Concentrating On Australia's Metropolitan Growth Areas Will Support Future Stability

Key Takeaways

• Strategic asset recycling and enhancing tenant mix underpin long-term returns and growth in metropolitan areas.
  
• Development pipeline and strong occupancy rates support earnings growth and stable margins.
  
• Reliance on asset recycling, high gearing risk, and metropolitan concentration could impact financial stability, liquidity, and revenue growth amid market changes.

Catalysts

An Australian Real Estate Investment Trust listed on the ASX with a mandate to invest in convenience-based assets across the target sub-sectors of Neighbourhood Retail, Large Format Retail and Health & Services.

• HDN's portfolio is highly concentrated in Australia's largest and fastest-growing metropolitan areas, which are experiencing significant population growth, driving tenant demand and anticipated revenue growth.
  
• The company has a $650 million development pipeline expected to deliver returns exceeding 7% yield on cost, which is likely to positively impact earnings growth as new assets come online.
  
• HDN's high and stable cash collection and occupancy rates of over 99% provide a strong foundation for reliable revenue and net margin stability.
  
• The strategic asset recycling—disposing of large format retail assets and acquiring high-quality metropolitan assets—aims to enhance the quality and yield of the portfolio, potentially boosting net margins and long-term returns.
  
• HDN's focus on enhancing tenant mix and developing last-mile infrastructure in strategic locations is designed to unlock additional value from their properties, supporting revenue and net income growth over the medium to long term.

HomeCo Daily Needs REIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming HomeCo Daily Needs REIT's revenue will decrease by 0.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 63.4% today to 87.6% in 3 years time.
• Analysts expect earnings to reach A$294.5 million (and earnings per share of A$0.14) by about February 2028, up from A$209.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$410.5 million in earnings, and the most bearish expecting A$195.1 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 12.1x on those 2028 earnings, up from 12.0x today. This future PE is lower than the current PE for the AU Retail REITs industry at 15.5x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.38%, as per the Simply Wall St company report.

HomeCo Daily Needs REIT Future Earnings Per Share Growth

Risks

• The reliance on asset recycling to maintain balance sheet stability might create financial strain if market conditions change, potentially affecting future net income and liquidity.
  
• High levels of gearing (34.6%) place financial risk if interest rates move unfavorably beyond current hedged arrangements, potentially impacting earnings and margins.
  
• Development projects, while potentially yielding growth, represent execution risks. Delays or cost overruns could negatively affect both revenue growth and net margins.
  
• Heavy concentration in metropolitan areas exposes HDN to market volatility specific to those regions, risking tenant demand and thereby rental revenue.
  
• Limited headroom in liquidity and dependency on continued asset sales to fund developments might restrict financial flexibility, impacting net margins and future revenue growth.

Valuation

• The analysts have a consensus price target of A$1.338 for HomeCo Daily Needs REIT 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$1.4, and the most bearish reporting a price target of just A$1.14.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$336.4 million, earnings will come to A$294.5 million, and it would be trading on a PE ratio of 12.1x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of A$1.2, the analyst price target of A$1.34 is 9.9% 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.