One of the companies I would like to own, but have been avoiding, is Westfield Corp Ltd (ASX: WFD). I think it has solid management and an attractive portfolio of properties. However, I think that it may be overpriced and set to underperform. Here's why I'm avoiding it today:
- It could be overpriced
Westfield has net tangible assets ('tangible' assets, e.g. properties and cash, minus debt) of US$4.60 per share, or approximately $5.84 in today's Australian dollar terms. Since shares last traded at $7.72, Westfield looks to be changing hands for 32% above its net tangible assets.
Although there are several properties under development which may contribute to a higher NTA in time, it is generally not advisable to pay a large premium to assets as this effectively decreases your returns.
For illustration, if Westfield earns a 10% rental yield on its properties at A$5.84 per share, this decreases to effectively a ~7.5% rental yield if you pay A$7.72 per share.
- Rents are growing slowly
Rental growth isn't rapid at the best of times, despite typically strong same-store sales growth at Westfield centres. Usually rents would increase at the rate of just a few percent per annum, suggesting that income growth may be modest. Overall returns from Westfield could still be quite satisfactory however, if the values of their properties keep rising. This may not occur, because…
- The growing threat of online
There have been myriad US news pieces focusing on the 'death of retail' and 'ghost malls' where shopping centres have been hollowed out as their tenants have seen their business model eaten by online competitors like Amazon.
Westfield may be more resistant to this, as it invests in 'flagship' centres that are an attraction on their own – plus it owns malls in several countries, not just the USA.
It's not that I think that Westfield is a bad business or that shopping centres are doomed – quite the contrary. I think that its apparently high price and the possibility of increasing competition has reduced the likelihood of investing success to the point where I can't be sure that it's a winner. As a result, I'm avoiding it.
