FY22 results and valuation update
Key message: despite a good set of results for FY22 and stable guidance for FY23, Equites’ share price has experienced a sharp de-rating since Apr-22. We think this has opened relative value and presents a rare opportunity to build a position in the counter.
- FY22 results were solid: Equites delivered an FY22 dividend of ZAR163.0c per share (+5.2%) that was marginally ahead of our expectations but in line with management’s guidance range. Arguably more impressive was its NAV growth (+7.9% y/y to ZAR18.61), driven primarily by valuation uplifts on the UK portfolio (reflecting rental growth and yield compression on the core portfolio as well as fair value adjustments on developments completed or in progress). Overall there were few if any surprises in these results: the SA portfolio is stable and the tailwinds in the UK logistics sector remain compelling overall (despite the negative outlook from Amazon indicating that it has excess warehousing space and is looking to sub-let).
- Positive momentum to continue into FY23: We expect Equites to deliver positive NAV growth in FY23 from upward revaluations to the SA and UK portfolios as well as from >ZAR700mn in after-tax profits expected to be received on three turnkey developments and land sales it has secured for clients Promontoria and Lidl. Management’s commentary suggests that near-term rental reversion and tenant retention risk in the SA portfolio is low, so we expect core lfl NPI growth of 4-6% in FY23 to be sustainable over the forecast period.
- Growth to be led by developments: Further inorganic growth will derive from the completion of the Hermes Hoylake development in the UK (ZAR1.4bn) and the current SA development (ZAR2.7bn) pipeline due for completion within the next 18 months. We expect limited acquisitive growth, with further developments to be announced in the UK (GBP1.0bn pipeline over five years) and SA (five new developments for ZAR1.8bn in final stages of negotiation). The pace of growth will depend on Equites’ funding capacity through time, but it has a modest LTV (31.5%) and a strong track record of raising equity at an attractive cost.
- Upgrade to forecasts and rating: Management is guiding for FY23 DPS growth of 4-6%; we revise our forecast DPS to ZAR170.1c (+4.3% y/y) and our target price to ZAR20.75, for a one-year forecast TSR of +20.7% (9.2% income and +11.5% capital return). At the current share price we estimate the counter is trading in line with NAV, and in our view the yield is attractive considering Equites’ risk profile and growth prospects. We upgrade it to a NEUTRAL rating.