The Motley Fool

Why this broker rates Shopping Centres Australia Property Group a buy

On Wednesday morning, analysts at JPMorgan raised Woolworths Limited (ASX: WOW) spin-off Shopping Cntrs Austals Prpty Gp Re Ltd (ASX: SCP) (“SCA Property Group”) to overweight, after the latter slumped to eight month lows.

The upgrade comes following the 10% slump in the S&P/ASX 200 A-REIT Index (ASX: XPJ) as the prospect of a rate rise in the United States reduces demand for reliable income from Australian real estate investment trusts.

With SCA Property Group currently trading on a handy 5.5% yield, I believe the broker upgrade makes it a good time to revisit the Australian property giant’s investment thesis.

About SCA Property

SCA Property Group is a stapled trust structure which was created by Woolworths in 2012. SCA Property Group is internally managed and owns 82 neighbourhood, sub-regional and freestanding retail shopping centres across Australia and New Zealand.

Portfolio

The company boasts a portfolio occupancy of 98.6% by gross lettable area and predominantly leases to non-discretionary supermarkets Woolworths and Wesfarmers Limited (ASX: WES) owned Coles. As at 30 June 2016, SCA Property Group’s portfolio was valued at approximately $2.14 billion, representing a net tangible asset (NTA) backing of $1.92 per stapled unit, up 8.5% on the prior year.

Financial performance

The strong asset performance and anchor tenants allows SCA Property Group to deliver consistent growth.

In its full year ended 30 June 2016, SCA Property Group reported statutory net profit after tax was up 22.7% on the prior corresponding period to $184.7 million. Funds from operations swelled a stellar 25% as its six neighbourhood centre acquisitions were completed during the period.

Impressively, management was able to deliver this growth whilst reducing costs, with its management expense ratio down 4 basis points to 0.51%.

Outlook

The sound profit results were coupled with a rosy outlook on earnings guidance.

Management expects funds from operation will rise a further 1.8% over the 2017 financial year with full year distributions amounting to 12.6 cents per stapled unit. At current prices of $2.22 per security, this forecast distribution represents a solid 5.7% yield.

Importantly, record low interest rates should continue to send commercial property prices higher over time, boding well for the group’s total portfolio value. Accordingly, there is a possibility investors could see NTA growth in the short to medium term if trends persist. This augurs well for the share price.

Foolish takeaway

SCA Property Group offers investors a blend of stable income and capital growth with its core portfolio being heavily leveraged to defensive, non-discretionary retailers.

Although top dividend stocks like the big four banks and Telstra Corporation Ltd (ASX: TLS) offer higher yield at today’s prices, long-term investors would also do well purchasing shares in SCA Property Group. As such, I rate the stock a buy.

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Motley Fool contributor Rachit Dudhwala owns shares of Shopping Centres Australasia Property Group. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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