AWA | Jumping off the treadmill

Arrowhead Properties (AWA) reported a FY'17 DPS of 87.5c (+6% y/y) in line with our expectation and at the lower end of management guidance of 6 to 8%. The result included an estimated R56m of non-recurring income which contributed 5.6c to DPS. Excluding the once off items we estimate that DPS would have been 82.0c (-1% y/y). Like-for-like growth was weak at 1.5% y/y. The anaemic performance was driven by a significant increase in vacancies by 430bps to 12.1%. Arrowhead has announced its strategic decision that from FY'18 it will not distribute once-off / unsustainable income and coupled with deteriorating property fundamentals has resulted in Arrowhead forecasting a decline in DPS of 6.5% for FY'18. In the note we analyse the implication of the guidance on the direct Arrowhead portfolio, provide a normalised earnings for the current period, perform a sum-of-parts valuation, update our distribution growth forecast and valuation.