Internalization And Capital Recycling Will Lower Costs

Key Takeaways

• Proposed internalization aims to reduce operational costs and enhance net margins, while strategic initiatives are set to boost revenue growth.
  
• Focus on accretive acquisitions and refinancing debt aims to improve financial flexibility, revenue, and future earnings through strategic ventures.
  
• Increased competition for high-yield assets and financing costs might offset earnings growth, potentially impacting profitability and revenue expansion strategies.

Catalysts

Supermarket Income REIT plc (LSE: SUPR) is a real estate investment trust dedicated to investing in grocery properties which are an essential part of the UK's feed the nation infrastructure.

• The proposed internalization of the company is expected to significantly reduce costs, targeting an EPRA cost ratio below 9%, down from 13.6%. This is likely to enhance net margins and earnings due to lower operational costs.
  
• Strategic initiatives such as lease renewals at higher rents than expected and capital recycling—selling lower-yielding assets above book value to reinvest in higher-yielding opportunities—are expected to boost revenue and earnings growth through enhanced income from investments.
  
• The company is working on establishing a strategic joint venture, which is intended to provide financial flexibility and earnings through management fee income while retaining ownership interests, positively impacting future earnings.
  
• SUPR’s focus on accretive acquisitions, such as high-yielding omnichannel stores, is expected to enhance revenue, as these assets are typically secured with long-term, inflation-linked leases.
  
• The ongoing transition from secured to unsecured debt and plans to refinance current facilities aims to provide greater balance sheet flexibility and lower financing costs over time, potentially improving net margins and earnings.

Supermarket Income REIT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Supermarket Income REIT's revenue will grow by 3.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 61.8% today to 93.5% in 3 years time.
• Analysts expect earnings to reach £116.5 million (and earnings per share of £0.08) by about May 2028, up from £69.6 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as £96 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.2x on those 2028 earnings, down from 14.0x today. This future PE is lower than the current PE for the GB Retail REITs industry at 20.0x.
• 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 8.27%, as per the Simply Wall St company report.

Supermarket Income REIT Future Earnings Per Share Growth

Risks

• The increase in financing costs due to higher leverage might outweigh the earnings growth from acquisitions, potentially impacting net margins and overall profitability.
  
• The company's reliance on acquiring high-yielding assets and capital recycling may become challenging if competition from grocery operators for similar assets intensifies, impacting revenue growth.
  
• The proposed internalization and the resulting cost savings could fail to materialize as planned, impacting net margins and earnings if unanticipated costs arise during implementation.
  
• The ability to establish strategic joint ventures might not be assured, which is crucial for SUPR’s strategy to replace equity market scaling, potentially affecting revenue and earnings growth.
  
• If the market's perception of property valuations and rents does not align with SUPR's positive outlook, it may impact net asset value (NAV) and shareholders' perceived value, affecting stock performance.

Valuation

• The analysts have a consensus price target of £0.828 for Supermarket Income REIT based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £124.7 million, earnings will come to £116.5 million, and it would be trading on a PE ratio of 11.2x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of £0.78, the analyst price target of £0.83 is 5.6% 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.