Stock exchange

Scentre Group Posts AU$3.6 Billion Loss in H1 as COVID-19 Pandemic Bites

Scentre Group, the owner of Westfield-branded shopping malls in Australia and New Zealand, reported an interim loss of AU$3.6 billion in the first half of 2020 amid rising concerns given the negative effects of COVID-19 crisis and the impact on tenants’ ability to pay rent.

The owner of over 40 Westfield malls said it also took AU$232.1 million credit charge relating to COVID-19. Overall revenue slumped 16% to AU$1.1 billion and funds from operations plunged 46% to AU$361.9 million.

Scentre reported a net loss for the six months to June 30 from a net profit of AU$740 million in the year-ago period, due to AU$4.1 billion downward revaluation of its assets.

For the six-month period, the Group collected 70% of gross rental billings and for the months of June and July 2020, gross rental billings collections were over 80%. In-store sales, Scentre’s retail partners were impacted by the pandemic and the associated restrictions on people movement.

In-store sales for the retail partners that traded throughout the six-month period were 8.1% lower compared to the previous corresponding six-month period in 2019. Speciality in-store sales were 12.1% lower for the six-month period compared to the previous corresponding period.

Scentre Group’s shares gained about 4% to AU$2.09 on Tuesday. However, the stock is down over 40% so far this year.

Executive comments

“As customers are returning to our centres, more than 93% of retail stores are open across the portfolio (excluding our Victorian centres). Portfolio occupancy was 98.8% at the end of June 2020. We launched Westfield Plus, our membership customer engagement platform, at Westfield Newmarket in New Zealand in late 2019 and recently introduced the program in Australia. We now have more than 500,000 members on Westfield Plus and this continues to grow,” Scentre Group CEO Peter Allen said.

“The shopping centre industry has provided over AU$1.6 billion of support for retailers during the pandemic. Our industry is unique in that it has provided, and self-funded, a level of financial support beyond any other industry as well as most government pandemic support packages. We have agreed arrangements with 2,438 of our 3,600 retail partners, including 1,624 SME retail partners,” Allen added.

Scentre stock forecast

Morgan Stanley target price is AU$2.71 with a high of AU$3.95 under a bull-case scenario and AU$1.70 under the worst-case scenario. Other equity analysts also recently updated their stock outlook. Jefferies lowered their price target to $2.00 from $2.28; retained ‘Hold’ rating.

We think it is good to hold for now as 50-day Moving Average and 100-200-day MACD Oscillator signals a selling opportunity.

Analyst view

“We believe Scentre Group is better placed to recover from a COVID-19 world than other retail-dominant REITs. Across its portfolio, its malls are located in wealthier areas (by house price), with stronger incomes, and among the highest median population densities in surrounding areas,” said Simon Chan, equity analyst at Morgan Stanley.

“Its discretionary bias means that it is more leveraged to the well-being of consumers than other portfolios. However, we have factored for this by assuming that rent after COVID-19 will be reset to 15% lower, allowing for an economic decline. In our view, what’s priced in is worse than we think our analysis justifies,” he added.

Upside and Downside risks

Upside: 1) A sustained recovery in speciality retail sales, to 3-4% p.a. 2) A pickup in development activities, including third-party activity. 3) Strong recovery trajectory after COVID-19 issues – highlighted by Morgan Stanley.

Downside: 1) Rise in Interest rates at both at the short and long end of the curve. 2) Further deterioration in the shopping habits of consumers – towards omni-channels. 3) Retailers continuing to rationalise store networks. 4) Prolonged COVID-19 impact.