Upgrading our view
We are upgrading our Sell rating to Hold. We are passing through peak fears around how high bond yields will go in this cycle. Central banks are likely to slow, then pause rate hikes in early 2023. This will release the key headwind of performance for the REIT sector, including VCX. A-REITs are the worst performing sector this year on the ASX at -20%.
VCX currently trades at a 25% discount to NTA, in-line with the broader A-REIT sector. In our view the discount is excessive given the potential for bond yields to have peaked.
We expect retail mall trading conditions for VCX to have remained relatively strong given recent trading updates from retailers and peer REITs. VCX AGM and trading update 16 November 2022.
Macro-economic conditions
The macro landscape is starting to shift, with some early signs suggesting that pipeline inflation pressures are peaking. We expect 3 more 0.25% rate rises before the RBA pauses to re-assess conditions.
With investors looking 6-9 months ahead, we see a lower risk of VCX underperforming the market.
Retail sales remain strong
Retail sales data has remained stubbornly strong despite tightening economic conditions. Sales strength is being driven by high savings built up from the COVID-19 pandemic, and the strength of the labour market.
Trading conditions into end of this calendar year, are expected to remain buoyant, which should be positive to VCX and peer mall REIT Scentre Group (SCG). Both Mirvac Group (MGR) Stockland Corporation (SGP) have reported September quarter sales growth of 12.6% and 10.1% respectively.
The potential for retail volumes to slow, remains a risk from mid-2023 which will need to be monitored.
Investment View
The share price will likely see less downward pressure as macro conditions ease. In our view, the market will not rush to bring the P/NTA back to 1x but at a 25% discount, there is some value here. The development pipeline will offset structural headwinds but is too long dated to offer any material impact for FY23. With retail sales remaining stronger than expected and macro conditions easing, we upgrade our rating to Hold.
Risks To Investment View
Upside risks
1). A fall in bond yields.
2). Higher than expected strength in retail spending
3). Improved retail leasing spreads.
4). Initiatives to help close the current valuation gap including capital management.
Downside risks
1). A collapse in retail spending over the Christmas period.
2). Rising vacancy rates in shopping centres
3). Rising cap rates could place downward pressure on property valuations.
4). Increased market share gains from online retailers
Figure 1: VCX Price to NTA has rerated to 0.75x, which is in-line with the sector. We see limited valuation downside on this measure.
Figure 2: VCX dividend yield vs AU 10yr bond yield gap. VCX dividend yield tends to rise in periods of rising bond yields.
