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

Property For Industry FY20 Result&nbsp;— Sheds at Capacity

UNDERPERFORM
Property For Industry (PFI) reported a solid result slightly above our expectations. However, PFI is now one of the most expensive&nbsp;LPVs&nbsp;in the market. While we are attracted to the defensive nature of industrial property and consistent&nbsp;strategic&nbsp;execution by management, we believe this is more than priced in given its current 30% premium to NTA and one of the slimmest gross yields in the sector, reflecting its&nbsp;tightest&nbsp;spread to bonds on record. We believe this leaves little room for relative&nbsp;upside vs. the sector and downgrade our rating to UNDERPERFORM.&nbsp;


What's changed?&nbsp;



Earnings:&nbsp;AFFO&nbsp;+1.8%/-0.4%/-4.6% in&nbsp;FY21/FY22/FY23 reflecting the sale of&nbsp;Carlaw&nbsp;Park and increased interest costs&nbsp;
Target price:&nbsp;Down -3cps to NZ$2.70
Rating:&nbsp;Downgraded to UNDERPERFORM from NEUTRAL



Industrial consistency


PFI delivered another solid result, in line with our expectations. AFFO was slightly ahead of forecasts, boosted by lower than expected tax and interest expenses. Corporate costs increased by 14% in the period as PFI hired additional staff to manage increasing compliance requirements and ESG ambitions. Maintenance capex fell -34% in the period due to COVID-19 related stoppages, although this was offset by increased tenant incentives due to activity at Carlaw Park prior to its sale. Portfolio fundamentals remain strong with 99.4% occupancy, WALT of 5.3 years, and pro-forma gearing of 30% sits comfortably below its 35% target. PFI guided to FY21 DPS of 7.85–7.90cps based on 95–100% payout of AFFO.


Transition nearing completion


Following the divestment of&nbsp;Carlaw&nbsp;Park, with settlement expected in December 2021, PFI will be 98% weighted to industrial property and have pro-forma gearing of 26.5%. PFI is nearing completion on its strategic initiative to become a pure-play industrial LPV, with an increased weighting in Auckland. We expect near-term portfolio activity to be driven by acquisitions rather than redevelopments, given its fully leased portfolio has limited near-term opportunities for larger scale redevelopments. Deploying NZ$100m would lift gearing into the low 30%'s.


Valuation&nbsp;


We make changes to our risk free rate (from 1.3% to 2.3%) and market risk premium (from 6.0% to 5.5%), consistent with our strategy report, Still a One Way Bet? — Updated WACC Assumptions, published 12 February 2021. The net impact of this is a +47bp increase in our WACC which, along with our earnings changes, lowers our DCF by c.5%. This impact is broadly offset by a 5% lift in our NAV driven by higher property values.



Rohan Koreman-Smit CFA
rohan.koreman-smit@forsythbarr.co.nz
+64 9 368 0085





Ashton Olds
ashton.olds@forsythbarr.co.nz
+64 9 368 0127



Property For Industry: FY20 Result — Sheds at Capacity