Key message: despite a recovery in footfall and turnover in its retail portfolio, L2D’s relatively soft financial performance continues to disappoint. We fail to see any meaningful catalyst that could lead to the share re-rating.

  • 1H FY22 results in line: DPS was ZAR17.5c (+10.7% y/y) while NAV marginally declined to ZAR7.53 (-1.2% y/y). Footfall and turnover in the retail portfolio have recovered well, with turnover at Sandton City up an impressive ~30% over the comparable pre-COVID period (1H FY19); Midlands Mall and Botshabelo Mall are also trading significantly ahead of their pre-COVID bases, while Eastgate, Promenade and Nelson Mandela Square are relative laggards. Operating conditions in the hospitality portfolio are normalising, with average YTD occupancy at the Sandton Sun of 71.5% (1H FY21: 39.8%; 1H FY19: 66.8%) and 40.7% at the Garden Court. However, L2D’s office exposure has failed to revive: excluding the Standard Bank Centre (ZAR153mn, held for sale), office occupancy is only 77.9% with average reversions of -26.1% for the period (FY21: -24.8%).
  • Update to earnings forecasts: we revise our FY22E DPS forecast to ZAR36.5c (+7.1% y/y) – towards the upper end of management’s 3-8% guidance range. In our view valuations in L2D’s property portfolio have sufficiently adjusted towards more conservative levels and should be relatively stable (reflecting cash flow growth) going forward; thus we expect marginal positive growth in NAV from 2H FY22 and into FY23.
  • Our revised target price is ZAR3.90, which implies a one-year TSR of +7.5% (9.5% income yield and -2.0% capital return). L2D’s share price has materially underperformed relative to the SAPY index over the last twelve months; now at a 46% discount to rolled forward NAV, there appears to be deep value in the counter. But at a 9.5% forward dividend yield, we think there are more attractive income yields attainable in the sector adjusted for quality and risk. In the absence of a major catalyst that could drive a re-rating, we maintain an UNDERWEIGHT rating.
  • Key catalysts and factors to watch: potential improvement in retail rental reversions to reflect portfolio turnover performance; execution of debt refinancing and impact on net finance charges; recovery of hospitality assets and impact on distributable earnings

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