Retail Resilience

MARCH 2023 QUARTERLY UPDATE

Need To Know

• Retail sales resilient for the period, up ~13%
• FY23 FFO to be at the top end of guidance range 
• ~13% discount to book value, to large given improving operating conditions

Vicinity released its March quarterly update which highlighted the strength of retail sales, whilst guiding to funds from operations (FFO) to be at the top end of the guidance range (14-14.6cps). 

An Upgrade? Not quite… The new expectations for FFO aren’t too surprising given how conservative management has been with its guidance historically. The market largely saw through this in the 1H23 result, which partly explains the muted response in the share price to the news.  

Underlying growth. The shift to the top end of the FY23 guidance range won’t be driven by any additional reversals of prior year provisions, like what we saw at the guidance upgrade at the 1H23 result. This implies that the groups FFO growth is driven by strong underlying performance for the period. Strong retail sales growth and strong operational execution were the key contributors.

Retail sales remained resilient. Retails sales increased ~13% relative to 3Q FY22 due to elevated retailer confidence and sales growth. Growth rates will continue to normalise in 4Q due to the effects of interest rates to be felt by consumers. Luxury once again outperformed, benefitting of improving international tourist visitation. 

Development: 1). The Chadstone ‘The Social Quarter’ opened in March which includes 17 entertainment and dining tenants (10,350sqm of additional gross lettable area). 2). The expansion of the Chadstone place office tower has been completed with Officeworks set to relocate its head office this month. 3). The four-level office building at Box Hill Central also completed during the quarter. 

Investment View

Another good release out of Vicinity. Whilst it’s not an upgrade, it does give the market an extra line of confidence around retail operating conditions. 

New developments should increase traffic to the centres and continues to fit the theme of the groups shift to services. Chatswood Chase’s fresh food and dining district being the next major project of the sort (expected completion March 2024). 

With improving operating conditions, a strong balance sheet (25.7% geared), rate hikes slowing and cap rates currently seeing lower than expected expansion, we remain positive in the view that VCX is poised to outperform on a longer-term basis. 

We still see the ~13% discount to book value as too great and see further upside for the share price when paired with the ~5.6% dividend yield (NTM) and the forward 3yr FFOps CAGR of 5%. 

We re-iterate our Buy rating.

Figure 1: Vicinity remains at a ~13% discount to book value

Figure 2: Vicinity has the highest 3yr forward FFO CAGR with a middle of the range price to book value.