Key message: Sirius is set to deliver FY25 financial performance in line with guidance, where there are headwinds to FFO per share growth given the dilution from new shares issued in the financial year and cash drag on earnings as the proceeds await deployment into yield-enhancing acquisitions. But the group remains well-poised with a consistently outperforming core.
- Strong growth in lfl rent roll: Sirius impressed with lfl group roll growth of +6.3% y/y for FY25, which modestly exceeded our expectations and was comfortably ahead of current inflation in Germany and the UK; it also marks the 11th consecutive year that the group has achieved lfl rent roll in excess of +5% p.a. Similar levels of growth have been experienced across Germany and the UK; overall, the second half of the financial year has seen particular success of management’s occupancy-led strategy to drive NOI growth, with reduced core portfolio vacancy rates across the portfolio at FYE. Lfl rental rates also typically grew strongly, which translated into heightened NOI growth for the group.
- Valuations improving in Germany, stabilising in the UK: Management expects to see consistently strong growth in NOI translate into a meaningful increase in portfolio valuation in Germany, against a backdrop of stable yields as the transactional market continues to improve. In the UK, the group expects to see valuations in the portfolio stabilise, in contrast to recent periods, as an improving transactional market builds further confidence.
- Acquisition and disposal activity: in the past twelve months to FY25 FYE, Sirius has notarised or completed on 11 property acquisitions investing in excess of EUR250mn across the UK and Germany, which we estimate which will provide a blended net initial yield of c. 8.5%, with further asset management opportunities available to drive future NOI growth. This is in addition to land parcels acquired at sites adjoining properties it already owns or that were bought during the period – namely at Oberhausen in Germany and Chalcroft in the UK – that should see future development activity based on market demand.
- Updated forecasts: we increase our FY25E FFO per share forecast to EUR8.43c (-5.8% y/y), where we reiterate that the decline is led by the increase in shares outstanding from the equity raises and initial cash drag on earnings as the proceeds await deployment, and does not reflect a deterioration in operating or financial performance. Our updated forecasts factor in the latest acquisitions and disposal activity, as well as the refinancing of the EUR350mn corporate bond for seven years at a 4.0% coupon and Saarbrücken secured debt at a 3.3% interest rate. Despite the headwinds to FFO per share, the group’s inherently flexible payout policy will allow for positive growth in dividend per share, which we still expect to amount to EUR6.15c for the full year (+1.7% y/y).
- Valuation and rating: our revised target price is EUR100.9c or ZAR22.04 translated at EUR/ZAR spot. This implies a one-year TSR of +22.5%, comprised of 7.2% income yield and +15.3% capital return, which continues ranks in the top quartile of our ranking table. We maintain an OVERWEIGHT rating on the counter. While macroeconomic risks remain heightened in the context of the global tariff war and conflict in Ukraine, we are encouraged by the historical defensiveness and above-average NOI growth that Sirius generates through the cycle, and the proposed increases in defence spend (especially in Germany) is encouraging for tenant demand for space in Sirius’ portfolio, given its flexibility and suitability to rapidly adapt to changing supply chains.