Dexus

Company Overview: Dexus (ASX: DXS) is one of Australia’s leading real estate groups with 35 years of experience in property investment, development, and asset management. The majority of the company’s earnings are derived from rental income received from its directly owned Australian property portfolio. The company promotes financial value creation through developing, acquiring, and repositioning assets to sell for a profit. DXS has a strong track record of delivering trading profits to investors. The company also provides organic growth in assets under management while enhancing the third-party fund management portfolio's quality and returns.

DXS Details

High-Quality Property Portfolio: Dexus (ASX: DXS) is Australia’s leading real estate group that manages a high-quality Australian property portfolio valued at ~$33.8 billion. Currently, the company directly owns $16.8 billion of properties, with a further $17.0 billion of properties managed on behalf of third-party clients. Dexus has a strong track record in capital and risk management, providing service excellence to tenants and delivering superior risk-adjusted returns for investors. The company’s strategy is to deliver superior risk-adjusted returns for investors from high-quality real estate in Australia’s major cities. The company’s development pipeline is purposely created to deliver future potential revenue streams while adding further depth and flexibility to the spaces it can offer to its customers. Over the last five years, the company has witnessed significant improvement in its bottom line. From 2015 to 2019, the company’s net income has increased at a CAGR of 19.95%.

Financial Performance (Source: Company Reports, Thomson Reuters)

The company had entered COVID-19 pandemic period in a solid position with a robust balance sheet and a quality property portfolio. The company’s priority is to support the ongoing viability of small business customers (tenants). DXS has maintained a continued focus on growth opportunities through investing on behalf of capital partners and progressing its $11.2 billion group development pipeline. Looking ahead, DXS expects the quality office and industrial asset values to remain resilient with pricing supported by an attractive yield spread over bonds and lower for longer interest rate environment, with some impact from a softer outlook for rental growth, downtime and incentives.

FY19 Results Highlights: During the financial year ending 30^th June 2019 or FY19, the company achieved a growth of 5.5% in its Adjusted Funds From Operations (AFFO) per security and a growth of 5% in distribution per security, driven by the performance of its property portfolio, selective acquisitions with future value addition, growth in its funds management business and the delivery of trading profits.

During the year, the Office property FFO (Funds from Operations) increased by 1.1% to $610.5 million, driven by lease commencements across the portfolio and acquisitions. Industrial property FFO increased by 3.5% to $137.3 million, driven by lease commencements, development completions and one-off income, offset by divestments. For FY19, the company reported a Net profit after tax of $1.28 billion, down 25.9%, primarily due to net revaluation gains of investment properties being lower than those recognised in FY18. Further, the company achieved a ROCE of 10.1% in FY19, driven largely by the strong AFFO result as well as revaluation gains from the completed development at 100 Mount Street in North Sydney.

FY19 Results (Source: Company Reports)

H1 FY20 Result Highlights:  For the first half of FY20, the company reported a net profit after tax of $994.2 million, up 36.9% on the previous corresponding period (pcp), driven by net revaluation gains of investment properties of $724.4 million, which were $267.9 million higher than pcp. The company reported Underlying FFO per security of 31.9 cents, up 1.9% on pcp. Office property FFO increased by 12% to $340.4 million in H1FY20, driven by fixed rental increases, development completions, and the acquisitions of 80 Collins and MLC Centre. Industrial FFO declined by 5.5% to $64.8 million, due to the divestment of the first tranche of the DALT portfolio, partly offset by fixed rental increases.

Over the period, the company was focused on enhancing the activeness of its properties, while leveraging its market intel and capabilities to create spaces where its customers want to be. During H1 FY20, the company benefitted from office occupier and investor demand for quality properties in its core markets, achieving record Melbourne rents and strong asset valuation uplifts. Over the half-year, the company completed the 240 St Georges Terrace development in Perth and progressed its $11.2 billion development pipeline.

H1FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 28.04% of the shareholding. Vanguard Investments Australia Ltd. and BlackRock Institutional Trust Company, N.A. hold the maximum interest in the company at 6.29% and 4.12%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For H1FY20, the company’s net margin stood at 170.4%, higher than the industry median of 57.2%. For the same period, the company reported ROE of 8.2%, higher than the industry median 4.7%. The company has a current ratio of 1.46x, higher than the industry median of 0.71x, demonstrating that the company is well equipped to pay its short-term obligations.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Track Record of Paying Regular Dividends: Dexus has a proven track record of paying regular and growing distributions to its security holders. From FY12 to FY19, the company’s distribution per security has grown at a CAGR of 6.6%. For FY19, the company paid a total distribution of 50.2 cents per security, reflecting a 5.0% increase on the prior year. For the six months ended 31 December 2019, the company has paid a distribution of 27.0 cents per stapled security. The estimated distribution amount for the six months ended 30 June 2020 is 23.2 cents per stapled security which will take the total estimated distribution for FY20 to 50.2 cents per stapled security, consistent with FY19 distribution. As can be seen in the following image, the company’s dividends have been increasing since FY12 and, thus, it can be said that DXS has been focusing on delivering respectable returns to its shareholders.

Distribution Summary (Source: Company Reports)

March Quarter Update: During the March 2020 quarter, the company implemented a broad range of cost reduction measures to maintain its financial position in order to deal with the uncertainties caused by the COVID-19 Pandemic. The company implemented annual leave initiatives, a freeze on recruitment and non-essential consultancy spend and temporary reductions in remuneration. During the quarter, a total of 33,284 square meters of office space was leased across 62 transactions in the core portfolio. The company also progressed its office developments at 180 Flinders Street and 80 Collins Street in Melbourne. As on 31 March 2020, the company’s property portfolio was in a decent shape with high portfolio occupancy, limited new supply in its key CBD office markets and a robust balance sheet.

Key Updates:

• Establishes New JV to Acquire Interest in Rialto Towers: On 6^th April 2020, the company announced an establishment of a new Joint Venture with GIC that has exchanged contracts to acquire a 50% interest in Rialto Towers, 525 Collins Street, Melbourne, for $644 million. This Joint Venture is in line with the company’s objective of being a wholesale partner of choice, providing the group with a breadth of capital sources through economic cycles. Further, the JV increases third party assets under management and reinforces Dexus’s ability to secure and transact high-quality opportunities off-market. 

• Secures Future Trading Profits: On 30 July 2020, the company announced that it has entered into agreements to sell a high-quality portfolio of industrial assets to the Dexus Australia Logistics Trust (DALT or the Fund). It is expected that this sale will contribute around $35 million in trading profits pre-tax over FY21 and FY22, with further trading profits that could be realised, subject to favourable leasing outcomes being achieved. The company has also exercised its put option in relation to the sale of its remaining 25% interest in 201 Elizabeth Street, Sydney for $157.5 million. DALT recently exchanged contracts to acquire two quality industrial properties, delivering on its active acquisition and development mandate.

• Resilience in Property Portfolio Valuations: On 24 June 2020, the company announced that 107 of its 118 assets, comprising 42 office properties and 65 industrial properties have been externally valued as at 30 June 2020. The office portfolio experienced around 1.5% decline on prior book values due to the softer assumptions relating to rental growth, downtime and incentives over the next 12 months. The industrial portfolio experienced an increase of around 0.7% on prior book values, reflecting the quality of the portfolio and investment attractiveness of the asset class. The external independent valuations have resulted in a total estimated decline of around $195 million on prior book values for the six months to 30 June 2020.

Key Risks: The company is exposed to the threats of COVID-19 Pandemic, as it could impact the operating environment and the company’s tenant base. The company is also exposed to the risks related to unexpected changes in equity and debt markets. Further, the company is also exposed to performance risks, mainly related to its ability to meet market guidance, deliver superior risk adjusted performance relative to industry benchmarks and completion of developments in line with expectations.

What to Expect: The company’s high-quality property portfolio is currently in a decent position with high occupancy levels, diversified tenant base, and limited new supply coming online in the company’s key office markets. Looking ahead, the company expects investment demand for quality assets to remain positive, with Australia remaining well-positioned for a recovery in foreign investment due to efforts relating to the control of the COVID-19 pandemic ahead of other countries. DXS expects the quality office and industrial asset values to remain resilient with pricing supported by an attractive yield spread over bonds and lower for longer interest rate environment, with some impact from a softer outlook for rental growth, downtime and incentives.

Earlier due to evolving COVID-19 situation, the company had withdrawn its FY20 full year guidance for distribution per security growth. However, later after getting clarity regarding rental collections and cashflow, DXS announced that it expects FY20 full year distribution per security amount is expected to be consistent with FY19. For the six months ended 30 June 2020, the company expects the distribution to be around 23.2 cents per stapled security, consistent with the FY20 distribution guidance. The company expects to release its FY20 annual results on 19^th August 2020.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative) 

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

 Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Over the last six months, the stock of DXS has corrected by 31.55% on ASX and is inclined towards its 52 weeks low price of $8.030, offering a decent opportunity for accumulation. As on 30 April 2020, the company was in a decent financial position with $1.7 billion of cash and committed undrawn bank facilities available and circa $400 million of debt maturing in late FY21. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). Considering the company’s robust balance sheet, a high-quality property portfolio, resilience in property portfolio valuations, its proven track record of paying regular distributions, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $8.620, down by 0.347% on 30 July 2020.

DXS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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