Key message: although FY22 results were stronger than we had expected, we think that Emira generally faces constrained growth conditions, particularly in its office portfolio. Current valuation is undemanding, but there are better prospects for re-rating amongst sector peers.  

  • FY22 results ahead of expectations: DEPS was ZAR128.9c (+3.8% y/y) and a full year dividend of 119.8c per share (+1.0% y/y) was declared. COVID-related rental relief greatly decreased over the period, from ZAR33.6mn for FY21 to ZAR1.9mn for FY22, which contributed to positive growth in distributable earnings. The more stable performance of the SA industrial and retail sectors has countered the strained local office market but negative reversions prevail across all sectors. Emira’s exposure to the USA grew with the acquisition of Summit Woods Crossing and overall the portfolio has provided a counter to the low growth South African environment; the portfolio reported a pleasing improvement in occupancy (4.5% at FY22 from 7.1% at FY21) on flat reversions. Truman’s Marketplace and Enyuka are set for disposal, with the proceeds to be ultimately used to fund the Transcend offer and the excess to settle debt. We highlight Emira’s high see-through LTV at 53.5% as an area of concern that we would prefer to see addressed.
  • Update to earnings forecasts: we revise our FY23E DEPS forecast to ZAR130.0c (+0.8% y/y); no guidance has been provided but management’s KPI target is ZAR129.5c. We assume a 95% payout ratio for a dividend of 123.5c per share (+3.1% y/y). We expect growth to again be roughly flat in FY24, with expected DEPS of 130.4c (+0.3% y/y) and DPS of 123.9c (+0.3% y/y). This reflects capital recycling out of Enyuka and into debt and Transcend, which is lower yielding.
  • Our revised target price is ZAR10.30, which implies a one-year forecast total return of +18.1% (12.6% income yield and +5.5% capital return). Trading at a 38% discount to forward NAV and 12.6% clean forward yield, there appears to be value in Emira at the current share price; we consider its valuation to fairly reflect its growth prospects, but generally find the asset quality of the portfolio and underlying growth potential to be relatively underwhelming. In the absence of a clear route to a positive re-rating, we downgrade the counter to an UNDERWEIGHT rating.
  • Key catalysts and factors to watch: completion of Transcend takeover, potential synergies and financial implications; Enyuka disposal and reinvestment of proceeds; initiatives to reduce see-through LTV; potential recovery of SA office market.

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