Investment In Urban Developments Like Atlassian Central Will Create Future Value

Key Takeaways

• Integration of infrastructure and investment in urban developments could significantly enhance revenue through diversification and expertise leveraging.
  
• Emphasis on sustainability and fund management growth aligns with market demands, potentially improving property valuations and boosting future revenue streams.
  
• Higher interest rates and transaction market challenges are impacting valuations, liquidity, and margins, with asset divestments and increased costs adding further financial pressure.

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 integration of infrastructure presents significant growth opportunities, driven by macroeconomic tailwinds. This could enhance revenue and earnings through diversifying income streams and leveraging cross-sector expertise.
  
• Investment in urban developments such as Atlassian Central and Waterfront Brisbane indicates potential for future value creation. Successful completion and leasing of these projects could boost revenue and net operating income.
  
• The emphasis on sustainability initiatives aligns with emerging market demands, potentially leading to improved property valuations and rental premiums, enhancing net margins over time.
  
• The fund management business is set to grow, benefiting from investment in new funds and products, DREP2 being a notable example, which could significantly impact future revenue streams and earnings.
  
• The updated distribution policy, retaining capital for reinvestment, could drive higher long-term earnings growth and enhance financial flexibility for strategic investments.

DEXUS Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming DEXUS's revenue will grow by 34.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -468.2% today to 86.0% in 3 years time.
• Analysts expect earnings to reach A$707.4 million (and earnings per share of A$0.69) by about February 2028, up from A$-1.6 billion 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$508.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.5x on those 2028 earnings, up from -5.0x today. This future PE is lower than the current PE for the AU Office REITs industry at 121.8x.
• Analysts expect the number of shares outstanding to decline by 0.28% per year for 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

• Higher interest rates and transactional evidence have continued to impact valuations, with the total portfolio declining by $1.9 billion or 12.9% over 12 months. This could negatively affect the company's asset values and financial health. (Net Asset Value)
  
• Despite achieving occupancy rates above the market average, there is still stubborn market vacancy in the office sector, with office FFO reducing partly due to divestments. This trend could pressure revenues and margins if market conditions do not improve. (Revenue, Net Margins)
  
• Transaction markets are subdued with $2 billion of assets earmarked for divestment over the next 3 years, which, if not in line with valuation expectations, might affect liquidity and capital recycling strategies. (Liquidity, Net Margins)
  
• Currently, there are redemption requests totaling $2.5 billion across strategies, which may require asset disposals potentially at less favorable terms, affecting the net asset position and operational liquidity. (Net Asset Position, Liquidity)
  
• Group corporate costs have increased, partly due to inflation and the AMP Capital transaction, suggesting potential margin pressures if not offset by efficiency improvements or revenue growth. (Net Margins)

Valuation

• The analysts have a consensus price target of A$7.956 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$7.2.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$822.2 million, earnings will come to A$707.4 million, and it would be trading on a PE ratio of 14.5x, assuming you use a discount rate of 6.6%.
  
• Given the current share price of A$7.31, the analyst price target of A$7.96 is 8.1% 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.