BWP Trust (BWP) - NEUTRAL - Analyst Research

COMPANY DATA

Date of Report	ASX	Price	Price Target	Analyst Recommendation
06/09/18	BWP	A$3.29	A$3.00	NEUTRAL

Date of Report

06/09/18

ASX

BWP

Price

A$3.29

Price Target

A$3.00

Analyst Recommendation

NEUTRAL

Sector : Real Estate	52-Week Range: A$2.87 – 3.35
Industry: A-REIT	Market Cap: A$2,113.4m

Source: Bloomberg

Company Description

INVESTMENT SUMMARY

We rate BWP as a Neutral for the following reasons:

Stable and sustainable distribution yield of ~6.1%.
Trades on a ~15% premium to NTA.
Strong and experienced management team.
WES stake in BWP (24.8%) provides security against risk of non-renewal of leases by Bunnings.
High quality property portfolio with long weighted average lease expiry, strong lease covenants, and high occupancy.
Low interest rate environment is encouraging for the housing industry and hardware sales however any sudden increase in interest rates provides risk to both revenue and debt financing costs.
Solid balance sheet with low gearing levels.
Risk of poor execution in redevelopment of assets vacated by Bunnings to other uses.

We see the following key risks to our investment thesis:

Any slowdown in demand and net absorption for hardware space.
Persistent lower inflation (and deflation) affecting retailers.
Economic conditions affect property fundamentals such as values (cap rates and rental growth), vacancies, retail activity (and hence demand for space at big-box retail sites).
Risk of non-renewal of leases by Bunnings Group.

ANALYST’S NOTE

BWP Trust (BWP) recorded robust FY18 results despite adverse impacts of Bunnings (Wesfarmers Ltd, ASX: WES) vacating various locations.

Total revenue of $153.4m was up +0.6% on the previous corresponding period (pcp) and distributable profit increased to $114.4m driven by rental growth from the existing property portfolio.

On uplift of its NTA to $2.85, BWP currently trades at a premium of +15.4%. Despite BWP being well placed with:
1. Stable demand for their core portfolio of Bunnings assets; and
2. Balance sheet strength and flexibility,

We maintain our Neutral stance given:

1. Uncertainty regarding few vacated sites;
2. Potential rate hikes which may affect bond-proxy stocks and their yield and debt books; and
3. BWP trades on a premium to NTA but offset by attractive dividend yield of ~5.5%. Neutral.

Stable growth highlighted in FY18 results, despite headwinds. BWP reported distributable profit of $114.4m, up +1.7% from pcp, with distributions increasing +1.7% to 17.81 cpu, driven by strong rental growth in the property portfolio.
FY19 outlook – maintain distribution growth. Management has reiterated that it expects to maintain distribution growth at +1.7% despite transition and divestment in its core Bunnings portfolio. Whilst management has noted that there may be some impact on overall rental income as stores are transitioned to alternative uses, capital profits are expected to be used to support distributions as required.
Rental growth remains stable and lease expiry terms increase. BWP saw like for like rental growth of +2.5%, contrary to the four market rent reviews finalised during the period which saw weighted average +4.1% increase in annual rent. Weighted average lease expiry increased to 5.0 years.
Revaluations of property portfolio increase NTA value. BWP’s entire portfolio was revalued and saw an uplift of ~$70m to $2,352.7m. The uplift was driven by rental income growth and average cap rate compression across the portfolio. BWP’s NTA increased +4.0% to $2.85, from FY17. One divestment was carried out by BWP in 1H18 in the Dangenong site, sold for $16.4m and four properties have been identified and scheduled for settlement (Altona, Burleigh Heads, Epping & Oakleigh South).
Reasonable gearing + Debt levels. BWP announced a new $100m forward start 5-year term debt facility with Sumitomo Mitsui Banking Corporation, which will commence in May 2019. Further, existing bank facilities have been negotiated to be extended an extra year. Gearing on a debt to total assets basis fell to 19.3% (relatively stable from 20.4% in FY17). Interest cover ratio (EBIT/interest expense) was strong at 6.5x, improving from 6.3x in FY17.
Four properties underway for divestment. Management has released information regarding the vacant properties which arose following Bunnings’ decision to move to ex-Masters locations. Out of the four, three properties (Altona, Burleigh Heads and Oakleigh South) are under unconditional contracts, with settlement scheduled during FY19. The Epping property is now under a conditional contract to sell in February 2019.

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Figure 1: BWP Financial Summary

Source: BTIG, Company, Bloomberg

COMPANY DESCRIPTION

BWP Trust (BWP) is a real estate investment trust focused on operating, owning, and divestments and acquisitions of large format retailing properties, in particular, Bunnings Warehouses, leased to Bunnings Group Ltd (‘Bunnings’). Bunnings is the leading retailer of home improvement products in Australia and New Zealand and is a major supplier to builders and trades people in the housing industry. BWP is managed by an external responsible entity, BWP Management Ltd who is paid an annual fee based on the gross assets of BWP. Both Bunnings and BWP Management Ltd are wholly-owned subsidiaries of Wesfarmers (WES), one of Australia’s largest listed companies. WES owns ~24.75% of BWP. Currently, BWP is the largest owner of Bunnings Warehouse sites, with a portfolio of ~80 stores. Eight properties have adjacent retail showrooms leases to other retailers. BWP also owns one stand-alone showroom property. The assets have a current value of ~$2,312.0 million, WALE of ~4 to 5 years, 99.9% occupancy rate.

Recommendation Rating Guide

Recommendation Rating Guide	Total Return Expectations on a 12-mth view
Speculative Buy	Greater than +30%
Buy	Greater than +10%
Neutral	Greater than 0%
Sell	Less than -10%

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BWP Trust (BWP) – NEUTRAL

COMPANY DATA

INVESTMENT SUMMARY

ANALYST’S NOTE

COMPANY DESCRIPTION

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BWP Trust (BWP) – NEUTRAL