FY22 results and valuation update
Key message: an impressive set of results and solid guidance provides continued justification for Spear’s Western Cape-focused investment case. The LTV reduction roadmap has been achieved and the focus will soon return to finding accretive inorganic growth opportunities.
- FY22 results were strong: DEPS grew +7.9% y/y to ZAR78.0c and the full year dividend was 68.3c per share (+16.3% y/y). In addition to sound operational metrics (occupancy, reversions), FY22 stood out for a sharp decline in LTV from 45.8% to 39.1% (driven by disposal activity and a successful equity raise) and the restructured 15 on Orange lease, which together with the disposal of the DoubleTree by Hilton property eliminates the last of variable hospitality income from the portfolio.
- Returning to inorganic growth in earnest: with LTV now in line with the strategic target range (38-43%) and further headroom to be provided by the 15 on Orange exit (ZAR265mn gross proceeds expected via Capital Group’s call option), there should be sufficient balance sheet capacity within the next 18 months for Spear to begin to return to inorganic growth plans. Its strategy to grow GAV to >ZAR10bn within the next five years is ambitious, but we expect material asset growth over the next few years to come from core retail and industrial acquisitions, the establishment of an urban logistics JV, and the development of Sable Square (residential) and Marine Place (mixed-use).
- Update to earnings forecasts: our revised FY23 DEPS forecast is ZAR82.2c (+5.4% y/y), in line with management’s guidance range for growth of 5-7%; based on a 90% payout ratio, we forecast a dividend of 74.0c per share (+8.4% y/y). For FY24 we forecast DEPS of 84.8c (+3.2% y/y) but ratchet up the payout ratio to 95% for a dividend of 80.6c per share (+8.9% y/y)
- Our revised target price is ZAR8.27, which implies a one-year TSR of +15.7% (9.7% income yield and +6.0% capital return). Spear’s share price has been relatively stable through 2021 while the rest of the listed property sector has been under more pressure; we find it fairly valued at current levels and maintain a NEUTRAL rating on the counter.
- Key catalysts and factors to watch: leasing conditions in Cape Town office market versus rest of SA; exercise of 15 on Orange option; acquisitive growth activity; impact of revised hedging policy (up to 75% fixed) and rising interest rates on net finance costs.