Honey, I shrunk the house

RESULT ANALYSIS

Need To Know

• Strong result. Solid beat on FY23 earnings, DPS in-line and ROIC at the top end of the target range
• FY24 Guidance in-line. Settlements expected to be flat on FY23 (at the midpoint). Average lot size shrunk by ~6% to lift affordability.
• P/FFO remains at a premium to long term average. FFOps growth outlook weakest of AREITs

Result Overview:

FFOps (post-tax) 35.6cps vs 34.2cps consensus (~4% beat)

DPS 26.2cps in-line with consensus

ROIC 18%, at the top end of the 14-18% ROIC target range. 

NTA down ~1.6% to A$4.24 (close to parity of current share price)

Master planned communities (MPC) Settlements 5403 vs “approximately 5500” target

Investment Implications

A strong result. FFOps ~4% beat and DPS in-line. To drive affordability SGP has decreased its average land package size by roughly ~6%. The affordability mix of 4Q23 increased to ~34% (up from ~22% in FY22). This has been a positive contributor to SGP gaining market share and is expected to be a major opportunity moving into the future, specifically due to the return of immigration. 

MPC Settlements of 5403 was marginally below the FY23 target range (~5500). 4Q settlements were flagged as weaker due to increased cancellations. FY24 guidance is 5200-5600 with a larger 2H23 settlement skew than FY23. Current contracts on hand should account for ~3800 settlements. Management expect similar settlement performance from 4Q should be seen over the next couple quarters. 

Land Lease Communities (LLC) settlements were 382, continuing to display strength in operations from the LLC business. The group has 387 contracts on hand for FY24 which represents ~90% of target for FY24 (400-450).

Balance sheet position is robust: Gearing 21.9% (down from 23.4%), Liquidity is A$1.6bn. NTA down ~1.6% from 1H23. Hedging is at ~60% which is at the lower end verses its peers. Management suggested that they have not made any additional contributions to group hedging since the ~A$600m in January. We don't see the balance sheet as an issue.  

FY24 Guidance

This was first period of guidance being split out into pre-tax FFOps and tax expense guidance (e.g. not providing post-tax FFOps). in our view this gives the group a bit of wiggle room given there is both a range on tax and FFOps (pre-tax). 

FY24 Guidance metrics: 

• FFOps pre-tax 34.5cps to 35.5cps 
• Tax expense expected to be high single digit % of pre-tax FFO. 
• DPS pay-out ratio 75%-85% of post-tax FFOps.
• FY24 MPC development operating margin of low 20%’s (26% FY23)
• FY24 Settlement of 5200-5600 (vs 5400 in FY23) with larger 2H settlement and FFO skew than FY23. 

FY24 Guidance assumptions:

Assuming a tax rate of ~7.5% (midpoint of high-single-digit), the post-tax FFOps is estimated to be approximately 32.4cps which is ~1% ahead of consensus (32cps). 

For the DPS, taking the midpoint of the 75%-85% and applying it to the assumed post-tax FFOps suggests a FY24 DPS of ~25.9cps, which is in-line with consensus. 

Investment View

A strong result with clear tailwinds coming from increasing affordability. We believe the market will still have some questions about the groups ability to meet FY24 settlement guidance. 

Despite the strong result, SGP still trades at a ~1SD premium to its long term average P/FFO, making it the most expensive of the AREITs. Consensus is forecasting a 3yr forward FFOps CAGR of -4% which is at the bottom end of the AREIT's. Given the valuation and lower than peer growth expectations its difficult to see value at current levels.

 We re-affirm our Hold rating.

Figure 1: Shrinking average lot size contributing to an increase in market share as affordability becomes a greater focus from the market

Figure 2: SGP provides the lowest discount to Book value as well as the lowest 3yr FFOps CAGR.

Figure 3: SGP trades at the largest premium to its long-term average P/FFO.