Fortress REIT | From order comes chaos

Fortress (FFA/FFB) has navigated a series of corporate governance challenges over the prior financial year. However, neither an FSCA investigation nor an internally mandated PwC report have made findings which have impacted the financial status of the business.

We reassess Fortress' capital structure and the implications of this structure for the valuation of FFB shares. We find that, on a sum-of-the-parts basis, FFB shares should trade at a clean share price of ZAR9.00. At the current level of growth, we find that the earnings attributable to FFB shares are 2.4x more sensitive to shocks than comparable peers. Thus, our assigned discount rate to FFB forecasted earnings is the highest within the South African Property Index. Although the more senior FFA shares currently trade at an estimated 12m forward dividend yield of 7.8% relative to a sector average of 10%, we believe FFA is the least risky stock available for investment within the SAPY. Relative to a one-year expected return of c.14% - 15%, a total expected return of 12.5% on the FFA shares is at worst justified.


We assign an underperform rating to the combined Fortress' Group (FFA + FFB), as the combined market cap exceeds our estimate of NAV by 1.5% in a listed property market which trades at an average discount of 15%. However, we believe the superior risk profile and essentially organic growth profile of the FFA shares justifies the current FFA market rating. By logical extension, we assign an underperform rating to FFB.