Trading profits weaken DPS guidance

RESULTS

Need To Know

• In-line result. DPS guidance miss on lower trading profits. 
• NTA of $10.88, down ~11% (implies a ~28% discount to current share price). Driven by property revaluations (known pre-result) and transaction costs. 
• Operational performance improving despite the weaker FY24 DPS guidance. Capital recycling and progress of development pipeline to help drive return growth. 

Result overview: 

FFOps 68.7cps vs 67cps consensus

AFFOps 51.6cps vs 51.9cps consensus  

DPS 51.5cps In-line. 

Gearing 27.9% vs 26.9% FY22.

FY24 DPS guidance 48cps vs 50cps consensus (4% miss)

Highlights

FY23 earnings largely in-line with market expectations. Office leasing operations are continuing to improve. Office occupancy increased 0.3% to 95.9% and total leased areas increased by ~33%. Industrials also continue to perform well with occupancy improving ~1.4%.

Balance sheet remains in good position. Look through gearing increased 1% to 27.9% (remains below 30-40% target range) and hedging increased to 86% (65% prev). The group delivered A$1.8bn in divestments over the period. Capital to be used to fund ~A$2.2bn in development spend (which is expected to increase gearing to midpoint of the target range).

NTA decreased ~11% to A$10.88 (a ~27% discount at current share price). The decrease was ~65% driven by revaluation in assets (released in June 23) with the balance being largely driven by transaction costs (~15%) 

FY24 outlook: Weak on DPS (~4% miss on consensus) attributed to lower trading profits (guided to ~A$10m FY24 vs ~50m for FY23). FY24 AFFO ex-trading profits is expected to be in-line with FY23 levels.

Management re-iterate that operationally the group is performing where they would like it to be. The group is in a comfortable capital position and are not forced seller. Capital recycling will be done where the business can achieve an improvement in returns. Management are comfortable with discussions around the sale of assets (like 1 Margaret St - NSW & 100 Mount St - NSW) being pushed out if an attractive price is not received. 

Investment Thesis

Not exactly the result we wanted from DXS, however, the underlying trend appears positive. Office occupancy is improving, leasing volumes appear strong with little indication of rental contractions. 

The funds management segment, in our view, continues to be discounted by the market. Third party FUM increased by 68% (61% of which was infrastructure). The Collimate capital acquisition should provide efficiencies for FY25 with integration progressing well (expected end of FY24).

The stock remains at a ~27% discount to NTA which is far too significant given the quality of Dexus' asset base. The stock also remains at an ~3pt discount to its long term average P/FFO. In our view, weakness off the back of the result adds to the attractiveness of DXS at these levels.