Morningstar | Kiwi Retail Doing Well But Outer-Year Risk to Tenant Sales Remain. FVE Unchanged at NZD 1.35
We have retained our NZD 1.35 fair value estimate for narrow-moat Kiwi Property Group, with the firm screening as slightly overvalued currently trading around NZD 1.48. The firm will rule off on its fiscal 2019 accounts this week and we expect no major surprises when Kiwi releases its results on May 20. Kiwi doesn’t provide earnings guidance but has guided for fiscal 2019 distributions of NZD 6.95 cents per share, or cps, up slightly on the prior year’s NZD 6.85 cps.Our key focus for the upcoming result will be on the performance of the retail shopping centres that comprise 71% of Kiwi’s income-generating assets. These assets reported marginally weaker than expected rent growth for the half year ending September 2018. Further, tenant sales growth was mixed, with the second-largest and high rent-paying apparel category reporting tepid like-for-like sales growth of 0.9%. Weaker fashion sales is a rising risk for Kiwi, with fashion representing 17% of total turnover and most likely over 20% of rent receipts. Retail landlords globally are being impacted by fast-changing consumer spending patterns, most particularly the reallocation of spending on high rent-paying categories to low rent-paying categories. Kiwi is no different with sales in the high rent-paying fashion retailers appearing to be redirected to low rent paying commercial services tenants (travel and mobile phones), where sales were up 8.6% in the year to September 2018.
Nonetheless, rent across Kiwi’s retail portfolio was still comfortably ahead of retail landlords in Australia, North America, and Europe. We suspect part of the reason is landlords in these markets are more exposed to the loss of sales to online retailers than is the case for New Zealand. We think this will be short-lived as New Zealand’s small population creates a disincentive for global online retailers such as Amazon to establish a physical presence. However, in outer years this will change, impacting sales for many retailers and hence the growth rate for Kiwi’s retail rents. We suspect our more conservative stance on rents is a reason for our fair value estimate being below the current share price.
Kiwi Property Group is engaged in investing in New Zealand real estate. The Trust's objectives are to maximize earnings and to provide long-term sustainable returns to investors through the strategic acquisition, intensive management and ongoing development of office, retail and industrial property assets. Co.'s business segments comprise retail (representing Co.'s investment in retail property), office (representing Co.'s investment in office property) and other (representing those items which are neither retail nor office). As of Mar 31 2010, Co. had total assets of NZ$1,984,822,000.
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