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Stobart Group — Targets on track, near-term volumes affected

Stobart Group — Targets on track, near-term volumes affected

Stobart Group continues to evolve from a holding company to an operating group, targeting £100m of underlying EBITDA by 2022 (from £35m in 2017), driven by material growth in the Energy and Aviation segments. Once mature, these segments should generate strong, dependable cash flows, and attract higher multiples and strong long-term value. Until then, the company is committed to paying a dividend of 18p/share (partly funded by asset sales), implying a current dividend yield of nearly 7%. We have adjusted our FY18 estimated earnings following slight delays in some projects and some higher than expected one-off costs. Modelling changes and a move to an exclusively DCF approach lowers our valuation to 285p/share, but we note that longer-term upside remains if the company can deliver on its targets.

Analyst avatar placeholder

Written by

Stobart Group

Targets on track, near-term volumes affected

Company update

General industrials

26 January 2018

Price

257.5p

Market cap

£924m

Estimated net debt (£m) at end February 2018

33.5

Shares in issue

359m

Free float

60%

Code

STOB

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(5.4)

(4.3)

43.1

Rel (local)

(5.7)

(6.4)

32.9

52-week high/low

303.2p

172.8p

Business description

Stobart Group owns and operates London Southend Airport, renewable energy fuel processing and supply assets, a rail and civil engineering business, a property portfolio, a regional airline/leasing company and non-controlling equity investments in logistics.

Next events

Full year results

May 2018

Analysts

Will Forbes

+44 (0)20 3077 5700

Andy Chambers

+44 (0)20 3681 2525

Annabel Hewson

+44 (0)20 3077 5700

Stobart Group is a research client of Edison Investment Research Limited

Stobart Group continues to evolve from a holding company to an operating group, targeting £100m of underlying EBITDA by 2022 (from £35m in 2017), driven by material growth in the Energy and Aviation segments. Once mature, these segments should generate strong, dependable cash flows, and attract higher multiples and strong long-term value. Until then, the company is committed to paying a dividend of 18p/share (partly funded by asset sales), implying a current dividend yield of nearly 7%. We have adjusted our FY18 estimated earnings following slight delays in some projects and some higher than expected one-off costs. Modelling changes and a move to an exclusively DCF approach lowers our valuation to 285p/share, but we note that longer-term upside remains if the company can deliver on its targets.

Year
end

Revenue
(£m)

Underlying
EBITDA* (£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

02/16

126.7

30.0

2.7

6.0

95.3

2.3

02/17

129.4

35.0

(2.7)

13.5

N/A

5.2

02/18e

251.4

134.0

29.6

18.0

8.7

6.9

02/19e

321.7

39.0

3.9

18.0

66.0

6.9

Note: *EPS and EBITDA are company-defined underlying metrics, which include profits from asset sales (which include £123.5m in H118).

Timing affects H218 estimates

Start-up delays in Energy caused by commissioning issues at third-party biomass plants (out of the company’s control) and reduced passenger numbers at London Southend Airport in FY18 and FY19 result in us lowering our FY18 underlying EBITDA estimates by 6% to £134m. However, the case for Southend’s growth as London’s sixth airport remains strong and we retain our 2022 estimate of passenger numbers at more than five million pa. Four energy plants are being commissioned in 2018, which should lead to strong volume and earnings growth. Equally, delays in plant start-ups do not affect the value of the contracts or cash flows derived from them in the long term.

Carillion collapse could be an opportunity

Rail is a limited contributor to overall growth, but the collapse of Carillion should present some opportunities for the division to capture additional contract revenues.

Valuation: Revised to 285p/share

Third-party plant delays and slightly lower passenger numbers are understandable. However, they should not distract from the long-term value proposition, in which both divisions should produce strong, reliable cash flows for long periods, attracting yield investors and relatively high multiples. We have adjusted our valuation to account for modelling and estimate changes, and it moves to 285p/share (based on DCF). We note that the strong dividend payout of 18p/share (and 7% yield) needs to be partly funded by asset sales over the next four years before growth in operating cash flows can fully take over – this should be achievable given considerable non-operating/investment assets. Our valuation suggests 10% upside. This valuation would imply an EV/EBITDA multiple of just 10.9x in 2022.

Carillion opportunity

The recent collapse of Carillion should give Stobart’s rail division some opportunities. Although Carillion was a tier one supplier and Stobart is a tier two, we expect the fallout of the liquidation to result in some broadening out of the contracts over time. Stobart Group’s H117 external revenues were £6.3m (adding to £13.9m internal revenues), so additional contracts could make a material impact on the segments results.

Estimate changes

We have adjusted our estimates for FY18, which move from £143m to £134m on a company-reported EBITDA basis (£19.7m to £10.5m excluding the sales seen in H118). Reported EBITDA estimates move more due to one off costs incurred by the delayed commissioning of biomass plants in Energy and marketing costs in Aviation (though the majority of these costs were seen in H118).

We see reduced energy earnings as temporary, as overall biomass requirements at the plants have not declined (indeed, the contracts have not yet started). However, we adjust aviation estimates in FY18 and FY19 as it is taking more time to grow the airline base. The group is investing a further £30-40m (of which £5-10m is in FY18) in awareness, branding, route development and marketing at London Southend airport over the next four years to 2021 to accelerate value creation. The accounting treatment of these costs is to be confirmed. The case for Southend’s growth remains strong in our opinion.

A summary of changes to EBITDA are summarised below:

Exhibit 1: Changes in underlying EBITDA

£m

2018e

2019e

Old

New

Change

Old

New

Change

Energy

12.6

12.0

(5%)

24.6

24.0

(3%)

Aviation

11.4

(1.0)

N/A

27.9

14.0

(49%)

Rail

4.0

4.0

1%

4.7

4.7

1%

Investments

2.3

1.5

(36%)

2.5

2.5

2%

Infrastructure

2.0

5.0

150%

2.1

2.1

2%

Central costs and eliminations

(12.6)

(11.0)

(13%)

(18.8)

(8.5)

(55%)

Total Underlying EBITDA (excluding sale proceeds)

19.7

10.5

(47%)

43.0

39.0

(9%)

Total Underlying EBITDA (including sales proceeds)

143.2

134.0

(6%)

43.0

39.0

(9%)

Source: Edison Investment Research. Note: For this analysis we exclude the profits of £123.5m reported on sale of assets in the investments segment in H118.

Valuation

We move to a DCF approach (from a mix of EV/EBITDA and DCF) as we feel this properly captures the value of the growth in coming years. In this approach we discount the cash flows from the operating assets and dividends from sales of non-operating assets (at book value), adding these to the value of the ESL stake (at current market prices) and intangible brand value. We exclude any value for the Stobart Capital element given low invested capital and the uncertain returns profile for the moment, although we believe this should contribute in time.

These factors are discounted using a WACC of 8.4% (lower than previously given a lower beta), which could fall over time as the aviation and energy businesses mature and the company gears up from a currently low base. We assume a terminal growth rate of 1% on terminal cash flows (which we assume is 10% higher than 2022 free cash flows).

Exhibit 2: Stobart Group DCF breakdown

£m unless noted

2019e

2020e

2021e

2022e

Terminal value

Underlying EBITDA (support services only)

34

64

79

97

Underlying EBIT (support services only)

23

53

68

86

Less cash taxes

(2)

(7)

(11)

(15)

Tax rate (%)

10

14

15

17

NOPAT

20.9

46.0

57.7

71.4

Working capital

(5)

(5)

(5)

(5)

Add back depreciation

11

11

11

11

Less capex

(15)

(15)

(15)

(15)

Free cash flow

12

37

49

62

1,067

Discounted cash flow

11

31

38

45

705

Value of operating assets

842

901

940

970

989

NPV of dividends (from non-operating businesses)

106

68

35

12

ESL stake

69

69

69

69

69

Brands

39

39

39

39

39

Total business value + ESL shares + brands

1,056

1,077

1,082

1,090

1,097

Adjustments (net debt)

34

66

74

69

47

Market cap implied

1,022

1,010

1,008

1,021

1,049

Pence/share

285

Implied EV/EBITDA (x)

30.7

16.7

13.7

11.2

11.3

Implied P/E (x)

73.8

26.0

19.6

15.1

15.5

Source: Edison Investment Research

Financials

In August 2017, the company reported £2.9m of net cash following asset sales, which brought in £227m, offset by £51m of capex additions (mostly on aircraft acquisitions) and £10m loss on operating cash flows. Much of this free cash flow went on paying down debt (£114m including capital on financial leases), but £26m of dividends was also paid out and £10.7m was spent on treasury shares (to pay for employee share benefits in current and future years). This left the group with £39m of cash in August 2017 vs £36.2m of gross debt.

In the second half of the year (ending February 2018), we expect cash to be drawn down further as no major asset sales have yet taken place in the period to offset the quarterly dividend payouts. Forecast net debt at end February2018 is £33.5m.

At an average dividend of 18p/share per year, the company will be paying out nearly £260m from 2019-22, with the bulk of this cash needing to come from asset sales as the business segments grow. The company has a record of selling assets for more than the book value, although we assume that future sales are achieved at book. We note that the company’s 12.5% holding of Eddie Stobart Logistics would bring in £69m at current market prices, while the book value of the brand was £39m in FY17.

Exhibit 3: Financial summary

£m

2015

2016

2017

2018e

2019e

Year-end February

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

116.6

126.7

129.4

251.4

321.7

EBITDA (underlying)

 

 

10.0

30.0

35.0

134.0

39.0

Operating Profit (before except.)

 

10.9

21.5

25.6

122.0

28.0

Exceptionals

(10.5)

(10.6)

(34.0)

(14.0)

(10.0)

Other

0.0

0.0

0.0

0.0

0.0

Operating Profit

0.4

11.0

(8.4)

108.0

18.0

Net Interest

(9.8)

(1.0)

0.4

(2.4)

(1.7)

Profit Before Tax (norm)

 

 

9.3

18.4

27.4

117.8

26.3

Profit Before Tax (FRS 3)

 

 

(9.4)

10.0

(8.0)

105.6

16.3

Tax

1.4

(1.2)

(1.2)

0.8

(2.4)

Discontinued businesses profit/(loss) underlying, post-tax

(3.7)

0.0

0.0

0.0

0.0

Discontinued businesses profit/(loss) non underlying, post-tax

10.6

0.0

0.0

0.0

0.0

Profit After Tax (norm)

 

 

8.6

16.2

27.6

118.3

21.8

Profit After Tax (FRS 3)

 

 

(1.2)

8.8

(9.2)

106.4

13.8

Average Number of Shares Outstanding (m)

329.9

328.1

343.5

359.1

359.1

EPS - normalised (p)

 

 

(0.3)

2.7

(2.7)

29.6

3.9

EPS - normalised and fully diluted (p)

 

(0.3)

2.7

(2.7)

29.6

3.9

EPS - (IFRS) (p)

 

 

(2.8)

2.7

(2.7)

29.6

3.9

Dividend per share (p)

6.0

6.0

13.5

18.0

18.0

EBITDA Margin (%)

8.6

23.6

27.0

53.5

12.1

Operating Margin (before GW and except.) (%)

9.3

17.0

19.8

48.5

8.7

BALANCE SHEET

Fixed Assets

 

 

427.7

453.3

510.4

462.9

442.0

Intangible Assets

116.2

112.3

108.4

106.4

106.4

Tangible Assets

221.9

218.0

326.3

267.8

246.8

Investments

78.8

109.7

62.3

4.3

5.3

Other

10.8

13.4

13.4

84.4

83.5

Current Assets

 

 

101.7

109.2

155.6

156.1

182.6

Stocks

46.2

45.1

63.7

70.0

75.0

Debtors

42.4

49.0

48.1

60.0

60.0

Cash

5.7

9.9

30.7

12.6

34.1

Other

7.4

5.4

13.1

13.5

13.5

Current Liabilities

 

 

(52.3)

(54.5)

(88.8)

(83.1)

(83.1)

Creditors

(43.9)

(38.2)

(61.5)

(65.0)

(65.0)

Short term borrowings

(7.3)

(9.0)

(18.3)

(10.0)

(10.0)

Other

(1.2)

(7.3)

(9.0)

(8.0)

(8.0)

Long Term Liabilities

 

 

(70.8)

(94.4)

(189.6)

(107.3)

(161.8)

Long term borrowings

(17.5)

(48.9)

(133.1)

(36.1)

(90.5)

Other long term liabilities

(53.3)

(45.5)

(56.6)

(71.3)

(71.3)

Net Assets

 

 

406.2

413.7

387.5

428.6

379.8

CASH FLOW

Operating Cash Flow

 

 

5.7

0.2

(1.7)

(12.7)

25

Net Interest

(1.6)

(1.7)

(1.7)

(2.9)

(1.7)

Tax

(0.0)

0.0

0.0

0.8

(2.4)

Capex

(10.1)

(45.3)

(14.5)

(55.5)

(15.0)

Acquisitions/disposals

204.4

14.7

54.4

121.0

25.0

Financing

(34.8)

17.4

15.0

(10.7)

0.0

Dividends

(19.8)

(19.7)

(34.7)

(58.8)

(64.6)

Other

4.4

17.0

(0.2)

105.1

0.9

Net Cash Flow

148.3

(17.5)

16.5

86.3

(32.9)

Opening net debt/(cash)

 

 

127.9

19.1

48.0

120.7

33.5

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

(39.5)

(11.4)

(89.3)

0.9

0.0

Closing net debt/(cash)

 

 

19.1

48.0

120.7

33.5

66.4

Source: Edison Investment Research, company accounts

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Stobart Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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United Kingdom

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10017, New York

US

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Level 12, Office 1205

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

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United Kingdom

New York +1 646 653 7026

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10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Stobart Group and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). 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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Real Estate

Picton Property Income — Strong total returns continue

The valuation of Picton’s property portfolio showed a 2.1% like-for-like increase in the three months ending 31 December 2017 (Q318), primarily driven by asset management, continuing growth in expected rental values and yield compression on some assets. Including the dividend, NAV total return was 4.1%, with dividend cover increasing to 126%. The targeted DPS for the current year was increased by c 3% to an annualised 3.5p (a well covered 4.1% yield). Ongoing active asset management initiatives provide additional opportunities, with leasing progress continuing in Q4.

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