The S&P/ASX 200 Index (ASX: XJO) stock Scentre Group (ASX: SCG) has been hurting a lot. Since the start of 2023, the Scentre share price has fallen 14%. It's down 20% from 24 January 2023 and it's down around 40% from mid-January 2020.
There aren't too many large ASX 200 shares that have fallen as hard as that.
For readers that don't know this business, it owns the Westfield shopping centres in Australia and New Zealand. It owns 42 Westfield destinations across ANZ.
Why is the Scentre share price down so much?
It's understandable why the ASX 200 stock has suffered a loss of investor confidence. First, there was a large increase in online shopping (decreasing the attractiveness of physical stores). Also, there has been a large increase in interest rates. Warren Buffett once explained why interest rates can affect the valuation of all assets:
The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature…its intrinsic valuation is 100% sensitive to interest rates.
Is it a bargain buy?
Analyst ratings collated by Factset certainly think so, with eight buy ratings, two holds and two sell ratings.
The business recently reported its half-year result for the six months to 30 June 2023, with funds from operations (FFO) (rental profit) up 1.5% to 10.74 cents per security. This was an increase of 13.3% compared to the second half of 2022. Management said that this reflected "strong operational performance and proactive management" of funding costs.
Scentre's distribution grew by 10% year over year to 8.25 cents.
The FY23 half-year result saw a property valuation decrease of $392.5 million for the ASX 200 stock. With property values being 0.6% lower than 31 December 2022.
At the time, management said that customer visitations were up 9.8% to 314 million compared to the same period in 2022. Its business partners achieved annual sales of $27.8 billion to 30 June 2023, an increase of 21.6% compared to the same period in 2022. During the half, business partner sales were $13.1 billion, an increase of 9.1%.
A number of its portfolio statistics look good, with occupancy of 99%. On average, specialty rent escalations saw a rise of 8.1%, and new lease spreads improved to 2.6%. Average specialty occupancy costs are now 16% of specialty sales, compared to 18% in 2019. In other words, rental income is improving and tenants are getting better value for their rental costs.
The business is expecting to generate FFO (rental profit) between 20.75 cents to 21.25 cents per security, which would be growth of between 3.4% to 5.9%.
Distributions are expected to be at least 16.5 cents per security, which would be growth of 4.8%, and the distribution yield could be at least 6.7%. Investors would have snapped their hand off to get that sort of yield from the ASX 200 stock in 2019.
It has more than $4 billion of future developments planned, with a target yield of between 6% to 7%, and an incremental internal rate of return of between 12% to 15%, implying growth in the future.
I think the business is undervalued by the market. It's offering a big yield, investing for growth and over time I think the composition of Westfields' tenant base can change, unlocking new rental streams and future-proofing its rental profits and distributions.