FY22 results and valuation update
Key message: Sirius remains in excellent operational shape and its FY22 results were ahead of our expectations. Now down ~40% from its Jan-22 highs and trading in line with NAV, we think it is oversold at current levels.
- Engine in strong shape: Sirius impressed in its FY22 with +16.2% y/y growth in FFO per share to EUR6.79c (FY21: 5.84c), while adjusted NAV grew +15.7% y/y to EUR102.0c (FY21: 88.3c). The period was notable for Sirius’ entry into the UK market with the acquisition of BizSpace (GBP380mn enterprise value, 7.1% net initial yield) and two landmark corporate bond issuances (EUR700mn total), which should prove transformative for Sirius’ capital structure by increasing its debt maturity profile, reducing its average cost of debt, and significantly reducing the level of asset encumbrance on the balance sheet. The core German portfolio continued its strong and defensible growth trajectory, as lfl occupancy increased to 87.4% (FY21: 86.6%), the lfl rent roll grew +6.4% y/y to, and lfl valuations increased +9.4%.
- Growth story intact: in our view, the fundamental growth opportunities within Sirius remain intact. BizSpace is so far proving a natural fit within the portfolio with +7.6% growth in the rent roll in only 4.5 months since acquisition, which drove a +10.6% increase in its lfl valuation and demonstrates Sirius’ ability to capture positive reversions in its operating markets. The runway for value-add capex in Germany is still deep and now largely provided by recent acquisitions; c. 64 000sqm of space is to be transformed over the next 18-24 months, requiring EUR17mn additional investment and expected to yield additional rent roll of c. EUR4.5mn. We expect a smaller but comparable capex programme to be enacted in the BizSpace portfolio over the forecast period, although details have not yet been provided and we do not factor this upside potential into forecasts at this stage. The high-inflation environment presents more opportunity than risk, in our view, as Sirius should be able to grow its rent roll at or ahead of inflation through indexation and churn.
- Updated forecasts: we increase our FY23 FFO per share forecast to EUR8.15c per share (+20.1% y/y); this reflects core growth and the remaining accretion from the BizSpace transaction plus tax savings from the conversion of BizSpace to a UK REIT (c. EUR3mn annual increment to FFO). Our FY23 NAV forecast is EUR114.2c per share (+6.5% y/y).
- Valuation and rating: our revised target price is EUR1.28 or ZAR22.47 translated at EUR/ZAR spot. This implies a one-year TSR of +27.7%, comprised of 5.2% income yield and +22.6% capital return; this return profile ranks in the top quartile of our rated coverage and we accordingly upgrade it to an OVERWEIGHT rating.
- Key catalysts and factors to watch: rising cap and discount rates and impact on property valuations; further acquisitive growth in UK and Germany; conversion of BizSpace to UK REIT; rollout of capex programmes; impact of inflation on rental growth.