Morningstar | Scentre Skews to Moaty Malls, but FVE Unchanged
We make no changes to our AUD 3.85 fair value estimate for Scentre Group following the company's disposal of office towers in the Sydney central business district. The AUD 1.52 billion transaction, by way of a 299-year lease, further skews the firm's property portfolio towards its retail malls. For this reason, the transaction makes sense. We believe Scentre's large-format malls enjoy sustainable competitive advantages from efficient scale, underpinning the firm's narrow economic moat. Last trading at AUD 3.97 per security, Scentre screens as fairly valued.Scentre's high-quality malls are generally located in built-up areas where suitable land for a competing mall is both rare to find and expensive to purchase. Combined with high costs to establish a new competitive mall, low expected returns discourage new entrants. However, having a portfolio more leveraged to the rapidly changing retail environment presents risks. E-commerce remains a serious headwind for physical retailers. Online stores enjoy cost advantages from lower occupancy costs, and we expect sales leakage to online channels to accelerate from current levels. We expect this to drive lower rents on market rent reviews and lease expiries; this is reflected in our forecast for annual Australian rent growth of 2.2% over the next decade.
The AUD 1.52 billion sale of office space follows the sale of 50% in Westfield Burwood in May for AUD 575 million. Together, these transactions are around AUD 0.6 cents per security dilutive to fiscal 2019 funds from operations. However, the AUD 2.1 billion windfall allows Scentre to implement a 12-month, AUD 800 million on-market buyback, which is due to commence following the release of half-year results in August. We forecast fiscal 2019 FFO of AUD 25.60 cents per security and continue to forecast dividends of AUD 23.60 cents per security, in line with guidance.
Scentre Group is engaged in the ownership, development, design, construction, asset management, leasing and marketing activities with respect to its Australian and New Zealand portfolio of retail properties. Co.'s operational segment comprises the property investments and property and project management segments. The property investments segment includes existing shopping centers and completed developments. The property and project management segment includes property management and development. As of Dec 31 2015, Co. had a portfolio of 34 centers in Australia and six centers in New Zealand.
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