Despite its share price trading more or less sideways over the last couple of months, major broker Goldman Sachs believes retail property group Home Consortium (ASX:HMC) is a buy.
Goldman reinstated its coverage over the company last week and has slapped a 12-month price target of $4.20 on the company’s shares. This would represent more than an 8% upside on the company’s current share price of just $3.83.
What is Home Consortium?
Home Consortium manages a retail and commercial property portfolio valued at over $1.7 billion. After the Masters home improvement brand went belly-up back in 2016, Home Consortium purchased the Masters property portfolio from Woolworths Group Ltd (ASX:WOW). The group renovated the old Masters sites and transformed them into multi-brand shopping centres serving suburban and regional areas.
It has a number of leading Australian retail brands in its centres, including Woolworths, Coles Group Ltd (ASX:COL), Harvey Norman Holdings Limited (ASX:HVN), Chemist Warehouse, Spotlight, and many other sporting goods and outdoor brands. Its property portfolio currently consists of 35 centres spread across 5 Australian states.
What does Goldman like about it?
Home Consortium recently established the HomeCo Daily Needs REIT (ASX:HDN). The new REIT property portfolio is focussed primarily on more defensive retail brands that would generate lower churn, like supermarkets, large format retail shops, and health and wellness centres. The REIT offers a more dependable income stream and has a lower gearing ratio, meaning it is less risky.
Home Consortium is also planning on creating another standalone REIT for its health, wellness and government portfolio in the first half of 2021. It recently acquired 6 health, education and government properties at a cost of $131 million, bringing the total value of properties in this asset base to more than $400 million.
Goldman believes that the creation of the new Daily Needs REIT, as well as the possible establishment of the Health, Wellness and Government REIT, leaves the core Home Consortium business more capital light with greater earnings potential.
What are the risks?
Despite its bullish outlook on the company’s shares, Goldman does flag a number of potential risks to investing in Home Consortium.
Key among them is the company’s obvious exposure to the retail property market. An economic slowdown or declining consumer confidence can both hurt the brick-and-mortar retail sector leading to both lower property values and rents. This could be a key concern for Home Consortium over the next 12 months as the market closely monitors how the retail industry recovers from the damage inflicted by COVID-19.
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Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of COLESGROUP DEF SET and Woolworths Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.