GRIT released its FY 19 results today, which were below our expectations. PAT grew 1% to US$26mn, impacted by a threefold increase in tax to US$13mn. This was attributable to a fourfold increase in deferred tax in the period, which resulted in a 34% effective tax rate (16% in FY 18). The other key divergence from our US$75mn PAT estimate was due to a lower fair value adjustment from properties at US$21mn compared with our US$44mn estimate.
Grit will hold a general meeting on 11 October to discuss with shareholders its intention to raise equity by issuing 280mn shares on the London Stock Exchange (LSE), as detailed in our results preview. With the issue constrained to a minimum size of the last published NAV per share, this brings the potential equity raised to US$370mn.
We have a Hold recommendation on the stock, which we will re-evaluate on further analysis of the numbers.
Total return below guidance due to listing costs. Based on the LSE listing price of US$1.43 and EPRA NAV growth of 1% yoy to US$1.47 (NAV growth: -2.7% yoy to US$1.32), the total return in FY 19 was 9.5%, which was under the 12% total return guidance due to the impact of listing costs and exchange rate movements. Excluding the impact of listing, EPRA NAV would have grown 4% to yield 12.5% total return (8.5% dividend yield plus 4% NAV growth).
Gross rental income grew 36% yoy to US$43.6mn, slightly above our US$43.1mn estimate. This was due to additional rental income received from 5th Avenue (Ghana) and Acacia Estate (Mozambique), which were acquired during the year, as well as the impact of acquiring an additional 25% stake in Zambia's Mukuba Mall (from 50% previously).
Property operating expenses increased by 37% yoy to US$10mn, above our US$9mn estimate due to the impact of additional hires to effect Grit’s change in strategy of having active management on site. This increased property opex intensity to 24.4% from 22.8%.
Administrative costs grew 4% to US$15mn compared with our US$11mn estimate. This was due to an increase in costs related to compliance and reporting requirements from the LSE listing (external valuation costs, increased cost of non-executive directors and additional audit fees). This also increased the ratio of administrative costs to total assets to 1.7% in FY 19 from 1.3% in FY 18.
Fair value adjustments on investment properties grew 55% yoy to US$21mn, lower than our US$44mn estimate. This was due to lower-than-expected valuation adjustments in the retail segment, which only grew by US$0.6mn. We note that there was a negative fair value adjustment in Zambia (-US$6mn), implying weak market sentiment in retail assets in the country.
Weighted Average Cost of Debt (WACD) grew 6.44% in FY 19 (from 5.75% in FY 18) due to increased Libor rates over the period, while the weighted average maturity decreased to 1.8 years in FY 19 from 2.3 years in FY 18. Grit raised an additional US$40mn in 2019 through refinancing existing facilities and new debt acquired. In September, the Group consolidated a number of its debt facilities into a single US$140mn facility from Standard Bank South Africa, which cross-collateralises the Mozambique asset portfolio for a four-year term bearing interest at 3 Month Libor +5%. The resultant interest cost saving on this refinance is 1.14%. In addition, the board approved in August an extension of Mara Delta (Mauritius) Properties' Euro facility for EUR22.3mn to March 2022 from March 2020. The interest rate will increase to 4.00% from 3.75%. Management expects these changes to decrease the WACD to 6.0% and increase maturity profile to 2.6 years.