Expanding Westfield Sydney Will Attract More Visitors And New Merchants In The Future

Key Takeaways

• Increased visitation and high occupancy rates bolster revenue growth opportunities through new leases, specialty rent, and attraction of business partners.
  
• Strategic development and fund management initiatives aim to boost revenue, earnings, and efficiency through expanded retail space and capital allocation.
  
• Rising operational costs and financial risks, along with external threats, could challenge revenue generation and stability, impacting Scentre Group's growth and shareholder value.

Catalysts

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

• Scentre Group has seen an increase in visitation, with 320 million visits so far this year, representing growth opportunities for increasing sales at its Westfield destinations. This could positively impact future revenue growth as more business partners are attracted to leasing space at the malls.
  
• The company completed 1,459 leasing deals and welcomed 515 new merchants, increasing portfolio occupancy to 99.3%. The introduction of new brands and specialty rent escalations are expected to bolster revenue and net operating income due to higher rental income from new leases.
  
• Scentre Group is progressing a $4 billion pipeline of future retail development opportunities and is expanding key locations such as Westfield Sydney. These developments are set to enhance revenue and earnings over time by adding more leasable space and attracting more visitors to updated and expanded destinations.
  
• The establishment of funds such as the Tea Tree Opportunity Trust and expected completion of a similar fund for West Lakes showcases strategic capital management. These initiatives not only provide incremental fee income but are expected to enhance earnings through better capital allocation and strategic partnerships.
  
• Scentre Group is pushing for higher occupancy costs, leveraging the strong productivity of tenants. With previous occupancy costs at lower levels than current tenant productivity, there is room for rental growth, potentially leading to increased revenue and net margins.

Scentre Group Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Scentre Group's revenue will decrease by 5.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.9% today to 79.4% in 3 years time.
• Analysts expect earnings to reach A$1.7 billion (and earnings per share of A$0.34) by about February 2028, up from A$429.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$2.7 billion in earnings, and the most bearish expecting A$1.2 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 14.8x on those 2028 earnings, down from 44.4x today. This future PE is lower than the current PE for the AU Retail REITs industry at 44.4x.
• 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 8.18%, as per the Simply Wall St company report.

Scentre Group Future Earnings Per Share Growth

Risks

• The recent devastating attack at Westfield Bondi could pose a risk, potentially deterring visitors and negatively impacting revenue and occupancy rates.
  
• The increase in property expenses due to higher security and cleaning costs could strain net operating income and margins.
  
• The decrease in project income suggests potential volatility in earnings, impacting overall financial stability and growth prospects.
  
• The ongoing unrealized property revaluation decrease could affect asset valuation, potentially leading to lower net income and impacting shareholder equity.
  
• Increased borrowing and interest rate hedging may elevate financial risk, affecting net margins due to higher interest expenses.

Valuation

• The analysts have a consensus price target of A$3.774 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$4.44, and the most bearish reporting a price target of just A$3.37.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$2.1 billion, earnings will come to A$1.7 billion, and it would be trading on a PE ratio of 14.8x, assuming you use a discount rate of 8.2%.
  
• Given the current share price of A$3.67, the analyst price target of A$3.77 is 2.8% 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.