Why Vukile is still a buy

If you don’t own shares in Vukile Property Fund you’ve lost out on a total return of nearly 63% in the year to end-October.

Granted, most local real estate investments trusts (Reits) have had a strong recovery in their share prices this year. But retail-focused Vukile, whose R40bn mall portfolio is split roughly 40/60 between South Africa and the Iberian peninsula, has comfortably outperformed the South African listed property index’s 52%.

That places the stock among the sector’s top five performers over one year. The picture looks equally impressive over three years, with Vukile again among the top five with an annualised 25% total return, SA Reit Association figures show. 

The good news is that despite a slight pullback in its share price in November, in line with the sector, Vukile appears poised for a further rerating.

That comes on the back of better than expected dividend growth numbers declared last week. Vukile’s interim cash dividend of 55.2c a share for the six months to end-September is up 6% year on year.

The 6% increase comes off an already high base after dividend payouts rose 10% for the 12 months to end-March, which places the company as one of just a few Reits that have already returned to inflation-beating growth. 

The above-market performance has been underpinned by a robust operational performance in both Vukile’s South African and Spanish mall portfolios. 

Trading density (sales per square metre) in its 33 South African shopping centres — many of which are in townships, rural areas and CBDs — grew by 4.2% in the six months to end-September.

Vacancies remained low at 1.9% while rental reversions on lease renewals have turned positive at an average 1.6%. The portfolio’s cost-to-income ratio is down to 15%, the lowest level in a decade. 

Vukile’s 15 Spanish shopping centres, owned through its subsidiary Castellana Properties, has delivered an equally strong performance.

The portfolio has a marginal 1% vacancy and achieved a substantial 45.5% upward rental reversion on lease renewals.

The Reit has had a busy year in terms of corporate action. In September it entered Portugal for the first time via the acquisition of a blue-chip-tenanted portfolio of three shopping centres in Lisbon and Porto for €176.5m. The deal is expected to deliver 10%-plus cash-on-cash yields in euros.

The three malls are RioSul in Seixal, south Lisbon; LouresShopping, which is located in a strong growth node in the north of Lisbon; and 8ª Avenida, the only mall in São João da Madeira, an industrial and manufacturing town south of Porto.

In October, Vukile sold its 28.8% stake in Spanish-listed Lar España for €200m at a €70m capital profit, of which the proceeds will be used to further bulk up the Iberian portfolio.

Curwin Rittles, investment analyst at Metope Group, says the investment case for Vukile remains compelling as the company continues to scale up its exposure to Spain and Portugal. 

“The key opportunity lies in the Iberian expansion plans, where the company has a strong track record of allocating capital effectively,” he says.   

Rittles says Vukile’s attraction for South African investors is that it offers the best of both worlds: its portfolio is well positioned to continue capturing growth in a hard currency region while it also benefits from a strengthening economy and improved consumer sentiment in South Africa.

Evan Robins, portfolio manager at Old Mutual Investment Group, shares this view. “Vukile is no longer cheap, but its longer-term outlook remains favourable.”

Given that property in Spain and Portugal already makes up more than half of Vukile’s asset base (and the proportion is growing), Robins says investors are ultimately taking a view on the continued outperformance of Iberia. 

Like Rittles, Robins also cites management’s capital allocation ability as a strong suit. He says the Reit, which was the first local property player to target Iberia, has done particularly well in its offshore expansion drive — not only in terms of geographic selection but also through successfully orchestrated redevelopments of the assets it bought in Spain.   

He adds that Vukile’s South African strategy, with a bias to the high-growth lower-income market, has also paid off handsomely, delivering above-market returns. 

Ridwaan Loonat, senior property analyst at Nedbank CIB, agrees that Vukile is well positioned for growth in the medium term. He says the company has enough liquidity (R6.4bn in cash and undrawn facilities) to capitalise on further Iberian expansion opportunities. 

Another positive is that management has scope to increase its dividend payout ratio as it has targeted a range of 80%-85%, ahead of the 79% adopted for the year to March.   

Analysts say the downside risk to Vukile’s outlook centres largely on macroeconomic factors. For example, if rate cuts fail to materialise as quickly as expected, deals may prove less attractive.

The stock’s offshore exposure may also mean that earnings could be affected by a potentially stronger rand.

Meanwhile, Vukile CEO Laurence Rapp is confident that the company will be able to acquire at least three more Iberian shopping centres in the next two to three months — one in Spain’s Valencia province and two in Lisbon. He says Portugal’s fragmented retail property sector is ripe for consolidation. “We still see lots of runway for deals in Portugal,” he says.

Discussions to acquire Bonaire shopping centre, Valencia’s largest mall, from Unibail-Rodamco-Westfield have been extended to early next year due to damage caused by recent floods.

Rapp notes that if all proposed deals are clinched, Vukile would have added six malls worth about R7bn to its Iberian portfolio in the year to March, taking its Spanish and Portuguese footprint to about 67% of total assets. “This will be a year of huge growth for us,” he says.   

Rapp’s bet on Iberia comes on the back of the region’s continued outperformance of the eurozone in terms of consumption and economic growth.

Spain had GDP growth of 3.4% in the third quarter year on year, way above the eurozone’s 0.9% over the same period, according to Eurostat statistics.

Foreign tourist arrivals in Spain continue to rebound, which indirectly boosts retail sales. An estimated 91-million international visitors are expected in 2024, an increase of 7% year on year.   

Still, Rapp has no plans to exit South Africa and continues to invest locally in redevelopments and acquisitions. This includes a R200m redevelopment of the recently acquired Mall of Mthatha in the Eastern Cape, which Rapp says should deliver a yield of at least 10%.

Bedworth Centre in Vanderbijlpark is undergoing a R141m upgrade that will introduce several new tenants, including Boxer and Shoprite. Construction is also under way at Thavhani Retail Park in Thohoyandou in Limpopo, where Vukile acquired a 33% stake for R101m on an 8.6% yield.

“We have never sold local assets to reinvest in Spain and Portugal and we don’t intend to start doing that,” says Rapp.