While an interest rate cut did not materialise last week, experts are still expecting the Reserve Bank of Australia (RBA) to deliver multiple rate cuts in the coming months.
ASX investors may be looking for ASX 200 opportunities to capitalise on this environment.
ASX 200 real estate stock Scentre Group (ASX: SCG) could be one to consider. The company owns and operates 42 Westfield shopping centres across Australia and New Zealand.
With a 4.7% dividend yield, the ASX 200 share offers attractive passive income.
A clear rate cut beneficiary
Following the RBA's shock rate call last week, the big four banks revised their outlook for interest rates.
Commonwealth Bank of Australia (ASX: CBA) and ANZ Group Holdings Ltd (ASX: ANZ) are expecting two more 25 basis point cuts (August and November).
Meanwhile, National Australia Bank (ASX: NAB) is tipping three more 25 basis point cuts (August, November, and February), and Westpac Banking Corp (ASX: WBC) predicts the RBA to deliver four more 25 basis point rate cuts (August, November, February, and May).
Scentre Group shares stand to benefit in three ways. Firstly, with the return on cash (term deposits) declining, a 4.7% dividend yield appears increasingly relatively attractive.
Lower interest rates should also increase Scentre Group's interest repayments, and increase the value of its properties. Finally, higher disposable income (due to rate cuts) could stimulate consumer spending at Westfield centres, boosting sales.
Given this positioning, is Scentre Group a buy today?
Let's see what one expert had to say.
What's Macquarie's price target?
In a 11 July report, Listed Property Sector, Macquarie Group Ltd (ASX: MQG) discussed the trajectory for the listed property sector, given the outlook for interest rates.
Following strong recent share price performance, the broker said the sector was trading at a premium. This has prompted the broker to reduce its price target for several stocks in the sector, including Scentre Group.
For the year to date, Scentre Group shares have risen 5%. Since their 52 week low of $3.18 reached in March, they have surged 14%.
In its 11 July report, Macquarie reduced its price target on Scentre Group from $3.24 to $3.18. Given that shares closed yesterday at $3.69, this suggests Scentre Group's share price will decline 14% over the next 12 months.
When issuing this revision, the broker said:
Retail sector tailwinds should benefit SCG, though we see better value elsewhere in the A-REIT sector with the group trading at ~16x FFO (15.0x LTA) and a 4.9% DPS yield (5.5% LTA).
What should investors do?
Based on current share prices, the broker prefers Mirvac Group (ASX: MGR), which it has assigned a price target of $2.38.
However, Macquarie remains positive on the business fundamentals of Scentre Group shares. Should its share price revert to fair value down the road, it could be a quality pick for passive income orientated investors.
How to monitor Scentre Group shares?
For those interested in Scentre Group, Macquarie revealed what it's looking for when Scentre Group releases its half-year results in August (unlike most ASX listed companies, Scentre Group reports according to the calendar year).
In particular, the broker will be monitoring three things:
Guidance around the likely timing of the make-whole redemption of all the remaining US subordinated notes.
Valuation outcomes for the half will also be of interest with strong income fundamentals and a recovery in capital demand for retail assets.
Lastly, any further update on timing and returns from development opportunities in the portfolio (e.g., Westfield Warringah was declared a state significant development with the potential to create up to 1,500 dwellings). SCG continues to participate collaboratively in state and local planning processes to secure opportunities.
Macquarie is predicting Scentre Group to deliver a 5.5% increase in Funds from Operations (FFO) per share of 23 cents, and a 2.5% increase in dividends per share of 17.63 cents.
