FY21 results, EPP transaction and valuation update
Key message: a stronger than expected dividend for FY21 and solid progress on reducing LTV has justified Redefine’s share price recovery and material re-rating through 2021. The potential EPP transaction will be favourable for Redefine shareholders in our view, but faces hurdles before execution can be certain.
- No major operational surprises but dividend stronger than expected: the lack of income from EPP was a primary constraint on Redefine’s FY21 distributable earnings, but was offset by a higher than anticipated payout ratio (effective 100%, versus our 75% forecast) and the distribution of a non-recurring, taxable unrealised foreign exchange gain (ZAR350mn, 7.2c per share) for a final dividend of 60.1c per share – significantly ahead of our forecast 41.2c, and reflecting confidence in the materially improved liquidity and solvency position of the group. See-through LTV declined to 49.7% (FY20A: 54.2%), aided by a relatively aggressive level of capital recycling from disposals (ZAR5.2bn total in FY21) and a highly conservative earnings retention policy.
- Watch the momentum: Redefine’s share price has been one of the strongest performers in the sector over the last twelve months as it has recovered off severely depressed all-time lows, and the company is in credibly better shape (quality of earnings, balance sheet) than it was pre-COVID in our view. We think there is still some positive momentum going into 2022, especially if it takes control of EPP, but we observe that the discount relative to Growthpoint has mostly closed and further re-rating would open better value in Growthpoint.
- Intention to de-list and take control of EPP: Redefine has formally announced its intention to acquire the shares in EPP it does not own in a share swap for RDF shares (at a ratio of 2.70 RDF per EPP share held) and subsequently delist and operate EPP as an unlisted, consolidated subsidiary. The proposed transaction would include conditions for restructuring at EPP, including specific disposals of shares in investment properties to JV partners, that would reduce its LTV to below 40% and cut its DEPS base by c. -22% pro forma, but prioritises a much faster return to dividend payments. We think the transaction makes sense from Redefine’s perspective and for overlapping shareholders, but is not as clearly compelling from the point of view of EPP shareholders in isolation.
- Updated financial forecasts and valuation: based on Redefine’s FY21 performance and updated prospects, we revise our clean price target upwards to ZAR4.86, which implies a one year forecast TSR of +24.1% (comprised of a 13.5% dividend yield, based on a 95% forecast payout ratio in FY22, and +10.6% capital return). This ranks in the top quartile of our ranking table and is accordingly assigned an OVERWEIGHT rating.