New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Asset Plus</h2>
Downgrade to&nbsp;UNDERPERFORM
UNDERPERFORM
In our sector report Real Estate Reflections, dated 26 March 2020, we looked at sector gearing and provided an update on our preferred LPVs. We also provided some thoughts on how investors should be positioned as uncertainty persists, and a reminder of what happened during the global financial crisis (GFC) and how things may be 'different this cycle'. We downgraded our APL&nbsp;&nbsp;investment rating from NEUTRAL to UNDERPERFORM.
<table class="table table-striped"><colgroup><col> <col> <col> <col> <col> <col> <col span="2"> <col span="2"> <col> <col></colgroup>
<tbody>
<tr>
<td style="width: 48pt;">NZX Code</td>
<td style="width: 48pt;">APL</td>
<td style="width: 48pt;">Financials:Mar/</td>
<td style="width: 40.2pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 43.2pt;">21E</td>
<td style="width: 48pt;">22E</td>
<td style="width: 48pt;">Valuation (x)</td>
<td style="width: 42.6pt;">19A</td>
<td style="width: 42.6pt;">20E</td>
<td style="width: 48pt;">21E</td>
<td style="width: 42.6pt;">22E</td>
</tr>
<tr>
<td style="width: 48pt;">Share price</td>
<td style="width: 48pt;">NZ$0.42</td>
<td style="width: 48pt;">NPAT* (NZ$m)</td>
<td style="text-align: left; width: 40.2pt;">5.2&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">6.3</td>
<td style="text-align: left; width: 43.2pt;">5.8&nbsp;</td>
<td style="text-align: left; width: 48pt;">5.6&nbsp;</td>
<td style="width: 48pt;">EV/EBITDA</td>
<td style="text-align: left; width: 42.6pt;">12.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">10.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">12.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">12.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Target price</td>
<td style="width: 48pt;">NZ$0.65</td>
<td style="width: 48pt;">EPS* (NZc)</td>
<td style="text-align: left; width: 40.2pt;">3.2&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.9&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">3.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">3.5&nbsp;</td>
<td style="width: 48pt;">EV/EBIT</td>
<td style="text-align: left; width: 42.6pt;">12.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">10.0&nbsp;</td>
<td style="text-align: left; width: 48pt;">12.5&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">12.4&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Risk rating</td>
<td style="width: 48pt;">High</td>
<td style="width: 48pt;">EPS growth* (%)</td>
<td style="text-align: left; width: 40.2pt;">-17.7</td>
<td style="text-align: left; width: 42.6pt;">21.1</td>
<td style="text-align: left; width: 43.2pt;">-6.7</td>
<td style="text-align: left; width: 48pt;">-3.6&nbsp;</td>
<td style="width: 48pt;">PE</td>
<td style="text-align: left; width: 42.6pt;">13.2&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">10.9&nbsp;</td>
<td style="text-align: left; width: 48pt;">11.6&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">12.1&nbsp;</td>
</tr>
<tr>
<td style="width: 48pt;">Issued shares</td>
<td style="width: 48pt;">161.9m</td>
<td style="width: 48pt;">DPS (NZc)</td>
<td style="text-align: left; width: 40.2pt;">3.6&nbsp;</td>
<td style="text-align: left; width: 42.6pt;">3.6&nbsp;</td>
<td style="text-align: left; width: 43.2pt;">3.6&nbsp;</td>
<td style="text-align: left; width: 48pt;">3.6&nbsp;</td>
<td style="width: 48pt;">Price/NTA</td>
<td style="text-align: left; width: 42.6pt;">0.6</td>
<td style="text-align: left; width: 42.6pt;">0.6</td>
<td style="text-align: left; width: 48pt;">0.6</td>
<td style="text-align: left; width: 42.6pt;">0.6</td>
</tr>
<tr>
<td style="width: 48pt;">Market cap</td>
<td style="width: 48pt;">NZ$68.m</td>
<td style="width: 48pt;">Imputation (%)</td>
<td style="text-align: left; width: 40.2pt;">100</td>
<td style="text-align: left; width: 42.6pt;">100</td>
<td style="text-align: left; width: 43.2pt;">100</td>
<td style="text-align: left; width: 48pt;">100</td>
<td style="width: 48pt;">Cash div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">8.6</td>
<td style="text-align: left; width: 42.6pt;">8.6</td>
<td style="text-align: left; width: 48pt;">8.6</td>
<td style="text-align: left; width: 42.6pt;">8.6</td>
</tr>
<tr>
<td style="width: 48pt;">Avg daily turnover</td>
<td style="width: 48pt;">109.6k (Z$68k)</td>
<td colspan="3" style="width: 130.8pt;">*Based on normalised profits</td>
<td style="width: 43.2pt;"></td>
<td style="width: 48pt;"></td>
<td style="width: 48pt;">Gross div yld (%)</td>
<td style="text-align: left; width: 42.6pt;">12.2</td>
<td style="text-align: left; width: 42.6pt;">12.2</td>
<td style="text-align: left; width: 48pt;">12.2</td>
<td style="text-align: left; width: 42.6pt;">12.2</td>
</tr>
</tbody>
</table>
Retail uncertainties
NZ listed retail exposure is mostly KPG, although its last stated position was only 20% pure retail with the balance comprising its new classification of mixed use for its three major shopping centres and its office assets. IPL is 100% retail but all large format and mostly supermarkets. Others are APL 50%+ retail via Eastgate Shopping Centre in Christchurch, SPG ~40%, and ARG ~10% mostly large format retail. Large format should be relatively resilient given the typically large corporate nature of the tenants. Shopping centres with specialty tenants are more problematic, in particular, those that are not dominant centres in their wider catchment area. The near term risks are rent relief to keep tenants going for when centres fully re-open, rental levels and occupancy over the next 12 months, and what valuers say near term.
Development in Limbo
APL&nbsp;announced a $100m capital raise on 10 March 2020, which was subsequently cancelled eight days later due to the extreme volatility seen in capital markets arising from the outbreak of COVID-19.&nbsp;The proceeds from the capital raise were intended to fund the development of Munroe Lane, and provide some capacity for the redevelopment of&nbsp;APL's&nbsp;Graham Street asset.
The Munroe Lane development, which is 63% pre-leased to Auckland Council, is subject to a funding and shareholder approval condition with the Council. Given current circumstances, APL is in talks with Auckland Council to extend the condition satisfaction date. The uncertainty in capital markets in unlikely to wane in the near term, meaning APL's development schedule is likely on pause.
Downgraded to&nbsp;UNDERPERFORM
The current environment makes&nbsp;APL's&nbsp;growth strategies and efforts to diversify and expand its asset base problematic.&nbsp;Eastgate&nbsp;Shopping Centre remains a key concern, and while this may be priced in given&nbsp;APL's&nbsp;discount to&nbsp;NTA&nbsp;(as detailed in Figure 3 and Figure 4), the outlook is challenging relative to the broader sector.&nbsp;APL&nbsp;was looking at divesting this asset and this will be even more difficult now.&nbsp;APL&nbsp;also has a moderately high dividend payout ratio relative to the sector. Our target price has dropped from NZ$0.65 to NZ$0.52 on the back of our&nbsp;NAV&nbsp;falling from NZ$0.66 to NZ$0.50. Our earnings are unchanged at this time.
Jeremy Simpson CFA jeremy.simpson@forsythbarr.co.nz +64 9 368 0022

Asset Plus
Downgrade to&nbsp;UNDERPERFORM
UNDERPERFORM
In our sector report Real Estate Reflections, dated 26 March 2020, we looked at sector gearing and provided an update on our preferred LPVs. We also provided some thoughts on how investors should be positioned as uncertainty persists, and a reminder of what happened during the global financial crisis (GFC) and how things may be 'different this cycle'. We downgraded our APL&nbsp;&nbsp;investment rating from NEUTRAL to UNDERPERFORM.
         


NZX Code
APL
Financials:Mar/
19A
20E
21E
22E
Valuation (x)
19A
20E
21E
22E


Share price
NZ$0.42
NPAT* (NZ$m)
5.2&nbsp;
6.3
5.8&nbsp;
5.6&nbsp;
EV/EBITDA
12.5&nbsp;
10.0&nbsp;
12.5&nbsp;
12.4&nbsp;


Target price
NZ$0.65
EPS* (NZc)
3.2&nbsp;
3.9&nbsp;
3.6&nbsp;
3.5&nbsp;
EV/EBIT
12.5&nbsp;
10.0&nbsp;
12.5&nbsp;
12.4&nbsp;


Risk rating
High
EPS growth* (%)
-17.7
21.1
-6.7
-3.6&nbsp;
PE
13.2&nbsp;
10.9&nbsp;
11.6&nbsp;
12.1&nbsp;


Issued shares
161.9m
DPS (NZc)
3.6&nbsp;
3.6&nbsp;
3.6&nbsp;
3.6&nbsp;
Price/NTA
0.6
0.6
0.6
0.6


Market cap
NZ$68.m
Imputation (%)
100
100
100
100
Cash div yld (%)
8.6
8.6
8.6
8.6


Avg daily turnover
109.6k (Z$68k)
*Based on normalised profits


Gross div yld (%)
12.2
12.2
12.2
12.2



Retail uncertainties
NZ listed retail exposure is mostly KPG, although its last stated position was only 20% pure retail with the balance comprising its new classification of mixed use for its three major shopping centres and its office assets. IPL is 100% retail but all large format and mostly supermarkets. Others are APL 50%+ retail via Eastgate Shopping Centre in Christchurch, SPG ~40%, and ARG ~10% mostly large format retail. Large format should be relatively resilient given the typically large corporate nature of the tenants. Shopping centres with specialty tenants are more problematic, in particular, those that are not dominant centres in their wider catchment area. The near term risks are rent relief to keep tenants going for when centres fully re-open, rental levels and occupancy over the next 12 months, and what valuers say near term.
Development in Limbo
APL&nbsp;announced a $100m capital raise on 10 March 2020, which was subsequently cancelled eight days later due to the extreme volatility seen in capital markets arising from the outbreak of COVID-19.&nbsp;The proceeds from the capital raise were intended to fund the development of Munroe Lane, and provide some capacity for the redevelopment of&nbsp;APL's&nbsp;Graham Street asset.
The Munroe Lane development, which is 63% pre-leased to Auckland Council, is subject to a funding and shareholder approval condition with the Council. Given current circumstances, APL is in talks with Auckland Council to extend the condition satisfaction date. The uncertainty in capital markets in unlikely to wane in the near term, meaning APL's development schedule is likely on pause.
Downgraded to&nbsp;UNDERPERFORM
The current environment makes&nbsp;APL's&nbsp;growth strategies and efforts to diversify and expand its asset base problematic.&nbsp;Eastgate&nbsp;Shopping Centre remains a key concern, and while this may be priced in given&nbsp;APL's&nbsp;discount to&nbsp;NTA&nbsp;(as detailed in Figure 3 and Figure 4), the outlook is challenging relative to the broader sector.&nbsp;APL&nbsp;was looking at divesting this asset and this will be even more difficult now.&nbsp;APL&nbsp;also has a moderately high dividend payout ratio relative to the sector. Our target price has dropped from NZ$0.65 to NZ$0.52 on the back of our&nbsp;NAV&nbsp;falling from NZ$0.66 to NZ$0.50. Our earnings are unchanged at this time.
Jeremy Simpson CFA jeremy.simpson@forsythbarr.co.nz +64 9 368 0022

Asset Plus

Asset Plus: Downgrade to UNDERPERFORM