Growthpoint’s results were disappointing overall, with the main detractors from DIPS being SA operations (-4.3%), GWI (-3.8%), and GOZ (-2.1%). Management is guiding for further decreases in DIPS in FY25.
As we discuss in this report, we believe distributions are not at a sustainable level and are effectively being funded by debt and equity. We think it is likely that management will pay guided distributions, but the impact of this on future growth is muted. We have forecasted what in our view is sustainable, and this differs from guidance. We calculate the gap between distributions paid and operating profits as R10.9bn over the past five years, with R20.3bn in debt raised, R8.3bn in equity and net investments of only R17.2bn. This means the excess funding raise not invested totals R11.4bn. Operating profit growth since FY17 has averaged just 1.5%, with the highest growth in FY21 at 6.7%.
GRT’s yield on book value (asset efficiency) is at a 10-year low at 7% (the average from 2015-19 was 8%) and has recently been declining. The profit generated from operations fell by 23.6% from FY15 to FY24, yet property assets increased 62% over the same period. The biggest reason for the inefficiency is that operating costs keep rising ahead of revenue growth. For example, property costs rose 16.7% y-y in FY24, and administrative costs climbed 21.1% y-y in FY24. At the same time, from a financing perspective, due to high LTVs, costs continue to increase, rising 21.85% y-y in FY24. The underlying LTV of 52.4% (on cost, excluding cumulative FV adjustments) is climbing toward its pre-2020 high, due to the unsustainable distributions.
While this report does not go into detail on NewRiver, our initial view is that the offer price is not very appealing at R14.55, as it would be value destructive for GRT shareholders.