Strong div­i­dend growth from Euro­pean as­sets

Financial Mail - Investors Monthly - - Analysis - Joan Muller

The grow­ing pool of JSElisted prop­erty stocks that gen­er­ate 100% of their earn­ings off­shore — around 20 at last count — is likely to con­tinue to lure most of the flow of money into the sec­tor in the short term, given SA’s dis­mal growth out­look.

How­ever, since the rand’s move­ment against ma­jor cur­ren­cies has be­come so un­pre­dictable it would be fool­ish to place all your eggs in one bas­ket. Re­mem­ber last year, when those who bet against the rand got it hor­ri­bly wrong? A num­ber of rand hedge stocks ended 2016 more than 30% down.

Be­sides, there are still some SA-fo­cused prop­erty coun­ters that are de­liv­er­ing div­i­dend growth well ahead of in­fla­tion and are backed by as­tute man­age­ment teams that are ex­pand­ing their SA foot­prints off­shore in a de­fen­sive bid to counter the SA down­turn.

Hyprop In­vest­ments is one of them. Close to 80% of the com­pany’s port­fo­lio is still SAbased. These in­clude a num­ber of shop­ping cen­tres, such as Rose­bank Mall, Hyde Park Cor­ner and Clear­wa­ter Mall in Jo­han­nes­burg and Canal Walk and Som­er­set Mall in the Cape. Be­sides, Hyprop also has a R3.1bn ex­po­sure (9% of to­tal as­sets) to the rest of Africa via five malls in Ghana, Zam­bia and Nige­ria as well as a R4.3bn port­fo­lio (12% of to­tal as­sets) of malls in South­east­ern Europe.

The com­pany is ex­pected to de­liver 12% growth in div­i­dend pay­outs when man­age­ment an­nounces results for the year end­ing June on Septem­ber 1. This is at­trac­tive com­pared with the no more than 5%-7% that is likely to be achieved by most other SA-fo­cused prop­erty stocks this year.

Granted, Hyprop is fac­ing some head­winds on the back of weak con­sumer spend­ing and more re­tail­ers clos­ing shop (among oth­ers, Stuttafords and River Is­land). This has no doubt con­trib­uted to the counter’s un­der­per­for­mance over the past year in terms of its share price — Hyprop is down 16% for the year to Au­gust 10.

Lil­iane Barnard, CEO of Me­tope In­vest­ment Man­agers, says the cur­rency and earn­ings volatil­ity ex­pe­ri­enced by Hyprop’s African as­sets as well as un­cer­tainty about how the newly ac­quired South­east­ern Euro­pean malls will per­form have added ad­di­tional risk to Hyprop’s port­fo­lio, which is a con­cern to in­vestors.

She says: “Hyprop’s re­cent un­der­per­for­mance has meant that the stock has lost the sub­stan­tial pre­mium rat­ing it al­ways en­joyed.” But the up­side is that the softer share price could cre­ate an at­trac­tive en­try point for in­vestors with a longterm view and those look­ing for con­tin­ued strong div­i­dend growth, she says.

At a cur­rent price of R118.00, Hyprop of­fers a 12-month for­ward yield of 6.7%. That com­pares with around 7.5% for the sec­tor as a whole, which means that Hyprop is now trad­ing at a sub­stan­tially smaller pre­mium than the 2% plus still seen 12 months ago.

Craig Smith, head of re­search at An­chor Stock­bro­kers, ex­pects Hyprop to con­tinue to re­port above-market div­i­dend growth. Dis­tri­bu­tions per share are fore­cast to in­crease by an av­er­age 9%/year over the next three years. “De­spite the cur­rent head­winds faced by the re­tail prop­erty sec­tor, we still like Hyprop as it owns what is ar­guably the best-qual­ity shop­ping cen­tre port­fo­lio in SA,” Smith says.

He says it ap­pears that Hyprop is also buy­ing goodqual­ity as­sets in a mea­sured man­ner in South­east­ern Europe, where funding spreads are still very at­trac­tive — ac­qui­si­tion yields of 7% to 7.5% com­fort­ably ex­ceed in­ter­est rates, (gen­er­ally still be­low 2%).

Hyprop’s lat­est ac­qui­si­tion in Bul­garia is a case in point. The com­pany last month ac­quired, via its 60% stake in UK-based Hys­tead, what is re­garded as the pre­mium shop­ping cen­tre in the cap­i­tal, Sofia for à156m.

The 52,000 m² cen­tre, which is known as The Mall, is Hyprop’s fourth ac­qui­si­tion in the re­gion — Hys­tead also owns malls in Mace­do­nia, Mon­tene­gro and Ser­bia — and takes the com­pany’s ex­po­sure to the re­gion to à460m.

Hyprop CEO Pi­eter Prinsloo says the mall will pro­vide crit­i­cal mass to its port­fo­lio in South­east­ern Europe and is the com­pany’s first ac­qui­si­tion in an EU cap­i­tal.

Though South­ern, Cen­tral and East­ern Europe still ap­pear to be the most favoured des­ti­na­tion for lo­cal prop­erty play­ers look­ing to di­ver­sify off­shore, both Barnard and Smith cau­tion that the re­gion is not en­tirely with­out risk. Pres­sure on fu­ture re­turns may come from lack of liq­uid­ity, lim­ited avail­abil­ity of ac­cu­rate and timeous prop­erty data, the pos­si­bil­ity that sup­ply will start to ex­ceed de­mand and in­creased com­pe­ti­tion for as­sets.

ment ser­vices to the mix.

While enX has grown markedly in scale and prof­itabil­ity, its market rat­ing has di­min­ished. This may well be in­formed (un­justly) by events at Torre In­dus­tries — like enX, Torre has fol­lowed an ac­qui­si­tion-driven growth strat­egy — and ( justly) by the un­cer­tainty around the per­for­mance of its con­tract min­ing as­sets.

Though a strain­ing Torre looks ready for break­ing up, enX looks more rounded and bet­ter fo­cused, op­er­a­tionally speak­ing. Its share price is now touch­ing lev­els where longert­erm value in­vestors could start pay­ing at­ten­tion.

Of crit­i­cal im­por­tance is that enX re­cently man­aged to ex­tri­cate it­self from a lin­ger­ing legacy “li­a­bil­ity” in the form of its share­hold­ing in strug­gling min­ing ser­vices com­pany eX­tract. That com­pany will aban­don its un­vi­able min­ing ser­vices op­er­a­tions and be re­con­sti­tuted as a re­source in­vest­ment com­pany un­der the chair­man­ship of min­ing sec­tor doyen Bernard Swanepoel.

EnX’s hold­ing in eX­tract has been un­bun­dled to share­hold­ers. This may be per­ceived as a ca­pit­u­la­tion, but the grasp­ing of this par­tic­u­lar net­tle may well be ap­pre­ci­ated in years to come (not­ing the frag­ile “po­lit­i­cal” im­passe in the lo­cal min­ing in­dus­try at present).

EnX’s ex­ec­u­tives, in­clud­ing re­spected busi­ness per­son­al­i­ties such as Paul Man­sour, Steven Joffe and stoic CEO Jan­nie Ser­fontein, can now fo­cus on a prof­itable and cash-gen­er­a­tive busi­ness hub that looks ca­pa­ble of solid per­for­mances even in the pre­vail­ing brit­tle trad­ing con­di­tions.

A re­cent re­search re­port by Av­ior pen­cilled in “high sin­gledigit growth” for enX’s fleet man­age­ment and in­dus­trial equip­ment seg­ments. IM sus­pects these seg­ments may even sur­prise on the up­side — though it’s clear enX is main- tain­ing a con­ser­va­tive vis­age.

Af­ter speak­ing to the ex­ec­u­tives re­cently, it seems enX will, by its stan­dards, en­dure a pe­riod of con­sol­i­da­tion be­fore ei­ther large ac­qui­si­tions are mulled or div­i­dends paid out. Bolt-ons are al­ready on the cards — and enX’s deal­er­ships are look­ing to buy in the UK. If this is done smartly, then earn­ings should keep grow­ing at a de­cent pace.

The in­terim results to endFe­bru­ary showed re­as­sur­ing cash flow from op­er­a­tions of R765m, or 136c/share. The com­pany has a chunk of debt (more than R4bn) on the bal­ance sheet, and an in­terim in­ter­est bill of a hefty R147.5m.

Rather than see­ing this as a bur­den, in­vestors should ex­pect it to be char­ac­ter­is­tic of the busi­ness, given its sig­nif­i­cant leas­ing op­er­a­tions.

Aside from the mori­bund lo­cal econ­omy, the abil­ity of the com­pany to re­fi­nance this debt and its cost of funding are clearly ques­tions that the market is ask­ing. EnX re­cently started to show its stripes in this re­gard, tap­ping the bond market for five-year money at favourable rates. Pre­sum­ably once the com­pany has its credit rat­ings up a notch or two and cash flows have eroded a chunk of debt, then div­i­dends may be re­con­sid­ered (pos­si­bly in the 2019 fi­nan­cial year).

As such, in­vestors might pre­fer to watch and wait, jus­ti­fy­ing their ret­i­cence by point­ing to the “of­fi­cial” trail­ing earn­ings mul­ti­ple. At 28 times this might look a tad steep for an in­dus­trial busi­ness — mea­sured against more es­tab­lished coun­ter­mates such as Hu­daco, In­victa, How­den Africa and Su­per Group. How­ever, it is im­por­tant to re­mem­ber this does not in­clude the earn­ings from the Eqs­tra busi­nesses. The “real” rat­ing is far more mod­est, and IM reck­ons the his­toric mul­ti­ple sits at about seven times — well be­low its peers if based on a full-year Au­gust 2017 earn­ings tar­get of be­tween 175c/share and 185c/share (as well as a market value of the eX­tract shares and loans of about 300c/share).

In­ter­est­ingly, Av­ior has an es­ti­mated earn­ings tar­get of 170c/share for this fi­nan­cial year, grow­ing to 232c in the 2018 fi­nan­cial year and 269c in fi­nan­cial 2019.

IM reck­ons a steady (rather than spec­tac­u­lar) profit per­for­mance by enX over the next three years should lead to a strong rerat­ing in the shares. Now could be a per­fect time to start ac­cu­mu­lat­ing stock.

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