Divesting $2 Billion In Assets Will Strengthen Future Portfolio Quality

Key Takeaways

• Divesting assets and focusing on premium-grade properties is expected to enhance portfolio quality and strengthen financial metrics positively.
  
• Expanding the funds management business and strategic portfolio positioning anticipates strong income growth through rent increases and reduced vacancy risks.
  
• Elevated redemption levels and high finance costs may erode earnings, while office occupancy reductions and market challenges could suppress asset valuations and rental income growth.

Catalysts

Dexus (ASX: DXS) is a leading Australasian fully integrated real asset group, managing a high-quality Australasian real estate and infrastructure portfolio valued at $54.5 billion.

• The commitment to divest $2 billion in assets from FY '25 to '27 and the emphasis on high-quality, premium-grade office and industrial assets are expected to enhance portfolio quality and maintain prudent gearing levels, impacting future earnings and balance sheet strength positively.
  
• The expansion of the funds management business, focusing on core plus and value-add products, and access to diverse pools of capital through a challenging market, positions DEXUS to drive performance fees and management income growth, thereby improving future revenue streams.
  
• The office portfolio's strategic positioning in premium CBD markets like Sydney and a significant slowdown in new supply suggests strong potential for rent growth and declining incentives, expected to increase net operating income and reduce vacancy risks.
  
• New developments, such as Atlassian Central and Waterfront Brisbane, are set to deliver secured income streams upon completion, with the latter having more than half of its space pre-leased, potentially boosting future earnings and occupancy levels.
  
• The industrial portfolio, with developments underway and strategic locations near key markets, is poised for income growth through rent resets and high re-leasing spreads, which are predicted to impact revenue positively over the life cycle of assets.

DEXUS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DEXUS's revenue will grow by 11.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from -147.7% today to 82.2% in 3 years time.
• Analysts expect earnings to reach A$747.9 million (and earnings per share of A$0.7) by about May 2028, up from A$-976.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$1.1 billion in earnings, and the most bearish expecting A$503.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.1x on those 2028 earnings, up from -8.3x today. This future PE is lower than the current PE for the AU Office REITs industry at 120.4x.
• 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 6.63%, as per the Simply Wall St company report.

DEXUS Future Earnings Per Share Growth

Risks

• Elevated redemption levels indicate potential liquidity issues or shifts in client strategy, which could affect revenues from funds management.
  
• Office operations are under pressure due to occupancy reductions and regional challenges, particularly in Melbourne, possibly impacting net margins.
  
• Higher finance costs driven by increased interest rates could erode net earnings in the near term.
  
• Continued market headwinds and transaction market challenges may suppress asset valuations, impacting earnings via devaluation losses.
  
• Potential for vacancy rate increases and leasing incentives in key markets to impact rental income growth, thereby affecting revenue.

Valuation

• The analysts have a consensus price target of A$8.125 for DEXUS based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$9.6, and the most bearish reporting a price target of just A$7.35.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$909.4 million, earnings will come to A$747.9 million, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 6.6%.
• Given the current share price of A$7.52, the analyst price target of A$8.12 is 7.4% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.