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Morningstar | Transitioning SCA Property to a New Analyst

We make no changes to our AUD 2.30 fair value estimate for Shopping Centres Australia Property Group, or SCA Property Group, following the transition to a new analyst. With a portfolio largely skewed toward smaller neighbourhood centres, which have low barriers to entry, we retain our no-moat rating for the firm. Our medium fair value uncertainty, and standard stewardship ratings also remain intact. Last trading at AUD 2.62, the company trades at a 13% premium to our intrinsic assessment.

With a relatively young portfolio of properties, we expect low maintenance capital expenditure over the medium term. We continue to expect steady rental growth for the defensive-skewed anchor tenants, of about 2.5% per year on average. We are upbeat over shopping centres focusing on nondiscretionary retail because we believe these will be less affected by online competition and consumer deleveraging.

However, many of the anchor tenants are some years away from hitting the sales hurdles to start paying more lucrative turnover-based rent. We also see operating risks with smaller neighbourhood centres, which comprise nearly 75% of SCA's portfolio by value. These smaller centres tend to have higher average vacancy rates for specialty tenants than larger centres, and a higher exposure to small businesses, which are susceptible to product expansion from supermarkets.