VCX, page-3

UBS Research - Last month on 15/08/2018 10:00 AM

Vicinity Centres "Unlocking value post a transition period" (Buy) McCasker
Strategy: superior growth with NAV upsize but VCX is currently in transition

The FY18 Result was in line with expectations (FFO 18.2c, +1.1% vs pcp or +2.2% comparable) with all focus turning to the strategy update. VCX have clearly articulated the strategy to focus on the top 50 assets (post $2b of expected asset sales in FY19, redevelopment/remixing, core portfolio with NOI growth expectations of 3%+), expanding funds management ($1b wholesale fund proposed) and realising mixed used development opportunities ($1b or $0.26ps in value upside from residual land across 20 sites). Post VCR expected asset sales, VCX anticipate to have pro forma gearing of 18% ($2.5b capacity going to 30% gearing, current gearing 26.4%) and a number of reinvestment opportunities (currently $450-500m pa FY19-21; technology driven operational initiatives, retail/mixed use devt and buyback). The targeted end result: superior FFO growth with NAV upside from mixed use opportunities. However, investors will have to be patient as FY19/20 appear to be transition years (divestments to hit FFO), but with VCX trading on 6% DPS yield and 10%/8% disc to NTA /UBS NAV (no mixed use upside included), risks remain to the upside. Buy maintained.

Underlying portfolio metrics marginally improve but difficult to analyse
Pre-development impacted centres continue to drag on the results. Comp NOI growth of 1% (or 1.7% ex pre devt centres) is low versus peers. Releasing spreads were marginally lower (+0.7% in FY18 vs 1.7% FY17, or -4% including short term deals). Sales growth of 1.2% improved vs pcp (0.4% in FY17). Post the $2b of planned divestments, the core portfolio's releasing spreads would have been +3.7% with sales growth of 2% (2.2% spec/mini majors) or 2.5% ex development impacted centres.
FY19 guidance and earnings forecast changes
VCX are guiding to FY19 FFO of 18.0-18.2c (18.2c in FY18) which reflects to 3.4-4.6% underlying FFO growth for the stable portfolio (adjusting for all divestments in FY18/19). UBS Earnings have been adjusted to reflect $2b of asset sales (previously $1b), $7m in performance fees in FY19 and increased capex.
Valuation: $2.92

FY19e NAV of $2.96 reflects a 1yr forward property yield of 6.1% (book cap rate 5.36%), 13x our FY19 Mgmt EBIT and $0.15b for enhanced devt value (no value included for mixed use). DCF $2.90 (8.0% discount rate). NTA $2.97. UBS does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of such reports. Investors should consider research reports as only a single factor in making their investment decision. Important information including analyst certification and required disclosures regarding specific companies, derivatives or other instruments discussed in the email is included in the relevant latest research report. Such reports are provided to our clients through UBS Neo and, where appropriate, UBS.com. Where such report is not attached and/or hyperlinked you should refer to UBS Neo for a copy. You should also refer to the public disclosures website at http://www.ubs.com/disclosures for required disclosures regarding specific companies. The message is subject to the Global Research Disclaimer available at http://www.ubs.com/disclosures. (c) UBS 2018. All rights reserved. Intended for recipient only and not for further distribution without the consent of UBS.