Stock: BWP Trust
Symbol: BWP
Exchange: ASX
Financial Year-end: 30 June
Latest price: $3.39
Market cap: $2.17 billion AUD
Date: 13 September 2018
Sector: Real Estate
Industry: Retail REIT
Investment Theme: Dividends & Growth
Company Profile
BWP Trust is a real estate investment trust (REIT) established in 1998 that invests in and manages commercial properties throughout Australia.
Wesfarmers Limited owns approximately 24.75% of the issued units in the Trust. The responsible entity for managing the Trust, BWP Management Limited, is a wholly-owned subsidiary of Wesfarmers.
BWP owns a portfolio of 79 stores in Australia. The majority of the properties are large format retail properties leased to Bunnings Group Limited, a subsidiary of Wesfarmers. Eight of the properties have adjacent retail showrooms, leased to other retailers and there is one stand-alone showroom property.
Markets
Over 92% of rental income is from Bunnings (Wesfarmers).
98.8% of the portfolio was leased, with two properties unoccupied, at 30 June 2018.
Of the 79 properties, 13 are expected to be vacated by Bunnings (in the process of relocating to a nearby site, including some ex-Masters sites), including the two currently vacant. Five of the 13 properties are being sold and 8 are being re-positioned.
Financial performance
Revenue Growth
Annual revenue continued to rise, with 2.5% like-for-like rental growth in FY18 while total rent received grew by 0.35%.
Long leases provide stability and growth. Weighted average lease expiry (WALE) is 4.5 years. Initial Bunnings leases are typically 10 to 15 years with further options of 5 or 6 years.
Approximately 59% of rental income are subject to annual CPI adjustment and 41% to fixed annual adjustments, typically reviewed to market every 5 years.
Rents are generally not linked to tenants’ turnover, but retailing conditions can impact on market rents. FY19 may bring some rent free periods and capital expenditure as 8 properties are re-positioned following Bunnings exit.
Earnings per share
Earnings include net unrealized gains in fair value of investment properties. Net increase in fair value of $67.4 million for FY18 is significantly lower than $111.3 million in FY17, accounting for the substantial drop in EPS.
Excluding unrealized gains, EPS shows an increase of 0.65% in FY18.
Distributions, excluding capital, were 17.62 cents per share for FY18, an increase of 0.65%.
Historical growth (CAGR) in distributions from 1999 to 2018 is 3.5% p.a.
Cash Flow
Cash flow from operating activities and free cash flow both increased by 0.83% in FY18.
Capital structure
Net debt to equity of 25% is manageable.
Weaknesses
BWP’s earnings are strongly linked to the ongoing success of Wesfarmers’ Bunnings business and their underlying markets: home improvement and outdoor living. While this business has a strong track record, declining housing prices are expected to weigh on performance.
Valuation
Net tangible assets (NTA) at FY18 were $2.85 per share. Decline in the weighted average capitalization rate to 6.48% in FY18 (FY17: 6.59%) accounted for most of the 4.0% increase in NTA.
We project current distributions of 17.62 cents (excluding capital distributions) will grow at a long-term rate of 2.5% per year, giving an expected annual return of 7.7% using Gordon’s Growth Model, or 8.1% including tax benefits.
Technical Analysis
Momentum (50-week) has risen to a modest 12%, while Trend Index (50-week) only recently crossed above zero. BWP has appreciated at an average of 6.0% CAGR since 1998.
The shorter term Trend Index (21-day) formed a bullish trough near zero in late August/early September. Another trough at or above zero should provide a good entry point.
Conclusion
We consider BWP to be over-priced at present: $2.95 would offer a long-term projected investment return of 8.5%, or 8.95% including tax advantages. Hold and accumulate if price dips below $3.00 per unit.
Disclosure
Staff of The Patient Investor may directly or indirectly own shares in the above company.
Colin Twiggs is a former investment banker with almost 40 years of experience in financial markets. He founded PVT Capital (AFSL number 546090), which provides income and growth strategies to wholesale clients.
Colin also co-founded Incredible Charts and writes the popular Patient Investor newsletter.
Using a top-down approach, Colin identifies macro trends in the global economy and then combines fundamental and technical analysis to evaluate opportunities in sectors that stand to benefit.
Focusing on interest rates and financial market liquidity as primary drivers of the economic cycle, he warned of the 2008/2009 and 2020 bear markets well ahead of actual events.