In March 2020, during the COVID-19 sell-off, the share price of shopping mall company, Scentre Group (ASX:SCG), hit a low of $1.51. It’s been a bumpy ride since then, with more lockdowns, but the share price has recovered nicely.  And the company’s FY21 results paint a picture of a business in reasonable shape and still trading at a steep discount to the value of its net tangible assets.

The Montgomery Fund has had a holding in Scentre Group for well over a year now. We entered after the steep fall in the share price in March 2020 when the shares were trading at a significant discount to the pre-COVID-19 Net Tangible Assets (NTA) – the book values of the assets if the company where to liquify the assets and buyers could be found at those values. Scentre Group’s share price has recovered since we established the position, and the company has revalued down the value of their shopping centres by about 11 per cent so the discount to NTA has narrowed significantly, but before Tuesday’s result was still around 30 per cent.

Looking at the FY21 results, there are a couple of conclusions we can draw:

• Firstly, it seems like we have reached a bottom in asset devaluations as they saw a (very) small upwards revision of $41 million in the total value of their properties. Property valuations are not a direct reflection of what they could realise for the assets but they are at least based on third party valuations and we have seen overall strong interest in real estate as we are (hopefully) nearing the end of the COVID-19 crisis.
• Secondly, rent collecting was back to about 100 per cent in 1H21 at around $200 million per month. With the lockdowns in Sydney starting in late June, many smaller non-essential retailers have either been forced to close or have seen significant reduction in demand. SCG has continued to follow the code of conduct established during the lockdown in 2020 and given rent abatements, and cash collections in July fell to about 84 per cent of normal or $167 million. This is probably a bit better than expected given a lot of its mall are located in or around Sydney where we are seeing the prolonged lockdowns.
• Encouragingly, there has not been any uptick in vacancies and the occupancy rate is still up around 98.5 per cent with no signs that defaults should pick up yet. This is good to see as retailers going under at an accelerating pace would be bad for both SCG and for the economy as a whole.
• Re-leasing spreads (the discount needed to be given when a rental contract comes to an end and is re-signed either with the existing tenant or with a replacement tenant) was 8.7 per cent in 1H21. Even though this might seem quite a high number, it is a positive trend as during FY20, we saw a re-leasing spread of 13.1 per cent for the full year and with 2H21 probably showing 17-18 per cent discounts given as a lot of tenants renegotiated their rents following the initial lockdowns so a significant improvement to last year’s trend.
• The company did not, despite the current lockdowns, change its distribution guidance for the full year at 14 cents per share or about 5.2 per cent yield on the current share price. This guidance is though predicated on the assumption that we will see reduction in lockdown activity from the end of October as vaccination rates increase.

Overall, it looks like SCG’s business is in reasonable shape and with the share price at $2.72 still about 25 per cent below the just reported NTA of $3.64, the valuation does not look unreasonable. There are of course longer-term question marks about what will happen with the relative bargaining power between mall owners and retailers as on-line shopping grows in importance but Scentre Group should be reasonably well protected from this because of their malls generally being in prime locations where retailers will likely find that maintaining a physical footprint is important.

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The Montgomery Funds owns shares in Scentre Group. This article was prepared 25 August 2021 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Scentre Group you should seek financial advice.