Australia | Mar 23 2012
– Moelis rates Centro Retail a Buy
– Sees upside from asset sales, redevelopment
– Achieving a credit rating would lower costs, enhance distributions
– Litigation may weigh on stock shorter-term
By Chris Shaw
Shopping centre manager Centro Retail's ((CRF)) interim result at the end of last month was viewed as a solid one by brokers covering the stock, while operating metrics were also considered to be of good quality.
As with brokers in the FNArena database covering Centro Retail, Moelis has made only minor changes to earnings forecasts post the interim result. Of more importance than the result will be strategy going forward, with some positives on offer in the view of Moelis.
Expected are further non-core asset sales, which will help Centro Retail de-leverage its balance sheet. As well, such sales would allow Centro Retail to strengthen its position as the number one owner of neighbourhood and sub-regional centres.
Redevelopment will play a role in this regard, as this program has been largely neglected in recent years given a lack of expansion capital. As the program continues, Moelis sees upside from modernised stores and an improved sales mix in Centro Retail's centres.
At the same time, Moelis expects a strategic review currently under way could result in management simplifying the funds management business, likely with a new focus on wholesale investors. Moves are also expected to gain a credit rating, which Moelis notes would benefit Centro Retail by lowering interest costs and allowing for greater diversity in terms of funding sources.
Moelis sees such moves as also enhancing dividend payments, while helping the share price reduce the current gap to net tangible asset backing. As this gap closes hedge funds, which are believed to still hold a significant portion of shares in Centro Retail, would be better able to exit the stock.
Assuming successful execution of this strategy, Moelis sees value in Centro Retail up to $2.00 and sets its price target near this level at $2.09. This compares to a consensus target according to the FNArena database of $1.96, with a range from Citi at $1.87 to JP Morgan at $2.10.
The potential returns on offer from Centro Retail, which include a dividend yield of around 6.6% in both FY12 and FY13 on its numbers, are enough for Moelis to rate Centro Retail as a Buy. Others are generally less positive, the FNArena database showing only one Buy against five Hold ratings.
This is largely a valuation call, as for example JP Morgan this month downgraded Centro Retail to a Neutral rating from Overweight previously given 9% share price outperformance since December of last year.
One issue that could impact on the stock is outstanding litigation. As Moelis notes, the class action against Centro Retail means purchasers of Centro Retail shares have no protection against the class action unless they also purchase unlisted CATS units.
Moelis sees the issue as a deterrent for potential investors in terms of paying a full price prior to the issue being resolved. Moelis's model assumes a $100 million payment will be made in relation to the class action.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.