Is there value in the Scentre share price?

The Scentre Group (ASX: SCG) share price has slumped 44% lower this year. Could there be hidden value in the ASX REIT today?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

The Scentre Group (ASX: SCG) share price has been an interesting one to watch in 2020.

The S&P/ASX 200 Index (ASX: XJO) has bounced back strongly since the March bear market. Although the Scentre share price has partially recovered from its March lows, this has been to much lesser degree than the ASX 200.

I thought I'd take the chance to dive into what exactly Scentre does and how the Scentre share price is performing in 2020.

What does Scentre Group do?

Put simply, Scentre is the owner and operator of Westfield shopping centres across Australia and New Zealand. It is also an Australian real estate investment trust or 'REIT'.

This means that, under normal circumstances, Scentre is a strong ASX dividend share. REITs are required to payout at least 90% of yearly profits to shareholders under the trust structure.

Scentre is heavily concentrated in the retail sector given its $56 billion in retail real estate assets under management.

How has the Scentre share price performed this year?

Unfortunately for investors, Aussie shopping centres have not been a great investment this year. The Scentre share price has fallen nearly 44% this year to just $2.15 per share. 

While retailers like JB Hi-Fi Limited (ASX: JBH) have soared in value, this has been predominantly due to significant online sales.

Without heavy foot traffic, it stands to reason that Aussie shopping centres will see a fall in income. That's because fewer shoppers means tenants (i.e. retailers) may be unable or unwilling to pay their usual rent throughout the coronavirus pandemic. This translates into less rental income for Scentre and lower free cash flow available for dividend payments.

Currently, no one knows what will happen in the next 3 months, let alone the next 3 years. So how can we say whether the Scentre share price is good value right now?

Are there better-priced REITs on the ASX?

These are very unusual times, particularly given the restrictions that still exist on the use of many public spaces. If an ASX share has fallen 40% lower, I tend to think there are smart investors who possibly know something I don't.

The best option in my books is to look at relative value. The COVID-19 restrictions should (in theory) affect all retail REITs. Therefore, comparing the Scentre share price against its peers can help tell us if its good value.

I think Vicinity Centres (ASX: VCX) and SCA Property Group (ASX: SCP) can be regarded as fairly comparable retail REITs to Scentre Group.

The Scentre share price trades at a price-to-earnings (P/E) multiple of 9.67 with an 8.93% dividend yield. It also boasts a market capitalisation of $11.16 billion which is larger than both Vicinity ($6.5 billion) and SCA ($2.4 billion).

SCA Property shares trade at a relatively more expensive P/E ratio of 12.98 while Vicinity trades at a lowly 4.37.

I don't think dividend yields are really worth comparing given the uncertainty around FY20 distributions at the moment.

Foolish takeaway

From a quick analysis, I don't think the Scentre share price is a great value buy right now. Retail real estate is one of the sectors that could continue to be challenged by COVID-19 restrictions for quite some time.

It appears that the Vicinity Centres share price is relatively cheaper than Scentre. Combined with the relative uncertainty over dividends this year, I don't think I'll be buying Scentre shares at $2.15 per share.

Motley Fool contributor Ken Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Shopping Centres Australasia Property Group. The Motley Fool Australia has recommended Scentre Group. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on REITs

a man sits on a ridge high above a large city full of high rise buildings as though he is thinking, contemplating the vista below.
REITs

2 ASX REITs I'd buy today for passive income

Commercial property is a great place to look for investment income and stability.

Read more »

A smiling woman puts fuel into her car at a petrol pump.
REITs

An exciting REIT for real estate investors to add to their watchlist

Have you heard of this ASX REIT?

Read more »

Two kids are selling big ideas from a lemonade stand on the side of the road for cheap!
REITs

Can a massive share buyback save the Dexus stock price?

Dexus investors have been waiting a long time.

Read more »

A mature aged man with grey hair and glasses holds a fan of Australian hundred dollar bills up against his mouth and looks skywards with his eyes as though he is thinking what he might do with the cash.
Dividend Investing

I'd buy 7,844 shares of this ASX stock to aim for $2,000 annual passive income

This business is providing very pleasing distributions…

Read more »

REIT written with images circling it and a man touching it.
Earnings Results

Income investors are watching these 3 ASX REIT results. Here's the details

Arena leads the way as the other 2 ASX REITs play defence.

Read more »

A service station attendant crosses his arms and smiles towards the camera with a backdrop of petrol bowsers and a drive-through facility.
REITs

Broker tips 16% upside for this ASX REIT

This REIT, which owns service stations and retail assets, could be positioned for growth in 2026.

Read more »

Three happy multi-ethnic business colleagues discuss investment or finance possibilities in an office.
REITs

Why 2026 could be the year of the REIT rebound

The case for REITs in 2026.

Read more »

Magnifying glass in front of an open newspaper with paper houses.
Earnings Results

Why these 2 ASX REITs are in the red after today's results

These 2 ASX REIT shares fall as their half-year results fail to impress investors.

Read more »