Key message: Sirius is in significantly better operational and financial shape than its share price performance over 2022 suggests, in our view, despite a highly uncertain macro backdrop in its core operating markets. With conservative upgrades to our earnings forecasts, we find value in the counter at a 9.4% forward FFO yield, 6.1% dividend yield and 19% discount to NAV.

  • Staying the course: Sirius’ 1H FY23 operating and financial performance remained intact with +32.2% y/y growth in FFO per share to EUR4.15 (1H FY22: EUR3.14c), primarily driven by accretion from the BizSpace acquisition but also reflecting pricing-led gains in the underlying rent roll (Germany +2.4% h/h, UK +4.1% h/h). Overall, we think Sirius should comfortably grow core lfl NOI by 5-6% on an annualised basis for FY23, even as occupancy and tenant retention comes under pressure from a constrained economic environment. But Sirius’ business model is well-suited to tenant churn and high inflation, in our view, and is capturing high positive reversions; the average rental rate per sqm grew +3.3% in Germany and +8.4% in the UK over the six-month period.
  • Valuations proving relatively defensive: NAV grew +2.0% to EUR109.5c per share, reflecting marginal but positive valuation gains in Germany and the UK even as cap rates loosened during the period (by 10bps on the German portfolio and 70bps on the UK portfolio). This reflects Sirius’ proven and continuing ability to capture valuation uplift from NOI growth, driven by core rental growth and the strong accretion from its capex investment programme. We think that there will be further upward pressure on cap rates for the foreseeable future, which presents a risk to its return potential, but we are satisfied that NOI and FFO growth will remain adequately strong even in the face of sharply rising interest rates and an uncertain operating environment for tenants.
  • Updated forecasts: we increase our FY23 FFO per share forecast to EUR8.28c per share (+21.9% 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 EUR113.3c per share (+5.6% y/y).
  • Valuation and rating: our revised target price is EUR117.6c or ZAR21.71 translated at EUR/ZAR spot. This implies a one-year TSR of +33.6%, comprised of 6.1% income yield and +27.6% capital return; this return profile ranks in the top quartile of our rated coverage, and we accordingly maintain it on an OVERWEIGHT rating.
  • Key catalysts and factors to watch: rising cap and discount rates and impact on property valuations; initiatives to reduce LTV; conversion of BizSpace to UK REIT; rollout of capex programmes; impact of inflation and economic environment on occupancy and rental growth.

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