Residential Development In Hornsby And Belconnen Will Diversify Future Revenue Streams

Key Takeaways

• Strategic partnerships and increased customer visits are expected to boost revenue growth by providing businesses opportunities to engage with more visitors.
  
• Development projects and strategic focus on membership programs are positioned to enhance rental income, occupancy rates, and diversification into residential revenues, bolstering earnings.
  
• Increased security costs and operational risks from incidents and development projects may pressure net income, while interest rate volatility threatens financing costs.

Catalysts

Owns and operates a leading portfolio of 42 Westfield destinations with 37 located in Australia and five in New Zealand.

• The ongoing increase in customer visits to Westfield destinations, supported by strategic partnerships like those with Disney and the Australian and New Zealand Olympic teams, is likely to drive revenue growth by offering businesses more opportunities to connect with a growing audience.
  
• The expansion and repurposing projects across multiple Westfield locations, like those at Westfield Bondi and Westfield Sydney, are expected to facilitate long-term rental income growth and higher occupancy rates, thereby positively impacting net operating income.
  
• The development pipeline, including residential components at sites like Westfield Hornsby and Westfield Belconnen, presents a significant opportunity for diversification into residential revenues, thus potentially boosting overall earnings.
  
• The strategic focus on the Westfield membership program, which has grown by 700,000 members, suggests an enhanced ability to personalize and target marketing efforts, thereby increasing customer engagement and positively influencing revenue streams.
  
• The strong demand for available space, with current occupancy at 99.6% and limited vacancies across multiple locations, suggests that positive leasing spreads and rent escalations are sustainable, thereby strengthening net margins and future earnings.

Scentre Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Scentre Group's revenue will decrease by 4.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 39.8% today to 54.1% in 3 years time.
• Analysts expect earnings to reach A$1.3 billion (and earnings per share of A$0.24) by about May 2028, up from A$1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.5x on those 2028 earnings, up from 17.9x today. This future PE is greater than the current PE for the AU Retail REITs industry at 13.0x.
• Analysts expect the number of shares outstanding to grow by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.78%, as per the Simply Wall St company report.

Scentre Group Future Earnings Per Share Growth

Risks

• The attack at Westfield Bondi in 2024, which resulted in increased security costs and operational disruptions, may continue to impact operating expenses and revenue negatively.
  
• The heightened security measures across Westfield locations have led to increased costs, which could pressure net operating income if these costs are sustained or increase further.
  
• The rapid rise in specialty rents (5.2% escalation) might not be sustainable long-term, especially if tenant sales do not keep pace, potentially resulting in pressures on occupancy rates and rent spreads impacting revenue growth.
  
• The exploration of large-scale residential development projects, while potentially lucrative, introduces development and execution risks and could strain capital allocation and impact net earnings margins if costs are not well-managed.
  
• Interest rate volatility and hedging costs have led to a weighted average interest rate of 5.7% in 2024, with potential increases to 5.8% in 2025, which could affect financing costs and net income negatively if the interest rate environment becomes less favorable.

Valuation

• The analysts have a consensus price target of A$3.771 for Scentre 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$4.34, and the most bearish reporting a price target of just A$3.24.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$2.3 billion, earnings will come to A$1.3 billion, and it would be trading on a PE ratio of 19.5x, assuming you use a discount rate of 7.8%.
• Given the current share price of A$3.62, the analyst price target of A$3.77 is 4.0% 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.