Key message: 2H FY23 performance is set to meet expectations and guidance. Overall, organic performance appears intact and the portfolio continues to reposition through investment and disposal activity.
- Trading in line with expectations: management has maintained guidance for FY23E DEPS growth of +5-7% y/y. Persistent loadshedding (especially Stage 6 and above) and operating cost creep are highlighted as key challenges. WACD is 8.8%, significantly up from 7.3% at FY22 and reflecting the increase in variable rates applicable to unhedged debt (65% fixed). But the Western Cape continues to be relatively resilient and this is reflected in stable performance of the portfolio; overall reversions have averaged -4.0% YTD (with a slight uptick in escalations to 7.4%) with occupancy maintained at c. 93% and a tenant retention rate of 96% achieved for FY23.
- Capital allocation and LTV reduction: Spear will generate c. ZAR425mn gross proceeds in FY23 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). Additionally, 6.9mn shares have been repurchased during the year for c. ZAR53mn. LTV should consequently settle below 38% at FY23 (from 39.1% at FY22). Further, the receipt of proceeds from the Liberty Life office disposal (ZAR400mn) effective in FY24 is expected to reduce LTV by a further 500bps; this will be well below the 38-43% strategic threshold, but in line with management’s policy to maintain a lower LTV in the short term until the rising interest rate cycle turns. Nonetheless, it will create capacity for future inorganic growth led by acquisitions and developments.
- Update to earnings forecasts: our FY23E DEPS forecast is ZAR82.6c (+5.7% y/y), roughly in the middle of management’s guidance range. We apply a 93% payout ratio on full year earnings for a dividend of ZAR76.6c per share (+12.3% y/y); we highlight that management has proposed an increase in the payout ratio from 90% to 95% for the final dividend. For FY24E we forecast a dividend of ZAR82.7c (+7.9%) on DEPS of 87.0c (+5.6% y/y).
- Our revised target price is ZAR8.12, which implies a forecast total shareholder return of +22.8% (11.4% income yield and +11.4% capital return). We maintain a NEUTRAL rating on the counter.
- Key catalysts and factors to watch: leasing conditions in Cape Town commercial property market versus rest of SA; potential future inorganic growth activity (acquisitions, developments); completion and receipt of Liberty Life disposal proceeds; impact of interest rate increases on net finance charges.