FY22 results and valuation update

Key message: a good recovery in FY22 was driven by improved leasing and operating conditions in the SA portfolio and highly favourable tailwinds in the PEL platform. Relatively strong share price performance over the last twelve months had rendered IPF comparatively expensive, but after a recent selloff its price now more fairly reflects its risk and prospects.

  • Recovery mode: IPF’s FY22 DEPS grew +10.8% y/y to ZAR107.6c with a dividend of ZAR102.2c (FY21: 92.2c). Overall, the SA portfolio benefitted from a significant reduction in COVID-related trading restrictions and rental relief, and leasing conditions have generally stabilised (negative rental reversions prevail but tenant retention has improved). The retail (base NPI +17.4% y/y) and industrial (+10.5%) portfolios were more defensive and have recovered faster than office (+2.1%), as expected. Design Quarter, Balfour Mall and The Firs are currently subject to refurbishment capex, which will assist with enhancing these assets.
  • PEL in strong shape: the PEL portfolio (IPF 65%) is attractively positioned in a structurally favourable environment, with normalised DEPS growth of +4.0% y/y (FY21: +9.6%) and a valuation uplift of +12.6% over the period. Demand for logistics and warehousing space is still healthy, driven by supply chain optimisation and ecommerce growth; however, investor sentiment has recently softened on concerns over rising bond yields (and the impact on cap rates) and potential oversupply/shadow vacancies in certain nodes as signalled by Amazon. Overall, we think market rental growth will be sufficiently supported by strong demand and rising replacement costs over the forecast period, but valuations will be under pressure from rising cap rates. The potential sale of the PEL platform would be transformative but is not factored into our forecasts pending a firm offer or other material update on the transaction.
  • Updated forecasts: our FY23 DEPS forecast is ZAR110.5c (+2.7% y/y); management is guiding for DEPS growth in the low- to mid-single digits. We maintain a 95% payout ratio in FY23 for a dividend of 104.9c per share (+2.7%). We forecast FY23 NAV to be relatively flat at ZAR17.05 per share (+0.5% y/y).
  • Valuation and rating: we revise our target price to ZAR11.24, implying a one-year TSR of +14.9% (9.9% income yield and +5.0% capital return). At a clean forward yield of 9.9% and 37% discount to NAV, we think that IPF has recently de-rated to a position where there is a materially more attractive margin of safety in the share price. We upgrade it to a NEUTRAL rating.
  • Key catalysts and factors to watch: near-term debt refinancing; execution of SA disposal pipeline; further reduction of LTV towards 30-35% target; potential disposal of PEL platform

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