Key message: Spear’s Western Cape focus presents a positive picture all around as the portfolio continues to deliver relatively stable and defensive performance.
- FY23 performance in line with guidance so far: overall reversions have averaged -3.5% for the period (retail +4.2%; office -1.5%; industrial +1.8%). Occupancy is materially unchanged at 93.5% (retail 92.9%; office 85.1%: industrial 97.8%); a new 10-year lease has been signed at 2 Long Street for DHL’s sub-Saharan Africa regional office, which will come into effect later in FY23. Collection rate of 95% has been achieved YTD. Disposals of Island Business Park, 5 Fitzmaurice and 6 Talana have been executed at premiums of +2-6% to book value. LTV was 39.0% at Jul-22 (FY22: 39.1%) with an ICR of 2.6x (FY22: 2.2x) and weighted average cost of debt of 7.8% (FY22: 7.3%). Guidance has been maintained for FY23E DIPS growth of +5-7% y/y.
- Bravo Brands development: Spear has agreed to redevelop c. 50% of the 38 000sqm Blackheath Park industrial property for Bravo Brands, which manufactures and distributes household furniture and comfort products. Redevelopment works commence from Nov-22 with occupation expected from Feb-23. In the first phase, Bravo Brands will take up 16 000sqm GLA (13 000sqm of existing GLA plus 3 000sqm of newly constructed GLA) on a ten-year lease at a ZAR74mn cost to Spear and forecast net initial yield of 9.9%. There is further intended expansion over the next five to seven years to an aggregate GLA of 42 000sqm.
- Update to earnings forecasts: our FY23E DEPS forecast is ZAR82.7c (+6.0% y/y), in the middle of management’s guidance range. We apply a 90% payout ratio for a dividend of ZAR74.4c per share (+9.1% y/y). For FY24E we increase our assumed payout ratio to 95%, for a dividend of ZAR80.8c (+8.6%) on DEPS of 85.1c (+2.9% y/y).
- Our revised target price is ZAR8.14, which implies a forecast total shareholder return of +15.7% (10.1% income yield and +5.6% capital return). Our valuation incorporates a discount rate of 15.6%, exit yield of 10.0% and exit P/NAV of 0.75x. We maintain a NEUTRAL rating on the counter, as we find it fairly priced at current levels relative to peers.
- Key catalysts and factors to watch: leasing conditions in Cape Town office market versus rest of SA; exercise of 15 on Orange option; potential acquisitive growth activity, including new developments; impact of revised hedging policy (up to 75% fixed) and rising interest rates on net finance costs.