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>Stride Property</h2>
<p><strong>FY20 Result — Stepping up to OUTPERFORM</strong></p>
<p><strong>OUTPERFORM</strong></p>
<p>Stride Property (SPG) reported an in line FY20 result, with stronger than expected management fee income offset by higher than expected one-off costs and tax expense. Recent asset sales to Investore (IPL) and the upcoming establishment of Industre will leave SPG in a strong capital position as it continues to execute its asset management growth strategy. We believe the risk reward is favourable with SPG trading at 1) a 13% discount to our NAV vs. the sector at a 3% premium, and 2) a 12-month forward PE of 16.4x vs. the sector at 22.5x. We believe the market is attributing no value to its asset management business. We adjust our earnings to incorporate the establishment of Industre, lift our target price to NZ$1.90, and upgrade our rating to OUTPERFORM.</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/141/850/original/image_59410441721592957546887.png?1592957548" class="editor-image img-responsive" data-smartkarma-image-id="141850"></figure>
<div>
<h3>Value for money</h3>
</div>
<div id="m_-4576616332428680949iwnuk">
<p>SPG is currently trading at a -12% discount to its net tangible asset (NTA) backing of NZ$1.91 per share (a measure which doesn't consider the value of its asset management business), and at a -13% discount to our NAV which conservatively assumes a further 10% decrease in the value of office and retail properties but includes our valuation of its asset management business of NZ$53m or 15cps. Given this discount to our NAV, we believe the risk reward is favourable at current levels with the market attributing no value to its asset management business. Additionally, SPG trades on the highest cash yield in the sector at 5.9%. While this is a lower quality yield, as it's not covered by underlying cash earnings, SPG's board appears committed to paying it in the near term.</p>
</div>
<div>
<h3>Funds management platform taking shape</h3>
</div>
<div id="m_-4576616332428680949ijm2g">
<p>SPG continues to grow its asset management platform and expects Industre, its JV with J.P. Morgan Asset Management (JPMAM), to commence operations on 30 June 2020. Industre is SPG's third investment vehicle and will lift assets under management by NZ$398m to NZ$1.8b. While SPG's initial co-investment in Industre is higher than desired at 68%, growth will be funded via additional equity from JPMAM, with a long term objective of reducing SPG's ownership to 25%, but in the process increases the funds asset base and management fees payable. Outside of Industre, Diversified and IPL have available capital of NZ$300m and SPG's balance sheet has undrawn debt facilities of NZ$220m which will likely be used to warehouse assets for the establishment of further funds.&nbsp;</p>
</div>
<div>
<h3>Adjusting forecasts for&nbsp;Industre&nbsp;and FY21&nbsp;DPS&nbsp;guidance 9.91cps&nbsp;</h3>
</div>
<div id="m_-4576616332428680949icoqj">
<p>​​​​​​​​​​​​​​We adjust our distributable earnings +7.4%/-8.8%/-10.0% in FY21/22/23 which largely reflects 1) lower tenant support in FY21, 2) higher FY21 activity based fees, and 3) dilution from the transfer of industrial assets to Industre. SPG does continue to over pay its underlying cash earnings with an FY20 AFFO payout ratio of 114%. We model flat distributions until earnings catches up, however, this results in an EPS/AFFO payout of 103%/113% in FY22E and 101%/111% in FY23E. We calculate c.NZ$130m of acquisitions would be required to lift FY22 earnings and lower the EPS payout to 95% (the middle of SPG's target band), assuming SPG can acquire assets for a yield of 6.0% with a marginal cost of debt of 2.5%.</p>
</div>
<div>
<div>
<div><strong>Rohan Koreman-Smit CFA</strong></div>
<div><a href="mailto:rohan.koreman-smit@forsythbarr.co.nz" target="_blank" rel="noopener">rohan.koreman-smit@<wbr>forsythbarr.co.nz</a></div>
<div>+64 9 368 0085</div>
<div></div>
</div>
</div>
<div>
<div>
<div><strong>Ashton Olds</strong></div>
<div><a href="mailto:ashton.olds@forsythbarr.co.nz" target="_blank" rel="noopener">ashton.olds@forsythbarr.co.nz</a></div>
<div>+64 9 368 0127</div>
</div>
</div>

Stride Property
FY20 Result — Stepping up to OUTPERFORM
OUTPERFORM
Stride Property (SPG) reported an in line FY20 result, with stronger than expected management fee income offset by higher than expected one-off costs and tax expense. Recent asset sales to Investore (IPL) and the upcoming establishment of Industre will leave SPG in a strong capital position as it continues to execute its asset management growth strategy. We believe the risk reward is favourable with SPG trading at 1) a 13% discount to our NAV vs. the sector at a 3% premium, and 2) a 12-month forward PE of 16.4x vs. the sector at 22.5x. We believe the market is attributing no value to its asset management business. We adjust our earnings to incorporate the establishment of Industre, lift our target price to NZ$1.90, and upgrade our rating to OUTPERFORM.


Value for money


SPG is currently trading at a -12% discount to its net tangible asset (NTA) backing of NZ$1.91 per share (a measure which doesn't consider the value of its asset management business), and at a -13% discount to our NAV which conservatively assumes a further 10% decrease in the value of office and retail properties but includes our valuation of its asset management business of NZ$53m or 15cps. Given this discount to our NAV, we believe the risk reward is favourable at current levels with the market attributing no value to its asset management business. Additionally, SPG trades on the highest cash yield in the sector at 5.9%. While this is a lower quality yield, as it's not covered by underlying cash earnings, SPG's board appears committed to paying it in the near term.


Funds management platform taking shape


SPG continues to grow its asset management platform and expects Industre, its JV with J.P. Morgan Asset Management (JPMAM), to commence operations on 30 June 2020. Industre is SPG's third investment vehicle and will lift assets under management by NZ$398m to NZ$1.8b. While SPG's initial co-investment in Industre is higher than desired at 68%, growth will be funded via additional equity from JPMAM, with a long term objective of reducing SPG's ownership to 25%, but in the process increases the funds asset base and management fees payable. Outside of Industre, Diversified and IPL have available capital of NZ$300m and SPG's balance sheet has undrawn debt facilities of NZ$220m which will likely be used to warehouse assets for the establishment of further funds.&nbsp;


Adjusting forecasts for&nbsp;Industre&nbsp;and FY21&nbsp;DPS&nbsp;guidance 9.91cps&nbsp;


​​​​​​​​​​​​​​We adjust our distributable earnings +7.4%/-8.8%/-10.0% in FY21/22/23 which largely reflects 1) lower tenant support in FY21, 2) higher FY21 activity based fees, and 3) dilution from the transfer of industrial assets to Industre. SPG does continue to over pay its underlying cash earnings with an FY20 AFFO payout ratio of 114%. We model flat distributions until earnings catches up, however, this results in an EPS/AFFO payout of 103%/113% in FY22E and 101%/111% in FY23E. We calculate c.NZ$130m of acquisitions would be required to lift FY22 earnings and lower the EPS payout to 95% (the middle of SPG's target band), assuming SPG can acquire assets for a yield of 6.0% with a marginal cost of debt of 2.5%.



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



Stride Property: FY20 Result — Stepping up to OUTPERFORM