by lockdown disruptions caused by COVID.
Pre-COVID, the market capitalisation, when the business was not too materially different, stood at nearly A$21 billion.
A look at NAVPS (Net Asset Value Per Share), a common metric for real estate valuation, tells the same story.
NAVPS represents the value of a real estate security based on the capitalized income it generates, net of liabilities.
Scentre’s NAVPS stands at A$4.32 as of 1H’22, as compared to a share price of A$2.80, representing a steep discount of about 46%.
However, foreign currency debt is a major weakness for Scentre.
About 71% of its debt and credit funding is foreign currency denominated and 45% of all debt is USD denominated.
Given the trend of hardening interest rates around the world and the condition of Western economies, their rate hikes might be bigger and may persist for longer than Australia.
Since Scentre Group (ASX:SCG) uses the much larger USD-denominated debt markets for its senior secured and subordinate debt, higher rates could substantially increase borrowing costs and pressure margins which could put pressure on the SCG share price.
Huge Omnichannel Opportunity But Recession A Serious Threat
Scentre Group shares (ASX:SCG) biggest opportunity lies in leveraging its network of centers and brands into a direct-to-customer offering.
The company recently launched Westfield Direct, which is an online shopping service, very similar to Amazon, that offers customers free shipping above A$50 and reward points.
The advantage of this model is that brands do not need to set up additional warehouse or logistics infrastructure since Westfield is within 30 minutes of about 80% of the country’s population.
Brands also need not bother with facilitating returns as customers can do so at their nearest Westfield and exchange for a product of choice or receive a refund.
Westfield Direct aggregates all product offerings from multiple brands onto one platform, giving the customer massive choice as these product catalogs are not available fully on sites such as Amazon.
Customers can filter by type, brand, stock, etc., and then choose either doorstep delivery, free click and collect, or easy returns at a nearby center. Reward points help tie the customer to the business.
Westfield Direct is very well suited to the Australian market where the characteristics of online retail in the country are different from other countries where mega online-only brands such as Amazon dominate.
In Australia, the four biggest online retailers are Coles, Woolworths, Officeworks, and JB HiFi, all of which are also brick-and-mortar operators.
Given that Westfield is home to all these brands and that they already host them as tenants, Scentre has a tremendous opportunity to grow Westfield Direct.
Despite dominance by brick-and-mortar operators, the online retail sector has grown at a 20% CAGR over the past 5 years and is expected to accelerate further.
Meanwhile, Scentre Group (ASX:SCG) is gradually revamping more of its physical locations into “experience-based” destinations.
From 10% when it was spun off from Westfield eight years ago, experience-based centers now constitute 43% of its locations.
For example, the company is adding attractions such as basketball courts, swim schools, and even a library, while expanding from a food focus to wellness, health, beauty, and sports.
As a result, malls are becoming ‘destinations’ for shopping, entertainment, and socializing.
“Our customer-focused strategy is to create the places that more people choose to come, more often, for longer,” says outgoing CEO Peter Allen.
While recent retail sales data in Australia has shown a strong recovery trend, there is tremendous uncertainty around the effects of large rate hikes over the medium term.
Ever since the 2008 financial crisis, interest rates have remained ultra-low to spur economic activity.
However, we are now looking at a prolonged period of elevated rates, which could dampen retail spending over the long and medium term, which in turn could hurt retail space demand.
Healthy Balance Sheet With Recovery In-Play
During 1H’22, higher footfalls in shopping centers, better occupancy, and rising rents combined to drive a more than 17% surge in Scentre Group shares (ASX:SCG) operating profit.
It boosted its Westfield Plus membership program by 550,000 to 2.75 million since January.
For 1H’22, Scentre reported revenues of A$1.164 billion (up 2.4% YoY), a Net Operating Income (NOI) of A$883.6 million (up 6% YoY), and a total income of A$907.3 million (up 5.9% YoY).
EBIT came in at A$864.9 million (up 6% YoY) and operating profit at $540.5 million (up 17.4% YoY).
Lastly, FFO (Funds from Operations), which is NOI adjusted for depreciation, gains/losses from asset sales, and tax assets/liabilities, is reported at A$548.6 million (up 18.3% YoY).
The company currently holds about A$402 million of cash on its books.
Total debt stands at A$9.8 billion, representing a leverage ratio of 0.27, with a weighted average interest rate of 4.2% and maturity of 4.1 years.
Available liquidity is $4.8 billion, most of which is from undrawn credit lines.
The Interest Coverage Ratio stands at 4.3x while FFO to debt stands at 13.1%.
For the full year FY22, the company recently raised its guidance to FFO of 19 cents per unit, reflecting expected growth of about 14% YoY, after strong footfalls and robust retail showing for the first half.
We will compare Scentre Group shares (ASX: SCG) to SCA Group (ASX: SCP) and Charter Hall REIT (ASX:CQR), both of which are retail asset-focused real estate entities operating mainly in Australia.
| Metric | Scentre Group (Year Ended 31st Dec 2021) | SCA Group (Year Ended 30th June 2022) | Charter Hall Retail REIT (Year Ended 30th June 2022) |
|---|---|---|---|
| Price/NOI | 9.33 | 12.38 | 14.11 |
| Price/AFFO | 16.83 | 16.99 | 16.41 |
| Dividend Yield | 5.27% | 5.85% | 6.11% |
| Gearing | 27.5% | 28.3% | 25.7% |
As can be seen, at the current SCG share price, Scentre Group shares are available at the cheapest NOI multiple and lie in between its peers in terms of Price/Adjusted Funds From Operations, dividend yield, and leverage.
Although the company is not hugely cheaper in terms of valuation, it has far more scale and bargaining power than both peers due to its substantially larger operations.
Scentre Group (ASX:SCG) Is Attractive For Its Growth Metrics And Valuation Discount
Scentre Group shares present an attractive retail-focused real estate play that is available at a substantial discount on its asset value.
Though such discounts tend to linger for fairly long periods of time, investors can rest easier because they offer a line of defense.
Moreover, Scentre boasts of a rock-solid balance sheet that is well-hedged against interest rate hikes, the dominant worry in today’s markets.
The recent second-half results show retail spending is robust and resulted in a good show by Scentre on metrics of shopper visitation, membership, occupancy, rents, and cash collection.
The CEO has underlined that these numbers do not reflect a post-lockdown revenge splurge, but rather a sustained shift in spending despite the threat of inflation and interest rate rises.
Could rising rates crimp shopping budgets to Scentre’s detriment?
Note the flip side of this: Many Australian families have built up sizable savings during the pandemic lockdown that could buffer against rate shocks.
Meanwhile, the retail strategy at Scentre smartly straddles both online and brick-and-mortar.
While online (Westfield Direct) is getting a boost from outlets acting as low-cost logistics service points for deliveries and returns, physical stores are morphing into go-to ‘destinations’ offering more than just groceries.
All-in-all, Scentre offers a decent, somewhat defensive investment opportunity at the current SCG share price, available at a ‘not-to-be-sneezed-at’ dividend yield.
