Stock Review

Westfield - one for the decades


  • Company: Westfield Group (WDC)
  • Recommendation: Long Term Buy
  • Price at Review: $16.90
  • Current Price: $12.17
  • Fundamental risk: 2
  • Share price risk: 3
  • Category: PROPERTY TRUST
  • Category: Financial Analysis

It's a pleasure to look back at the history of this Aussie success story. But is the future as bright?

There’s no guarantee that shopping centre owner and developer Westfield Group will continue to grow profits and shareholder wealth over the years. But if there is a surer bet on the stockmarket, we haven’t found it (yet).

There is one important caveat though, and it relates to the likely rate of growth after this year’s mega-merger of Westfield Trust, Westfield America Trust and Westfield Holdings, to form Westfield Group. Particularly for those subscribers who’ve held Westfield Holdings shares for many profitable years, it’s time to temper expectations. Over the next 20 years it would be nearly impossible for Westfield Group to grow at the rate Westfield Holdings did over the past few decades. After all, Westfield Holdings rose more than 100 times over the past 20 years, about 26% a year plus dividends. Frank Lowy would surely love to monopolise shopping centre development worldwide but even that couldn’t justify this $27bn group becoming a 100-bagger between now and 2024.

As we’ve said before, the merger means that trust investors will receive a little less income than they could otherwise expect, offset by some extra growth. Meanwhile, Westfield Holdings investors should expect the reverse but amplified—significantly less growth offset by much more income. But Westfield Group investors can still expect above-average results. After all, the Lowy family has Australia’s second-largest private fortune tied up, mostly in Westfield Group stock, betting on exactly that.

The combined group owns, at last count, almost $40bn of retail property. And its recently-successful $3bn bid for part of UK property group Duelguide plc shows just how significantly those assets are likely to grow over time—through acquisitions and organically. The group’s assets are split geographically as follows: 44% US, 38% Australia, 14% UK and 4% New Zealand. Such a level of foreign investment together with our positive recommendation might sound odd, especially given how quickly we’ve criticised ‘greedy’ property trusts and their rapid expansion into mostly-US assets. But Westfield has a 27-year track record in the American market and its 93% occupancy rate in the developed world’s most competitive retail market is industry-leading. This doesn’t guarantee success, but it does make it more likely.

And Australia, whilst offering less growth potential than elsewhere, still has its opportunities. The Bondi Junction redevelopment in Sydney’s eastern suburbs is a great example of how Westfield can extract even better returns by pushing a centre upmarket. There are numerous other opportunities to continue this work, particularly in centres with more affluent ‘catchment areas’.

It’s in this continual process of shopping centre redevelopment and expansion that Westfield’s most valuable talent lies. Zoning and planning restrictions are a minefield that Westfield has proven particularly adept at navigating successfully. That’s a huge competitive advantage over smaller and less-experienced competitors. It may lead to some unpalatable outcomes and, dare we say it, almost monopolistic behaviour, but there’s little doubt that Westfield’s willingness to wave its big political stick has been for the very significant benefit of its investors.

So, if Australian growth opportunities look meagre for a $27bn behemoth, where can future growth come from? There are still many opportunities in the fragmented American market, where ‘branded’ shopping centres don’t dominate the market as they do here. And in the UK, Westfield is trying to show the Poms that the indoor shopping centre experience is much more pleasant than ‘High Street’ retailing. Given that UK zoning laws are as restrictive as ours, that bodes well for a big, experienced player. And the group is considering expansion into mainland Europe, which would be its first foray into a non English-speaking market.

All this paves the way for many years of likely growth. Management has forecast dividends for the year to June 2005 of $1.03, putting the stock on a prospective yield of 6.5%. That will consist of a small, mostly unfranked dividend of perhaps 10 cents and the remainder via a trust distribution, with the tax-advantaged component forecast to be around 27%. The total distribution is forecast to grow to $1.10 in 2006.

While its yield is lower than some other property trusts, Westfield’s per-unit growth potential should be significantly more reliable. In other words, we expect distributions to rise nicely. At this price, investors can purchase an excellent business with first-rate management at a reasonable, but not cheap, price. It should provide a decent return over the years, although the ride might not always be smooth. The stock is up 10% since issue 162/Oct 04 (Long Term Buy—$15.37) and it remains a LONG TERM BUY.

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