Drury's Development Progress And Mackersy Investment Will Expand Future Opportunities

Key Takeaways

• Investment in Mackersy Property and Drury development progress can enhance capital access and revenue growth opportunities.
  
• Strong leasing spreads and cost control measures could improve margins and drive future earnings growth with diversified revenue streams.
  
• Declining occupancy and office portfolio valuations, coupled with increased development costs, signal potential challenges for Kiwi Property's revenue growth and net earnings.

Catalysts

Kiwi Property (NZX: KPG) is one of the largest listed property companies on the New Zealand Stock Exchange and is a member of the S&P/NZX 20 Index.

• Kiwi Property's investment in Mackersy Property can expand access to additional capital sources and drive earnings growth, potentially enhancing revenue through new investment opportunities.
  
• The completion of Stage 1 earthworks at Drury and the designation as a listed project under Fast-Track Legislation highlights development progress, which could significantly impact future revenue growth as infrastructure improves.
  
• The resilience in leasing spreads and asset valuation increases, driven by strong lease renewal activity and market demand for quality mixed-use developments, indicates potential future revenue and earnings growth.
  
• Cost control measures, including reduced headcount and operating efficiencies, are expected to improve net margins by decreasing management expenses as a percentage of net property income.
  
• The gradual lease-up of the Resido build-to-rent development demonstrates demand potential, which could provide diversified revenue streams and support earnings growth once stabilized occupancy is achieved.

Kiwi Property Group Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Kiwi Property Group's revenue will decrease by 10.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 8.7% today to 88.4% in 3 years time.
• Analysts expect earnings to reach NZ$170.2 million (and earnings per share of NZ$0.12) by about April 2029, up from NZ$23.6 million today.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 14.1x on those 2029 earnings, down from 62.9x today. This future PE is lower than the current PE for the NZ Retail REITs industry at 36.2x.
• Analysts expect the number of shares outstanding to grow by 0.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.71%, as per the Simply Wall St company report.

Risks

• Retail spending in New Zealand has cooled, with a decline in electronic card transactions, potentially leading to reduced consumer spending and affecting Kiwi Property's revenues.
  
• Portfolio sales have declined, with a slight decrease in the 12-month period, reflecting potential challenges in maintaining consistent revenue growth.
  
• There is a decline in occupancy from 99.3% to 98.4%, suggesting challenges in tenant retention, which could impact future net margins and earnings.
  
• The valuation of the office portfolio has declined, reflecting challenges in the sector, potentially affecting the asset's future revenue and profit margins.
  
• Resido's development costs surpassed budget by 9% and is currently valued below cost, suggesting risk of reduced returns and potential negative impact on net earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of NZ$1.11 for Kiwi Property Group based on their expectations of its future earnings growth, profit margins and other risk factors.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$1.2, and the most bearish reporting a price target of just NZ$1.0.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be NZ$192.6 million, earnings will come to NZ$170.2 million, and it would be trading on a PE ratio of 14.1x, assuming you use a discount rate of 8.7%.
• Given the current share price of NZ$0.9, the analyst price target of NZ$1.11 is 19.3% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.