Track record and range of as­sets of­fer hope

Financial Mail - Investors Monthly - - Analysis - Joan Muller

It’s not clear what has been be­hind the re­cent sell-off of Hyprop In­vest­ments. The share price touched a two-and-a-half year low of R95 this month de­spite fairly solid re­sults. Hyprop is one of only a hand­ful of SA-fo­cused prop­erty stocks that man­aged to achieve in­fla­tion-beat­ing dis­tri­bu­tion growth this year.

It de­clared an 8.8% in­crease in div­i­dend pay­outs for the 12 months to June, well ahead of the 4%-6% achieved by most other SA-fo­cused prop­erty stocks in the year to date.

Hyprop’s SA port­fo­lio of R29bn in­cludes nine up­mar­ket shop­ping cen­tres in­clud­ing Canal Walk in Cape Town, Rose­bank Mall and Hyde Park Cor­ner in Jo­han­nes­burg, and Clear­wa­ter Mall on the West Rand. Its above-mar­ket div­i­dend growth per­for­mance was sup­ported by strong growth in its port­fo­lio of six shop­ping cen­tres in South­east Europe.

It seems in­vestors have been spooked by man­age­ment’s cau­tious per­for­mance out­look for the year to June 2019. Though Hyprop’s SA mall port­fo­lio is re­garded as highly de­fen­sive, as they all dom­i­nate their catch­ment ar­eas in prime ur­ban lo­ca­tions, the port­fo­lio hasn’t been im­mune.

The con­sumer-spend­ing slow­down has prompted re­tail­ers to re­con­sider store ex­pan­sions. Hyprop fore­casts div­i­dend growth to slow to between 5% and 7% next year, an out­look An­chor Stock­bro­kers in­vest­ment an­a­lyst Pranita Daya says is “worse than ex­pected”. But she also says man­age­ment typ­i­cally un­der­promises and overde­liv­ers so it is likely Hyprop will achieve div­i­dend growth at the top end of its fore­cast next year, de­pend­ing on how quickly the SA econ­omy re­cov­ers and whether re­tail spend takes a fur­ther knock.

Trad­ing den­sity growth (turnover/m 2), used to gauge the strength of the re­tail en­vi­ron­ment, has slowed sig­nif­i­cantly in SA malls. Hyprop’s malls recorded av­er­age trad­ing den­sity growth of only 0.5% for the year to June, down from 5% two years ago.

CEO Pi­eter Prinsloo said at the com­pany’s re­sults pre­sen­ta­tion that most lo­cal shop­ping cen­tres have had a dif­fi­cult year, given an over­sup­ply of re­tail space cou­pled to con­sumers spend­ing less. “Sales growth is just not there,” he said. Shop­pers were be­com­ing more value-con­scious.

Hyprop, nev­er­the­less, has few empty stores in its malls with al­most the en­tire va­cancy left last year by the demise of Stuttafords al­ready re-let. The va­cancy has de­clined from 2.4% to 1.9% in the 12 months to June. How­ever, de­spite suf­fi­cient de­mand from re­tail­ers to fill empty space, Prinsloo said rental growth was un­der pres­sure as re­tail­ers be­come more re­sis­tant to rental hikes. Hyprop recorded an av­er­age 1.5% rental re­ver­sion on its mall port­fo­lio in the year to June, markedly down from the av­er­age 4% achieved on lease re­newals a year ear­lier.

The ques­tion is where growth will come from, given SA’s de­pressed eco­nomic out­look. Prinsloo said yield­en­hanc­ing growth op­por­tu­ni­ties in SA were be­com­ing scarce. Port­fo­lio growth will come from South­east Europe: “We can still buy qual­ity shop­ping cen­tres in South­east Europe at yields of 7%-8% with debt fund­ing rates at 3%-3.5%. Trad­ing den­sity growth is also far more ro­bust than in SA.”

This month Hyprop was trad­ing around R95 — 22% down from its Jan­uary peaks. It places the counter at a dis­count to NAV of more than 7%. That’s at­trac­tive given Hyprop’s as­sets and its track record.

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