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Is there value in the Scentre share price?

The Scentre Group (ASX: SCG) share price has been an interesting one to watch in 2020.

The S&P/ASX 200 Index (ASX: XJO) has bounced back strongly since the March bear market. Although the Scentre share price has partially recovered from its March lows, this has been to much lesser degree than the ASX 200.

I thought I’d take the chance to dive into what exactly Scentre does and how the Scentre share price is performing in 2020.

What does Scentre Group do?

Put simply, Scentre is the owner and operator of Westfield shopping centres across Australia and New Zealand. It is also an Australian real estate investment trust or ‘REIT’.

This means that, under normal circumstances, Scentre is a strong ASX dividend share. REITs are required to payout at least 90% of yearly profits to shareholders under the trust structure.

Scentre is heavily concentrated in the retail sector given its $56 billion in retail real estate assets under management.

How has the Scentre share price performed this year?

Unfortunately for investors, Aussie shopping centres have not been a great investment this year. The Scentre share price has fallen nearly 44% this year to just $2.15 per share. 

While retailers like JB Hi-Fi Limited (ASX: JBH) have soared in value, this has been predominantly due to significant online sales.

Without heavy foot traffic, it stands to reason that Aussie shopping centres will see a fall in income. That’s because fewer shoppers means tenants (i.e. retailers) may be unable or unwilling to pay their usual rent throughout the coronavirus pandemic. This translates into less rental income for Scentre and lower free cash flow available for dividend payments.

Currently, no one knows what will happen in the next 3 months, let alone the next 3 years. So how can we say whether the Scentre share price is good value right now?

Are there better-priced REITs on the ASX?

These are very unusual times, particularly given the restrictions that still exist on the use of many public spaces. If an ASX share has fallen 40% lower, I tend to think there are smart investors who possibly know something I don’t.

The best option in my books is to look at relative value. The COVID-19 restrictions should (in theory) affect all retail REITs. Therefore, comparing the Scentre share price against its peers can help tell us if its good value.

I think Vicinity Centres (ASX: VCX) and SCA Property Group (ASX: SCP) can be regarded as fairly comparable retail REITs to Scentre Group.

The Scentre share price trades at a price-to-earnings (P/E) multiple of 9.67 with an 8.93% dividend yield. It also boasts a market capitalisation of $11.16 billion which is larger than both Vicinity ($6.5 billion) and SCA ($2.4 billion).

SCA Property shares trade at a relatively more expensive P/E ratio of 12.98 while Vicinity trades at a lowly 4.37.

I don’t think dividend yields are really worth comparing given the uncertainty around FY20 distributions at the moment.

Foolish takeaway

From a quick analysis, I don’t think the Scentre share price is a great value buy right now. Retail real estate is one of the sectors that could continue to be challenged by COVID-19 restrictions for quite some time.

It appears that the Vicinity Centres share price is relatively cheaper than Scentre. Combined with the relative uncertainty over dividends this year, I don’t think I’ll be buying Scentre shares at $2.15 per share.

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Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Shopping Centres Australasia Property Group. The Motley Fool Australia has recommended Scentre Group. 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 Scott Phillips.

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