Investment Thesis
- Trades below our valuation, with an attractive (and growing) distribution of ~5%.
- Strong and experienced management team.
- Highest quality property portfolio of any Australian listed retail REIT with SCG’s portfolio heavily weighted to the growth economies of Sydney, Brisbane, and Melbourne. Approx. 20 million people live within close proximity to SCG’s 42 Westfield Living Centres.
- Expectations of a prolonged low interest rate environment and ongoing fiscal measures should be supportive of consumer spending.
- Potential recovery in retail sales.
- Balance sheet is in a strong position.
- Potential upside from its >$3bn redevelopment pipeline – if SCG undertakes ~$700m of developments p.a., we expect c$80m of value created per annum. SCG expects in excess of 15% returns (development yields >7.0% and cap rates of ~5.5%; NOI growth with rent escalations of CPI +2% and development yield targets of >7%).
Key Risk
- Covid-19 is prolonged with significant lockdowns re-introduced.
- Significant re-basing of rents.
- Structural shift continues to remove consumers/foot traffic from SCG’s centres.
- Unexpected and aggressive increases in interest rates or deterioration in credit/capital markets.
- Any slowdown in demand and net absorption for retail space;
- Any deterioration in property fundamentals especially delays with developments, declining asset values, retailer bankruptcies and rising vacancies.
- Any delays in developments.
- Lower inflation (and deflation) affecting retailers
1H22 Results Key Highlights: Relative to the the pcp:
- Operating Profit of $845.8m, or 16.32cps, up +10.9%.
- Funds From Operations (FFO) of $862.5m, or 16.64cps, up +12.7%.
- Statutory result inclusive of unrealised non-cash items was $887.9m, up from ($3,731.8)m and includes property revaluation gains of $81.2m.
- Operating Profit, FFO and the Statutory result each include a non-cash Expected Credit Charge (ECC) of $168.8m relating to the financial impact of the Covid-19 pandemic versus $304m in FY20.
- Net Operating Cash Flows (after interest, overheads and tax) of $913.6m, was up +24.8%, driven by SCG collecting $2,258m in gross rent in FY21, ~$200m more than FY20.
- Distribution of $738.7m equates to 14.25cps, up +103.6% and exceeds guidance.
- SCG maintained a strong balance sheet with available liquidity of $5.6bn, which is sufficient to cover all debt maturities to early 2024; Interest cover of 4.0x; balance sheet gearing at 31 December 2021 of 27.5%; 12.8% FFO to debt; and 5.6x debt to EBITDA. S&P, Fitch and Moody’s upgraded SCG’s outlook to Stable.
Company Profile
Scentre Group (SCG) is an Australia Retail A-REIT. The company derives earnings from operating, managing and developing retail assets. SCG has interests in 42 high-quality Westfield malls across Australia and New Zealand, worth ~$38.2bn. SCG owns 7 of the top 10 centres in Australia, and 4 of the top 5 centres in New Zealand. SCG earmarked ~$3bn in potential development.
(Source: Banyantree)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
Business Strategy and Outlook
VMware, a pioneer of virtual machines, dominates the maturing data center server virtualization market. With organizations prioritizing cloud over on-premises computing infrastructure, it is seen VMware’s robust cloud provider partnerships, including the hyperscalers, should help the firm handle the changing market landscape. It is anticipated VMware’s growth to come from being the glue between computing infrastructures, networking locations, and burgeoning security and developer offerings being bolstered from its strong end user compute portfolio.
Analysts’ view of cloud networking, akin to VMware’s assessment, is that most enterprises will utilize hybrid cloud solutions. Public clouds can precipitously augment network growth but enterprises face integration complexities among on-premises networks and private and public clouds. Beyond hyperscale cloud provider partnerships, VMware’s Cloud Provider Program offers thousands of cloud partners collaborating with VMware software. In Analysts’ view, this allows VMware to remain ingrained in networks while becoming the commonality between private and public clouds. It is held the November 2021 spin-off from Dell Technologies put an end to an uncertain future around VMware, and that growth can accelerate through VMware’s integration with cloud vendors and cadence of product releases outside of Dell’s umbrella. With solid free cash flow and growth opportunities, it is foreseen its $11.5 billion special dividend, to all shareholders, as part of the spin-off was worth the price of becoming a stand-alone entity.
VMware’s vSphere and ESXi hypervisor are virtualization gold standards, and its hybrid cloud platform creates a consolidated view across multicloud environments. It is projected the company’s strong franchises within end user compute, security, and virtualized networking and storage can be overlooked, and support growth ventures such as VMware’s integration of Kubernetes-based container management within vSphere. It is likely, software cohesion across on-premises and clouds along with nascent networking products should give VMware sustainable growth.
Financial Strength
It is held VMware a financially stable company that should continue generating strong free cash flow. The company’s main expenditures are in the forms of developing product innovations and marketing efforts. VMware’s R&D expenditures are in the low 20s as a percentage of revenue while sales and marketing expenditures are in the low 30s. In the past, VMware has bolted on firms to bolster its presence in focus growth areas, and it is projected organic developments to be supplemented with future acquisitions. As of the end of fiscal 2022, VMware had $3.6 billion in cash and equivalents, and it is anticipated the company will pay its debts on time.VMware completed its first special dividend of $11 billion in December 2018, which helped Dell Technologies facilitate an exchange of Dell Class V tracking stock (DVMT) for a new class of Dell Technologies Class C common stock or a cash buyout option for shareholders. As part of becoming an independent company and spinning off from Dell, VMware paid special dividends worth $11.5 billion and retained an investment-grade credit rating. Although VMware raised capital to help pay the special dividend, it is likely to quickly lower its obligations through cash on hand and its robust free cash flow generation.
Bulls Say’s
- VMware’s hybrid cloud program could yield tremendous growth if VMware is cemented as the dominant software supplier between private and public clouds. Its presence in hyperscale public cloud networks could make it the de facto virtualization choice.
- Product leadership in application management, enduser computing, cybersecurity, and software-defined networking provides robust growth opportunities beyond core virtualization.
- VMware can more tightly integrate itself with Dell peers as a stand-alone company, while also benefiting from its Dell commercial contract and their salesforce.
Company Profile
VMware is an industry leader in virtualizing IT infrastructure and became a stand-alone entity after spinning off from Dell Technologies in November 2021. The software provider operates in the three segments: licenses; subscriptions and software as a service; and services. VMware’s solutions are used across IT infrastructure, application development, and cybersecurity teams, and the company takes a neutral approach to being the cohesion between cloud environments. The Palo Alto, California, firm operates and sells on a global scale, with about half its revenue from the United States, through direct sales, distributors, and partnerships.
(Source: MorningStar)
General Advice Warning
Any advice/ information provided is general in nature only and does not take into account the personal financial situation, objectives or needs of any particular person.
