Key message: Sirius’ FY24 performance is poised to meet expectations. Management continues to create value through strong operational performance, and the acquisition pipeline following the Nov-23 capital raise has been executed swiftly and effectively.
- Operational performance: Sirius’ overall rent roll grew +7.2% y/y (lfl) for FY24, with ‘similar levels’ of growth achieved across the Germany and UK portfolios. This pleasing growth in the rent roll reflects a combination of rental rate increases and improved occupancy achieved through Sirius’ well-established asset and property management platform. The valuation movement for the Germany portfolio is expected to be positive overall, as marginal yield expansion should be offset by strong operating performance; similarly in the UK, rising cap rates should be largely absorbed by above-inflation rental increases, which have been achievable across the portfolio despite the macroeconomic environment.
- Capital raise and acquisition pipeline: alongside the release of its interim results, Sirius successfully executed a GBP146.6mn (ZAR3.4bn) capital raise. Management has rapidly deployed most of the proceeds into acquisitions in Germany and the UK over 2H FY24, more quickly than our prior expectations and at higher initial yields, which enhances our F25E FFO estimates. EUR55mn has been spent in Germany across four property acquisitions at a net initial yield of 9.3%, while GBP84mn (EUR96mn) was spent in the UK across six properties at a net initial yield of 8.9% and notably includes Vantage Point Business Village in Gloucestershire acquired for GBP48.3mn (EUR56.4mn). Collectively the acquisitions will add c. 139 000sqm GLA to the BizSpace (UK) portfolio and c. 72 000sqm GLA to the Germany portfolio, primarily comprising industrial space in both cases. As part of its ongoing capital recycling strategy, Sirius also disposed of a number of mature or non-core properties valued at EUR51mn at a blended exit yield of 6.4%, in line with or above book value in all cases. The group will still have c. EUR129mn available in unrestricted cash after accounting for all confirmed acquisition and disposal activity, so we can expect further material inorganic growth to come to fruition over the near- to medium-term.
- Balance sheet update: group net LTV was reported at 40.8% at 1H FY24 but should be lower at FY24 FYE after factoring the cash still on hand from the capital raise, with no significant debt maturities until FY27 following the successful refinancing of the EUR170mn Berlin Hyp and EUR58mn Deutsche PBB facilities during the period. The weighted average cost of debt is currently 2.1%, up from 1.4% at 1H FY24 (reflecting an all-in fixed rate of c. 4.3% on the newly refinanced facilities). While we remain concerned about the scenario of refinancing the FY27 debt maturity (EUR400mn unsecured bond) at current market rates, we are increasingly confident that interest rates will be materially lower in the future when the bond matures. Nonetheless, outrunning the expected increase in net finance costs in FY27 and maintaining positive FFO growth in that year is the management team’s key medium-term priority, in our view, and will require continued strong operating performance (rental rate increases and occupancy improvements), accretive acquisitive growth, value-add capex allocation, and higher NPI margins through improved service charge recoveries – all of which have been amply demonstrated in the past.
- Updated forecasts: we slightly increase our FY24 FFO per share forecast to EUR8.99c per share (+2.9 y/y) with an expected final dividend of EUR3.05c; likewise, we revise our FY25E FFO forecast upward to EUR9.01c per share (+0.2% y/y) with an expected full year dividend of EUR6.15c per share (+1.6% y/y). We highlight that the payout ratio over the medium-term is likely to flex between 65-70% to ensure progressive dividend growth, but based on management feedback it is unlikely to move as high as 75% as we had previously assumed.
- Valuation and rating: our revised target price is EUR115.9c or ZAR24.65 translated at EUR/ZAR spot. This implies a one-year TSR of +18.5%, comprised of 6.0% income yield and +12.5% capital return; based on a generally stable to improving outlook for the group and the effective deployment of the proceeds of the capital raise, we upgrade the counter to an OVERWEIGHT rating.