Tenant Remixing And Sustainability Initiatives Will Strengthen Future Operations

Key Takeaways

• Tenant mix strategy focusing on nondiscretionary essentials and capital recycling are expected to drive revenue and earnings growth.
  
• Sustainable investments and technology improvements aim to enhance net margins and earnings predictability through cost efficiencies and stable financial management.
  
• High property expenses and redevelopment costs may pressure short-term margins and revenue, while future benefits are expected from ongoing center upgrades.

Catalysts

Region Group (RGN) includes two internally managed real estate investment trusts owning a portfolio of convenience-based retail properties located across Australia.

• Region Group's strategy to remix tenants and focus on nondiscretionary essentials like food, retail services, and pharmacy can drive comparable net operating income (NOI) growth, improving revenue.
  
• The completion of capital recycling programs and reinvestment in higher-yielding assets and projects like regen and solar initiatives are expected to contribute to growth in earnings.
  
• Moderate cost inflation, a tailored focus on sustainable and efficient project investments, and technology improvements are likely to enhance net margins through improved cost efficiencies.
  
• High levels of hedging and stable debt costs coupled with moderate inflation setting provide a stable financial foundation that could improve earnings predictability.
  
• The potential for market expansion through funds management growth and strategic acquisitions offering higher yields than disposed assets aligns with increased revenue expectations.

Region Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Region Group's revenue will grow by 2.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 35.3% today to 63.5% in 3 years time.
• Analysts expect earnings to reach A$258.0 million (and earnings per share of A$0.22) by about March 2028, up from A$134.1 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$342.6 million in earnings, and the most bearish expecting A$185.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, down from 17.6x today. This future PE is greater than the current PE for the AU Retail REITs industry at 12.1x.
• Analysts expect the number of shares outstanding to grow by 0.09% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.25%, as per the Simply Wall St company report.

Region Group Future Earnings Per Share Growth

Risks

• The dragging effect of elevated property-level expenses remaining significantly higher than last year could negatively impact net margins.
  
• The administration of a national specialty retailer with provisioning for unpaid rent and vacancy could reduce future revenues as these replace tenancies and have an impact on earnings.
  
• The potential short-term impact from center repositioning projects, resulting in down time for earning rent, might lead to weaker net operating income growth and earnings.
  
• The expectation of higher fit-out costs and leasing incentives, which are now around 13 months for a 5-year deal, could impact the company’s ability to maintain or improve net margins.
  
• Ongoing capital expenditure on redevelopment and upgrading of centers is expected to yield future benefits, but the immediate impact could pressure revenue and earnings.

Valuation

• The analysts have a consensus price target of A$2.319 for Region Group 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$2.54, and the most bearish reporting a price target of just A$2.03.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$406.0 million, earnings will come to A$258.0 million, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 8.2%.
• Given the current share price of A$2.03, the analyst price target of A$2.32 is 12.5% 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.