Hyprop Investments | Potholes ahead

HYP reported FY'18 DPS of 756.6c (+8.8% y/y), in line with prior guidance of between +8% and +10%. NAV per share rose +3.2% y/y, placing the counter on an 11.4% discount to NAV. A deceleration in underlying tenant sales growth has created a reversionary overhang and caused a decline in like-for-like net property income growth over the period. Despite the overhang, which is consistent with market trends, HYP's vacancy rate has continued to decline to levels which outperform its peers in the listed sector. In this report, we note three obstacles to growth over our forecast horizon which we believe are affecting HYP's current valuation. HYP has the capacity to invest accretively through its holding in Hystead by exploiting positive funding spreads in the South-Eastern European region. As such, the risks to growth which we identify may be offset by a more aggressive offshore expansion strategy, albeit at the cost of earnings quality in our view.