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Research: Investment Companies
Ahead of interim results for the six months ended 31 December 2022 (H123), Supermarket Income REIT (SUPR) has reported its externally assessed property valuation. The like-for-like 13.3% decline is below the broad market decline of c 19% but above our assumption. We have reduced our FY23e EPRA NTA per share by c 10% to 91p but our forecasts for EPRA earnings, dividends and dividend cover are unchanged.
Supermarket Income REIT |
Reducing NAV but focusing on income |
End-FY22 valuation report |
Real estate |
28 February 2023 |
Share price performance
Business description
Next events
Analyst
Supermarket Income REIT is a research client of Edison Investment Research Limited |
Ahead of interim results for the six months ended 31 December 2022 (H123), Supermarket Income REIT (SUPR) has reported its externally assessed property valuation. The like-for-like 13.3% decline is below the broad market decline of c 19% but above our assumption. We have reduced our FY23e EPRA NTA per share by c 10% to 91p but our forecasts for EPRA earnings, dividends and dividend cover are unchanged.
Year end |
Rental |
EPRA |
EPRA EPS* |
NAV**/ |
DPS |
P/NAV |
Yield |
06/22 |
72.1 |
57.4 |
5.9 |
115 |
5.94 |
0.83 |
6.3 |
06/23e |
97.3 |
71.7 |
5.8 |
91 |
6.00 |
1.05 |
6.3 |
06/24e |
103.1 |
70.9 |
5.7 |
93 |
6.00 |
1.02 |
6.3 |
06/25e |
107.1 |
74.2 |
6.0 |
97 |
6.00 |
0.98 |
6.3 |
Note: *EPRA EPS is normalised, excluding gains on revaluation and other non-recurring items. **NAV is EPRA NTA throughout this report.
Valuation update
SUPR’s direct portfolio has been valued at £1,625m as of 31 December 2022 (end-H123) compared with £1,562m at 30 June 2022 (end-FY22) and includes £300m of acquisitions (before acquisition costs). The negative like-for-like valuation movement on the portfolio at the start of the period is 13.3%, with additional adjustments for acquisition costs and the value of assets acquired in the period. Across the broad UK property sector, yields have been adjusting to the increased cost of capital. End-year valuations incorporate volatility in financial markets, uncertainty about the longevity of high inflation and economic growth, and low transactions volumes. There has been a tendency for sectors with lower valuation yields to reprice more significantly despite, in many cases, a continuation of the positive fundamentals that had previously underpinned values. The SUPR portfolio net initial yield has increased to 5.5% from 4.6% during the six-month period.
Structurally supported income and capital values
SUPR’s investment proposition is based primarily on robust and visible income growth from long (c 14 years weighted average lease length) upward-only, mostly inflation-linked leases with strong tenants. The grocery sector benefits from sales inflation, while caps on indexed rents (typically c 4%) enhance affordability. The high-quality omnichannel stores on which SUPR is focused are expected to take further market share over time and it is far from clear that this is yet reflected in sector valuations. While market-wide property valuation uncertainty remains, we would expect SUPR’s rental growth to significantly mitigate any further general widening of yields over coming months. We will revise our forecasts more fully with the FY23 results in late March.
Valuation: Well supported income visibility
SUPR’s FY23 DPS target of 6.0p represents an attractive yield of 6.3%. Meanwhile the shares have tracked EPRA NTA downwards and continue to trade at close to FY23e EPRA NTA, below the average 5% premium since IPO.
Exhibit 1: Financial summary
Year ended 30 June (£m) |
2021 |
2022 |
2023e |
2024e |
2025e |
INCOME STATEMENT |
|||||
Rent receivable |
46.2 |
69.7 |
94.5 |
100.3 |
104.3 |
Rent smoothing adjustment |
2.0 |
2.7 |
2.8 |
2.8 |
2.8 |
Net service charge expense |
(0.2) |
(0.3) |
0.0 |
0.0 |
0.0 |
Total rental income |
47.9 |
72.1 |
97.3 |
103.1 |
107.1 |
Administrative & other expenses |
(9.3) |
(13.9) |
(16.4) |
(16.8) |
(17.3) |
Operating profit before investment property change in fair value |
38.7 |
58.2 |
80.9 |
86.4 |
89.9 |
Change in fair value of investment properties |
36.3 |
21.8 |
(231.6) |
29.8 |
55.7 |
Share of profit of jv |
15.5 |
43.3 |
13.0 |
0.0 |
0.0 |
Negative goodwill |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Operating profit/(loss) |
90.5 |
123.3 |
(137.7) |
116.2 |
145.5 |
Net finance expense |
(8.5) |
(13.0) |
(18.1) |
(15.5) |
(15.7) |
Profit/(loss) before tax |
82.0 |
110.3 |
(155.8) |
100.7 |
129.9 |
Tax |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Profit/(loss) for the period |
82.0 |
110.3 |
(155.8) |
100.7 |
129.9 |
Adjust for: |
|||||
Changes in fair value of investment property |
(36.3) |
(21.8) |
231.6 |
(29.8) |
(55.7) |
Share of changes in fair value of JV investment property |
(5.6) |
(31.1) |
(4.0) |
0.0 |
0.0 |
Negative goodwill |
(3.3) |
0.0 |
0.0 |
0.0 |
0.0 |
EPRA earnings |
36.8 |
57.4 |
71.7 |
70.9 |
74.2 |
EPRA cost ratio inc. direct vacancy costs |
16.8% |
16.5% |
17.5% |
16.2% |
16.1% |
Closing number of shares (m) |
810.7 |
1,239.9 |
1,242.6 |
1,242.6 |
1,242.6 |
Average number of shares in issue (m) |
652.8 |
975.2 |
1,242.1 |
1,242.6 |
1,242.6 |
IFRS EPS (p) |
12.6 |
11.3 |
(12.5) |
8.1 |
10.5 |
EPRA EPS (p) |
5.6 |
5.9 |
5.8 |
5.7 |
6.0 |
DPS declared (p) |
5.86 |
5.94 |
6.00 |
6.00 |
6.00 |
Total EPRA earnings (£m)/Total dividends paid (£m) |
104% |
108% |
101% |
95% |
100% |
EPRA NTA total return |
12.1% |
12.5% |
-16.0% |
8.9% |
11.3% |
BALANCE SHEET |
|||||
Investment property |
1,148.4 |
1,561.6 |
1,623.8 |
1,656.4 |
1,714.9 |
Associate |
130.3 |
177.1 |
50.1 |
0.0 |
0.0 |
Other non-current assets |
131.3 |
193.1 |
109.3 |
59.2 |
59.2 |
Total non-current assets |
1,279.7 |
1,754.7 |
1,733.1 |
1,715.6 |
1,774.1 |
Trade & other receivables |
3.1 |
1.86 |
5.0 |
5.2 |
5.4 |
Cash & equivalents |
19.6 |
51.20 |
17.5 |
22.0 |
19.8 |
Other current assets |
0.2 |
0.28 |
0.3 |
0.3 |
0.3 |
Total current assets |
23.0 |
53.35 |
22.8 |
27.5 |
25.5 |
Deferred rental income |
(12.1) |
(16.4) |
(16.4) |
(16.4) |
(16.4) |
Current tax liabilities |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
Trade &other payables |
(8.4) |
(10.7) |
(15.1) |
(15.6) |
(16.2) |
Total current liabilities |
(20.4) |
(27.0) |
(31.4) |
(32.0) |
(32.6) |
Bank borrowings |
(409.7) |
(348.5) |
(549.0) |
(509.5) |
(510.0) |
Interest rate derivatives |
(1.2) |
0.0 |
0.0 |
0.0 |
0.0 |
Total non-current liabilities |
(410.9) |
(348.5) |
(549.0) |
(509.5) |
(510.0) |
Net assets |
871.3 |
1,432.5 |
1,175.4 |
1,201.6 |
1,256.9 |
IFRS NAV per share (p) |
107 |
116 |
95 |
97 |
101 |
EPRA NTA per share (p) |
108 |
115 |
91 |
93 |
97 |
CASH FLOW |
|||||
Net cash from operations |
42.8 |
63.0 |
79.3 |
84.0 |
87.5 |
Acquisition & investment in investment property |
(570.0) |
(388.7) |
(321.1) |
0.0 |
0.0 |
Investment in associate |
(58.7) |
(3.5) |
140.0 |
50.1 |
0.0 |
Other investing activity |
(0.9) |
(10.6) |
0.0 |
0.0 |
0.0 |
Net cash from investing activity |
(629.5) |
(402.8) |
(181.1) |
50.1 |
0.0 |
Share issuance (net of costs) |
345.6 |
496.4 |
0.0 |
0.0 |
0.0 |
Debt drawn/(repaid) |
284.7 |
(61.1) |
200.0 |
(40.0) |
0.0 |
Interest paid and other financing costs |
(9.3) |
(12.7) |
(60.8) |
(15.0) |
(15.2) |
Dividends paid |
(34.9) |
(51.1) |
(71.1) |
(74.6) |
(74.6) |
Net cash from financing activity |
586.0 |
371.5 |
68.1 |
(129.5) |
(89.7) |
Change in cash |
(0.8) |
31.6 |
(33.7) |
4.6 |
(2.3) |
Opening cash |
20.4 |
19.6 |
51.2 |
17.5 |
22.0 |
Closing cash |
19.6 |
51.2 |
17.5 |
22.0 |
19.8 |
Debt as per balance sheet |
(409.7) |
(348.5) |
(549.0) |
(509.5) |
(510.0) |
Net debt |
(390.1) |
(297.3) |
(531.6) |
(487.5) |
(490.3) |
LTV |
34.0% |
19.0% |
32.9% |
29.6% |
28.8% |
Source: Supermarket Income REIT, Edison Investment Research forecasts
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