The rise, fall and rise again of Sirius
The rand hedge play has reclaimed its status as the JSE’s best property performer. Is it too late to share in the pickings?
Shareholders of Sirius Real Estate have been on something of a rollercoaster for the past three years.
After a stellar share price performance in 2021, when the German and UK-focused business park owner emerged as the JSE’s best performing property stock, Sirius plummeted nearly 50% in 2022.
This year, Sirius was firmly back on investor radars, again ending the year as the property sector’s top dog. The share has notched up an impressive total return of 42% in the first 11 months of 2023, streaks ahead of the 0.2% delivered by the South African listed property index over the same period, according to Anchor Stockbrokers figures.
The company’s strategy is to buy older, undervalued business and industrial premises, often on the outskirts of cities and towns, which it upgrades and redevelops into flexible and conventional workspaces for SMEs as well as larger companies.
Analysts argue the dual-listed share (on the JSE and London Stock Exchange) was oversold in 2022, primarily as a knee-jerk reaction to the rapid rise in interest rates — and not due to a deterioration in the company’s underlying performance.
In fact, Sirius is one of the few property companies that has consistently grown its dividend every year since listing on the JSE in December 2014, even during the pandemic, when most suspended or slashed payouts.
Nicolas Lyle, property analyst and portfolio manager at Stanlib, says Sirius’s share price was driven lower last year by fears that a global economic recession was imminent, causing a rotation out of small-cap stocks into larger companies.
Further pressure was placed on the share when one of Sirius’s anchor shareholders rebalanced its portfolio.
Lyle says this year’s rebound comes on the back of a strong operational performance. For the six months to September, Sirius achieved an increase of 9.3% and 11.1% in funds from operations and dividend payouts respectively.
Rentals in its €2.1bn portfolio of business and industrial parks, which is split 80/20 between Germany and the UK, grew by an average 7.7% on a like-for-like annualised basis. That means Sirius has delivered its 10th consecutive year of likefor-like rent roll increases exceeding 5% at group level.
Lyle believes Sirius was also the beneficiary of a general rotation out of low-yielding assets into higher-yielding stocks, to provide investors with a stronger margin of safety over rising bond yields. Rand weakness also led to local investors gravitating towards inward-listed offshore stocks this year.
The key question now is whether Sirius offers further share price upside.
Lyle believes Sirius remains a good buy, “both on a relative and absolute basis for those with a one-year-plus view”. He refers to last month’s successful capital raise of just more than R3bn, most of which will be used for acquisitions.
“While this cash will act as a short-term drag on earnings growth, the shares still offer a double-digit free cash flow yield in euros with upside should they deploy the proceeds quicker than expected,” he says.
Sirius has already bought several assets in the past four months in the UK in Liverpool, Barnsley and North London for about R1bn.
He adds that the balance sheet is in great shape and that the company has the highest interest cover in the sector, with no significant debt maturities due until 2026.
“The property portfolio’s reported valuation yield north of 7% [in euros] is also
compelling relative to bond yields.”
Lyle cites a potentially sharp rise in long bond yields and a deep and protracted recession in Germany and the UK as possible triggers for another drawdown.
However, he says it’s unlikely that Sirius’s share price would drop by more than 10% in the near term “given current valuations and the quantum of cash sitting on the balance sheet”.
Brendon Hubbard, portfolio manager at ClucasGray, agrees it’s not too late to buy Sirius. At this week’s share price of about R21,
Sirius is still trading at a discount to NAV of 10%, vs a 60% premium to NAV at its peak at end2021.
“We believe the stock should be trading at a premium because of the higher growth profile of the company and, more importantly, its hugely successful operating platform, which is not reflected in the NAV calculation,” says Hubbard.
He says Sirius is one of the few European property companies that is still managing to achieve inflation-beating rental increases and NAV growth, notwithstanding the high interest rate environment.
UK investment bank Peel Hunt has an equally bullish outlook. In a research note published last month after the release of Sirius’s interim results, Peel Hunt upgraded its buy recommendation on the stock, raising its 12-month LSE target price from 105p to 115p. That represents a hefty 30% share price upside on the 89p that Sirius was trading at earlier this week.
The report reads: “In our view, Sirius’s proven ability to drive income and value from undermanaged and underinvested assets puts it in a very strong position to continue generating strong returns.”
While a stronger than expected recession in Germany could put pressure on earnings, Sirius CEO Andrew Coombs tells the FM that most economists now expect Germany to post a recovery next year, with an average 1.3% GDP growth forecast for 2024. That follows an expected GDP decline of up to 0.5% for 2023 as a whole.
Coombs believes Germans are more concerned about governance issues and the next general election, set for October 2025, than a recession.
And he says Sirius isn’t seeing any decline in inquiry levels, or an increase in tenant defaults. “What we are seeing instead is strong price growth across nearly all of our products.”