The Scentre Group (ASX: SCG) share price could be good value for investors right now.
That's the view of one of Australia's leading brokers.
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Who is bullish on the Scentre share price?
According to a recent note out of Goldman Sachs, its analysts have reiterated their buy rating and $3.60 price target on this shopping centre-focused property company's shares.
With the Scentre share price currently trading at $2.68, this implies potential upside of 34% over the next 12 months excluding dividends.
And if you include the 14 cents per share dividend the broker is forecasting in FY 2021, this potential return stretches to almost 40%.
What did Goldman say?
Goldman notes that Australian inflation expectations are currently at their highest level since 2015.
This is a big positive for Scentre, with the broker's analysis suggesting that Scentre is far more positively leveraged to inflation than any other Australian real estate investment trusts under its coverage.
Goldman explained: "We estimate that 70%+ of SCG's base rental income is subject to inflation-linked escalation. Higher inflation also aids the profitability of SCG's retailer tenancy base, which benefits from fixed cost leverage, as we have previously demonstrated. Finally, the current independent valuations of SCG's assets are predicated on cash flow growth well below that assumed for other asset classes. Given the close linkages between SCG cash flows and CPI, we believe a tick-up in inflation expectations underpins the current valuation assumptions."
Aren't rents too expensive?
Goldman notes that it regularly gets feedback from investors suggesting that the company needs to cut its rent to attract tenants, but it doesn't believe this is the case.
It commented: "We frequently hear feedback / pushback from investors arguing that SCG's rent levels need to decline by ~20% in order for its centres to continue to attract retail tenants. In our view, the fact that SCG managed to maintain a relatively high occupancy rate (98.5%) through the pandemic -with four of its ten largest specialty retailers actually adding stores within SCG's portfolio on our count – would seem to argue against such a material level of over-renting."
In light of this, it feels that market is undervaluing the Scentre share price.
"With current pricing implying not only a re-basing of SCG's rents to the levels achieved in the midst of a pandemic but also a ~50bp softening of valuation cap rates, we believe SCG offers compelling relative value and maintain our Buy rating. Our 12mth TP of A$3.46 reflects a 50/50 blend of our SOTP (A$3.27) and DCF (A$3.65) valuations. Our TP implies a 12mth total return of +36% vs an average of +5% across our A-REIT coverage universe," it concluded.
