Hyprop (HYP) – Short-term pain, long-term gain

While it could be argued that HYP has made some questionable decisions lately – whether it be the decision not to pay interim distributions, the DRIPs, the price paid for Table Bay, the amount of leverage or getting too close to its interest cover ratio (ICR). Having followed HYP for several years, we believe that operationally, it has a good management team; however, from a corporate finance perspective, some of its decisions have been questionable, and shareholder value has been destroyed. We believe if you are looking at HYP as a short-to-medium term investment you should maybe give it a skip, if you are looking at it as long-term investor, and are willing to wait it is worth consideration. Besides SSA, which is underperforming and is an issue, its performance in the other divisions has been good. Hyprop’s assets are high quality, especially those in Eastern Europe. We believe Table Bay Mall was a good buy, even though it will decrease DIPS in the short- to medium-term.

We have determined the value of Table Bay Mall separately (not integrated into our current DCF model), and in our view, the purchase adds R310m in value to shareholders. Our calculations and estimated impact on DIPS are outlined on pages 6 and 7.

From an operating cost perspective, HYP has controlled costs better than its peers under our coverage (GRT, RES, FFB). It has recognised strong revenue growth, while providing tenants with an improving trading environment, which will support future rental growth. The risks lie on the financing side. The LTV will temporarily increase beyond 40%. The ICR is likely to near, if not breach, 2x. In our view, the funders will make concessions about dipping below 2x, as it is in their best interest to allow the breach. The expiration of hedges in Q1 and Q2 2025 will increase finance costs. While we believe the operational performance and potential sale of non-core assets should minimise the negative impact of increased costs, it will put further pressure on the ICR.