Highway Convenience Expansion And Urbanisation Trends Will Support Long-Term Rental Income Stability

Catalysts

About Dexus Convenience Retail REIT

Dexus Convenience Retail REIT owns and develops a national portfolio of fuel, highway and convenience retail assets that deliver defensive, growing rental income.

What are the underlying business or industry changes driving this perspective?

• Expansion of high-traffic highway sites such as Glass House Mountains, including multiple QSR pads and enhanced convenience formats, should increase tenant sales productivity and support higher market rents, which may lift portfolio revenue and earnings over time.
• Ongoing urbanisation and population growth around metro and corridor locations, with 2.6 million residents already within 3 kilometers of the assets, positions the network to capture rising everyday spend on fuel and convenience, which may support sustained like for like income growth and net margins.
• Recycling out of non-core assets into higher quality, larger format convenience hubs and truck stop facilities may improve asset mix and pricing power, which could help drive net operating income growth and support net tangible asset expansion.
• Long leases to major national and international operators that are actively reinvesting in food-on-the-go and grocery led formats may increase tenant turnover and reduce income volatility, which could underpin stable or rising occupancy and more predictable funds from operations.
• Low gearing, extended debt facilities and additional hedging capacity create room to fund one to two new development or acquisition projects. This may allow the trust to scale into attractive deals at yields above its cost of capital, which could improve earnings and support distributions.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Dexus Convenience Retail REIT's revenue will remain fairly flat over the next 3 years.
• Analysts assume that profit margins will increase from 19.4% today to 91.3% in 3 years time.
• Analysts expect earnings to reach A$50.9 million (and earnings per share of A$0.37) by about December 2028, up from A$10.9 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 11.3x on those 2028 earnings, down from 35.8x today. This future PE is lower than the current PE for the AU Retail REITs industry at 11.5x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.59%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Acceleration of electric vehicle adoption and shifts in transport fuel usage could gradually reduce traditional fuel volumes across the network. This may cap tenant turnover growth and ultimately slow rental growth and revenue.
• If interest rates or credit spreads rise from here, the current benefit of margins improving on refinanced debt and the spread between the 6.32% portfolio cap rate and marginal cost of debt could narrow. This could pressure net margins and earnings.
• Execution risk around the Glass House Mountains Northbound and Southbound redevelopments, including construction delays, higher build costs or weaker than expected demand for QSR and convenience offerings, could result in lower than anticipated returns and weaker earnings and net tangible asset growth.
• Reliance on a concentrated set of major national and international tenants in the fuel and convenience segment exposes the trust to structural changes in how these operators reinvest in their networks. If any large tenant rationalises sites or underperforms, occupancy and like for like income growth could fall, impacting revenue and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of A$3.36 for Dexus Convenience Retail REIT based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be A$55.7 million, earnings will come to A$50.9 million, and it would be trading on a PE ratio of 11.3x, assuming you use a discount rate of 7.6%.
  
• Given the current share price of A$2.82, the analyst price target of A$3.36 is 16.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.