Westfield And Scentre Group: What Lies Ahead

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This story features SCENTRE GROUP.
For more info SHARE ANALYSIS: SCG
The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

-Higher growth for Westfield
-But more volatility
-Scentre Group low growth
-But quality, high yield
 

By Eva Brocklehurst

After some wrangling over value, the Lowy family has succeeded in delivering the revamped Westfield businesses. The two new entities are Westfield Corp ((WFD)) and Scentre Group ((SCG)). Westfield Corp is now the offshore-focused business, as those Australasian assets previously held by Westfield Group are merged with Westfield Retail to form Scentre Group. In the lead-up to the vote on the proposal, brokers were not so sure Westfield Retail was getting the best end of the bargain. A small adjustment was made as merger terms for the Scentre Group were sweetened. Westfield reduced the net debt attributable to the Australian and New Zealand businesses to $6.8 billion from $7.1 billion.Westfield also clinched approval by suggesting it would spin off its Australasian operations regardless of whether Westfield Retail unit holders agreed.

So, what does the outlook for the two new entities look like?

Westfield Corp's assets are located in UK/Europe with a portfolio of 38 centres in the US and several on the agenda to be sold. The company will now see 70-75% of assets and earnings derived in US dollars, with the remainder primarily in British pounds. The company intends to investigate an appropriate location for its longer-term listing. Westfield Corp has performed strongly since re-listing, with BA-Merrill Lynch observing the stock is trading at a slight discount to the earnings multiples of its US peers and in line with valuation, which incorporates upside from a US$6 billion pipeline of development assets. Having said that, the broker also notes the stock exposes investors to currency volatility. The possibility of an offshore listing is not a catalyst for performance and while the broker thinks the asset quality deserves a premium valuation relative to peers, there are outstanding concerns on how the market will value the extensive development pipeline. All up, Merrills opts for an Underperform call.

UBS thinks development will progress sufficiently to pay for execution over the next 12 months but also acknowledges the added complexity of currency, bond yields, listing destination and register turnover in valuing the stock, which may overshadow real estate fundamentals. Citi likes the exposure to higher growth US/UK markets and notes that Westfield has a good track record of developments. Nevertheless, the broker thinks a favourable outlook is increasingly factored into pricing.

To Goldman Sachs the new Westfield is now a higher growth vehicle. Moreover, the restructure has addressed the issue of an overvalued management business. Project and development earnings are lower now – at 10-11% of earnings – and Goldman thinks this is more appropriate. Now the stock is a more attractive proposition and the reduction in the equity base provides better earnings leverage. Still, Goldman agrees the stock is fairly valued based on peer multiples in the US and UK, and this justifies a Neutral rating.

Macquarie envisages upside risk in a takeover, with a complete exit by the Lowy family a feasible proposition. The family retains an 8.4% stake. The portfolio includes several iconic and irreplaceable assets, for which Macquarie suggests investors would accept low returns. Having said that, the broker suspects US investors value development pipelines more conservatively than Australian investors. In the near term, investors will have to put up with dilutive assets sales. Macquarie does not find the stock a compelling proposition but returns are sufficient to justify an Outperform rating.

Merrills suggests Scentre Group offers the highest quality retail portfolio in Australia, with 15 of the 20 largest shopping centres and occupancy rates over 99% for the past 20 years. Scentre Group currently has $1.9bn in projects under construction and the broker thinks the stock offers the best development capability in the sector as well. There are positive catalysts for Merrills, such as debt restructuring and property divestments. Citi notes operating conditions may be soft at present but they are stabilising and growth, while slow, should be steady. Citi does not think the quality of the portfolio is reflected in market pricing, with the stock trading at a discount to peers.

UBS also believes the stock provides an attractive investment opportunity. There is upside risk to FY14 pro-forma earnings in the broker's view, by as much as 2%. UBS agrees that income from operations is likely to be subdued, given re-leasing spreads are negative, but the company is supported by a reasonable development pipeline. Management has flagged an intention to reduce gearing to 30-35% from 37% by joint venturing on assets to source capital. UBS notes this would be dilutive to earnings, although that could be reduced by selling assets above book value. Help may be at hand, in Goldman's opinion, as near-term cap rates – the ratio comparing book value with income – should compress further and boost the asset base, reducing gearing organically.

Goldman echoes a similar theme to the other brokers, finding Scentre Group screens well for its distribution yield but offers limited growth, while being at risk of earnings dilution through potential asset sales. The broker thinks there will be significant focus from investors on the Lowy family's intentions with its 4% stake. In February 2013 the Lowy family sold a 7.1% stake in Westfield Retail and Goldmans notes this sale acted as an impediment to the share price up until the restructure was announced as many market participants questioned what the family knew or intended.

On FNArena's database Westfield attracts one Buy, two Hold and one Sell rating. The consensus target is $7.32, suggesting 1.6% downside to the last share price. Targets range from $7.15 to $7.45. The distribution yield on FY14 and FY15 forecasts is 3.9% and 3.6% respectively. Scentre Group attracts three Buy ratings and one Sell. The consensus target is $3.35, suggesting 5.3% upside to the last share price. The targets range from $3.13 to $3.55. The distribution yield is 8.6% and 6.6% on FY14 and FY15 forecasts respectively.
 

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