Key message: 1H FY23 performance met expectations and guidance. We are encouraged by Spear’s capital recycling and inorganic growth initiatives, which lift the quality and growth prospects of the portfolio.
- Solid 1H FY23 performance: DEPS was ZAR41.3c (+6.1% y/y), reflecting stable core performance from the retail and industrial portfolios (which experienced positive reversions) against more difficult operating conditions in the office portfolio (where reversions are still negative and vacancies are rising). A payout ratio of 90% was applied for a dividend of 37.1c (+12.3% y/y); NAV per share was broadly flat at ZAR11.36 (+0.5%). LTV declined to 38.7% (FY22: 39.1%) with an improved ICR of 2.5x for the period (FY22: 2.2x). Overall, the portfolio continues to display relatively resilient performance, and the Western Cape focus is compelling, with clearly stronger property market fundamentals.
- Capital recycling and inorganic growth: Spear should generate c. ZAR425mn gross proceeds from the disposals of 6 Talana (ZAR71mn), 5 Fitzmaurice (ZAR85mn), Island Business Park (ZAR23mn) and 15 on Orange (ZAR246mn), which will be reinvested into the redevelopment and extension of Blackheath Park for Bravo Brands (ZAR74mn) and the acquisitions of 27 Junction (ZAR65mn) and The Island (ZAR185mn). LTV should settle at c. 38%, assuming the balance is used to pay down debt. With the execution of this pipeline, Spear will fully divest from the hospitality sector by the end of FY23, ahead of expectations, and increase its exposure to strategy-aligned investment opportunities (i.e. multi-let industrial and warehousing).
- Update to earnings forecasts: our FY23E DEPS forecast is ZAR82.6c (+5.9% y/y), roughly in the middle of management’s guidance range (unchanged at +5-7%). We apply a 90% payout ratio for a dividend of ZAR74.4c per share (+8.9% y/y). For FY24E we increase our assumed payout ratio to 95%, for a dividend of ZAR83.2c (+11.9%) on DEPS of 87.6c (+6.0% y/y).
- Our revised target price is ZAR8.22, which implies a forecast total shareholder return of +21.7% (10.8% income yield and +10.9% capital return). We maintain a NEUTRAL rating on the counter.
- Key catalysts and factors to watch: leasing conditions in Cape Town office market versus rest of SA; potential acquisitive growth activity, including new developments; impact of revised hedging policy (up to 75% fixed) and rising interest rates on net finance costs.