Strong dividend growth from European assets

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.