Here are 5 Reasons to Buy Shares of Simon Property Group (SPG), According to Morgan Stanley
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Morgan Stanley analyst Richard Hill has reiterated an “Overweight” rating and $135 price target on Simon Property Group Inc (NYSE: SPG) as he believes that the company can benefit from the shake-up in retail given its strong balance sheet and ability to self-fund “(re)development costs.”
In this context, Hill highlights five reasons to invest in SPG shares. First, there are multiple drivers of earnings growth, the analyst notes in today’s memo.
“We see 2020 as the earnings trough as SPG lost ~20% of NOI, or $1B,vs.2019, with nearly 40% driven by rent abatements. This is an effective pull-forward of the rationalization in retail real estate that we have been expecting and a de-risking of cash flows. Indeed, our modelling assumes that there is a permanent impairment in total NOI of -10% in 2025 after considering: 1) $360mn from the closing of the TCO acquisition and increased retailer negotiating leverage, 2) $60mn from $800mn of re/development,and 3) $55-75mn from retailer investments. In other words, we are giving no credit for future growth in their core portfolio — we assume $1bn of NOI goes away and never comes back,” Hill says.
Secondly, a higher multiple is warranted as the economy improves post-pandemic. Based on a scenario where a 10-yr Treasury rate of 2%, an equity risk premia of 4.22% and pre-covid rolling 5-year beta that averaged 0.75 from 2016 to 2019, Hill sees a value of $154 per share, compared to the MS’ current PT of $135.00.
Thirdly, the company should benefit from the ongoing recovery in retail fundamentals, driven by the faster-than-anticipated vaccine rollout and stimulus checks.
“The Softlines retail team’s data shows a gradual recovery in N.A. Total Discretionary Retail Store Traffic (- 34% Mar Week 4 (on a 2-yr stack) vs. -53% Feb and -56% Jan), driven by plateauing Covid-19 infections, ramp in vaccinations, and stimulus checks. Total company sales also appear to be recovering (-5% y/y 4Q20), though eCommerce continues to make an outsized contribution (+49% y/y 4Q20) while store revenue remains under pressure. Looking ahead, focus is on recovering lost revenue, profitability,and where margins settle once sales return to pre-Covid levels,” Hill adds.
Moreover, the SPG screens as a cheaper option compared to other retailers, the analyst notes in the context of the 4th reason to buy SPG. The company has generated +37% total returns YTD, but the stock price still stands ~20% below it's pre-covid level and almost 50% off the record highs set in 2016.
“Some of this is for good reason given the secular headwinds facing retail real estate, but the current multiple of 12.1x is below the 5-year average of 12.9x whereas REITs and the S&P are trading well above their respective 5-year averages. We note that a 15x multiple on 22e FFO implies a stock price of $146 vs $116 where it's trading today.”
Finally, arguably the most interesting driver of growth for SPG is e-commerce. During the Q4 call, the company said "these retail investments is all of these brands generate $3.5 billion in digital sales and all we have to do is look at how e-commerce brands are being valued today."
Hall expects SPG to continue investing and growing its ecommerce business.
Shares of Simon Property Group closed at $115.00 yesterday.
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