Vukile has undertaken two equity raises and announced a DRIP without being in financial distress. The propensity of management to issue scrip may suggest Vukile is expensive, in our view. As its distribution yield is significantly lower than those of its peers, this implies the market is pricing in growth.
When we examine the cash flows of Vukile and Castellana to assess growth, we find that Castellana’s cash flows in EUR were flat across FY22, FY23 and FY24. In the South African segment, we see declining cash flows and FFO, which has fallen 41% since FY21. Most of the good performance in Spain has been generated by LAR España – which we noted was a good investment in our initiation – as well as ZAR weakness.
While vacancies are low and there are positive reversions, cost increases are growing in line with or faster than revenue. While the number of properties and GLA has been decreasing, property and administrative costs have risen. In additional, the full impact of higher finance costs is still to be felt in FY25. Using FY24 and 1H24 to back out 2H24, we see that cash flow from operations (after interest) dropped 27.4% from 1H24 to 2H24. Our cash flow generation concerns are further validated by the ICR dropping from 3.4x in FY22 to just 2.3x in FY24.
Vukile has opted for an early refinancing of the Castellana debt expiring in FY26, and its percentage of debt hedged has dropped to 58% as the hedges expired. This will likely increase finance costs further in FY25.
The LTV has declined to 39.9%, as Vukile has not facilitated a purchase with the funds raised; however, should a large purchase occur, the LTV will increase substantially, and with it finance costs.