Buy Nexus Select Trust Ltd For Target Rs.158 By JM Financial Services
Muted quarter with expectations of a stronger 2H
Nexus Select Trust (NXST) reported a muted quarter as consumption at its malls was impacted by the heavy rains, no weddings and lack of blockbuster content release. However, NXST has witnessed strong rebound in Oct’24 with consumption increasing 18% YoY and management expects the momentum to continue in 2HFY25. Retail NOI grew 5% YoY to INR 3.7bn, aided by contractual escalations and higher contribution from ticketing income. NXST has announced a distribution of INR 2 per unit (in line with FY25E guidance), of which c.72% will be tax-exempt. Furthermore, the recently announced acquisition in Bengaluru is expected to be closed in next few weeks and NXST has 1.3msf of active inorganic pipeline across 4 malls. We estimate NXST’s NOI to grow at 13% CAGR over FY24-27E (NDCF should also grow at a similar rate, w/o future acquisitions) and maintain a BUY rating with a Sep’25 TP of INR 158. Key risks are prolonged slowdown in consumption and higher interest rates.
* Consumption growth impacted by lower footfalls: Consumption in 2QFY25 was recorded at INR 29.7bn (flat YoY/QoQ) majorly driven by categories like electronics and jewellery. We highlight that footfalls at the malls fell 2% during the quarter and the performance of certain segments like F&B and Cinema was muted. However, with a sharp uptick in consumption during October with 18% MoM growth, management has maintained the annual guidance as they expect a better performance in 2HFY25. NXST announced a distribution of INR 3.05bn, translating to INR 2.0 per unit. Of the total, 56% will be in the form of dividend, 15% as principal repayments (both tax-free) and 28% in form of interest.
* Leased occupancy increased 40bps YoY, stable lease expiry profile: NSXT leased 0.22msf across 121 deals and re-leased 0.19msf with a re-leasing spread of 20%. Consequently, retail leased occupancy improved 40 bps YoY to 97.4%. NXST has an average of 0.8msf expiring till FY27. Furthermore, it has an opportunity to improve its in-place rentals as the MTM potential on the upcoming expiries is c. 20%. Trading occupancy remained stable at 96% with majority of the malls close to 100% occupancy levels. Office portfolio was stable, while the hospitality segment performance was robust.
* Closing-in on acquisitions; comfortable leverage levels: NXST has a strong balance sheet with a net debt of INR 36bn and a low LTV of 14%. Nexus will acquire 100% stake in Vega City Mall which has a leasable area ~0.45msf. The purchase consideration for this acquisition stands at INR 8.8bn (Enterprise Value) and company has raised the required funds to close the transaction and expects deal closure in the next few weeks. NSXT is awaiting regulatory approvals for the acquisition of two Grade-A malls in Hyderabad. It has also concluded due diligence for 0.3msf mall in North India and documentation is underway. The company has enough leverage headroom to acquire assets worth ~USD 1bn and is looking to a build a healthy pipeline for inorganic growth.
* Maintain BUY with a Sep’25 TP of INR 158: We have reduced our FY25/FY26 NOI estimates by 3% and roll forward to Sep’25 with a slightly lower TP of INR 158.
Key conference call takeaways:
* Economic activity was low during this quarter which was impacted, because of heavy rains across key cities like Navi, Mumbai, Delhi, Chandigarh, Shrad, lower wedding days coupled with no blockbuster movie releases
* However, consumption saw healthy rebound with malls recording their highest ever one day sales on 27th of October leading up to Diwali.
* October month saw 18% MoM growth in consumption with footfalls increasing 2% YoY and the growth was broad based across categories which were soft in 2Q.
* Company has also been generating additional income streams by optimally utilizing small open spaces. The ticketed events revenue has seen a jump of 6x in the first half of this year compared to last year
* Basis the uptick witnessed in October, management remains confident on meeting both the NOI and NDCF guidance
* Fast fashion players were sitting on old inventories which were impacting their performance. Now that inventory is refilled, expect the category performance to improve
* Marginal dip in NOI on sequential basis is on account of seasonality and higher cash tax.
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