Chadstone And Chatswood Chase Projects Will Attract High-Profile Tenants

Key Takeaways

• Strategic acquisitions and investments in development projects improve asset quality, enhancing leasing opportunities and positioning for revenue and earnings growth.
  
• Divestment of nonstrategic assets and robust occupancy with fixed escalators improve margins, ensuring stable growth despite economic challenges.
  
• Development delays, high gearing, and market dynamics could negatively impact Vicinity Centres' financial stability through increased expenses and pressure on revenue growth.

Catalysts

Vicinity Centres (Vicinity or the Group) is one of Australia’s leading retail property groups with a fully integrated asset management platform, and $24 billion in retail assets under management across 56 shopping centres, making it the second largest listed manager of Australian retail property.

• The strategic acquisition of a 50% interest in Lakeside Joondalup and full control over Chatswood Chase increases Vicinity Centres' portfolio of premium assets, likely driving future revenue growth through enhanced leasing opportunities and revitalization of these well-located assets.
  
• Continued investment in development projects at key assets like Chadstone and Chatswood Chase, along with plans for mixed-use developments, positions the company for potential increases in earnings as these projects come online and attract high-profile tenants.
  
• The strategic divestment of nonstrategic assets and the targeting of additional asset sales could improve net margins and capital allocation efficiency, allowing the company to reinvest in higher-quality, growth-oriented projects.
  
• The robust occupancy rates and positive leasing spreads in premium portfolios suggest potential for sustained growth in net property income (NPI), supporting future earnings despite current cost pressures on retailers.
  
• Engaging in long-term leases with fixed annual growth escalators provides a predictable income stream and positions Vicinity as a resilient investment with potential for stable revenue growth amid macroeconomic uncertainty.

Vicinity Centres Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Vicinity Centres's revenue will decrease by 6.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 41.7% today to 68.6% in 3 years time.
• Analysts expect earnings to reach A$729.3 million (and earnings per share of A$0.16) by about February 2028, up from A$547.1 million 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 17.7x on those 2028 earnings, down from 18.2x 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 remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.47%, as per the Simply Wall St company report.

Vicinity Centres Future Earnings Per Share Growth

Risks

• Elevated living costs and retail sales growth pressures may affect consumer spending, potentially impacting revenue growth and net profit margins.
  
• Development delays and cost overruns, particularly with major projects like Chadstone and Chatswood Chase, could increase expenses and negatively affect earnings.
  
• High gearing relative to target levels, as a result of acquisitions and developments, could lead to increased financial risk and higher interest expenses, impacting net margins.
  
• Market dynamics, including the uncertain interest rate environment, may place pressure on property valuations and capital costs, impacting revenue and profit stability.
  
• The focus on strategic acquisitions and divestments presents execution risks that might not yield the expected returns, affecting future revenue and net margins.

Valuation

• The analysts have a consensus price target of A$2.286 for Vicinity Centres 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$2.5, and the most bearish reporting a price target of just A$2.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$1.1 billion, earnings will come to A$729.3 million, and it would be trading on a PE ratio of 17.7x, assuming you use a discount rate of 7.5%.
  
• Given the current share price of A$2.19, the analyst price target of A$2.29 is 4.2% 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.