Residential Crunch
1H23 RESULT
Need To Know
- Downgraded Master Planned Communities (MPC) guidance for FY23 from 6,000 to 5,500
- Soft 1H, with FY23 guidance re-iterated. Implies at 40/60 2H skew to earnings, much like 2022
- SGP has re-classified earnings between divisions, which highlights higher overhead costs
Result Highlights
Funds From Operations (FFO) $353m vs $384m market. FFOps 14.8cps vs 16cps market. DPS 11.8cps (80% payout) in-line with market.
FY23 FFO guidance re-affirmed at 36.4cps to 37.4cps. Residential MPC settlement guidance downgraded from 6,000 to 5,500. FY23 residential margin guidance upgraded from to 19% vs 18% (driven by deferment of some development costs)
Result Detail
FFO miss attributed to significant 2H skew (similar to FY22), with a lower contribution from residential. Logistics continued to churn away in the background but remains secondary to the residential business. Workplace underperformed due to the re-leasing of one key asset. Relationship with Mitsubishi Estate Asia was expanded through an MPC JV which will target new origination. This is expected to lift ROIC due to capturing management fees.
An unfavourable result in the residential space, especially after peer MGR was able to maintain 2H23 residential settlements guidance.
SGP downgraded residential guidance by ~8%, from 6,000 settlements to 5,500. Management indicated that this was largely due to weather-related issues and interest rate pressures.
1,872 MPC settlements were completed in 1H23 which implies the group needs ~3600 settlements in 2H (~65% of 2023 volume). January enquiries were very strong, leading to 343 sales.
Balance sheet gearing 22.1%, low end of the 20-30% target range. Step-up capital redeployment expected over the next 12 months.
SGP is likely to face low single digit earnings revisions of FY23-24E estimates by the market.
Investment Thesis
The focus will remain on the residential business, and ability to meet sales targets in 2023. The downgrade to residential volumes places a question mark around FY24 earnings. The market is currently forecasting a ~9% decrease in FFO for FY24E and for the dividend to fall -4%, suggesting some of the weakness is already accounted for.
In our view, it’s too early to call the recovery in Australian housing especially when rates are yet to peak and full impact of prior rate rises is yet to be reflected in SGP residential activity levels. We rate SGP a Hold.
Figure 1: SGP Residential enquiries per month. January 2023 saw a strong seasonal improvement.
Stock Overview
Share Price
Company Overview
SGP is an Australia-based creator and curator of connected communities. SGP develops, funds, owns, operates, and manages its residential and commercial property assets.
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