BWP Trust (ASX:BWP) Share Analysis and Stock Report

Consolidation is the rule

BWP trust (ASX:BWP) draws 85% of its income from Bunnings, with the balance coming from other national tenants. The business model has been developed to meet Bunnings requirements, the result is long duration lease agreements with annual rent increases with 55% from CPI adjustments and 45% coming from fixed adjustments.

The Daily chart of BWP display the current period of price consolidation above the $3.60 support level with current resistance around $4.15, currently no trend is defined. Price movements remains close to the 200 and 20 day moving averages.

BWP (ASX:BWP) have released the 1H-23 report, we review the numbers and make our recommendation. The overall results are in line with earlier consensus, the Trust made one new acquisition during the reporting period, it seems management has taken steps to acknowledge the current rising interest rate and inflationary cycle. Rising costs in the construction industry has limited immediate expansion with only a small commitment to expand the Bunnings warehouse in Lismore at a cost of A$12.5m.

Net profit of A$113m resulted in a distributable amount of A$57.9m from a total income of A$78.6m remains in line, resulting in the distribution of 9.02 cents also remaining in line with the corresponding period, we note distribution has remained the same from FY2019 through out the covid period, at this point it is yet to confirm but it would be expected the final distribution will also remain around 9.27 cents.

The overall portfolio valuation remains solid at A$3.1b returning 3.9% rental growth for the 12 months to December 2022. The all important finance costs of $7.8 million were 4.0 per cent higher than the previous corresponding period, due to the weighted average cost of debt increasing from 3.2 per cent to 3.3 per cent due to higher interest rates. So much depends on this going forward a further significant rise in interest rates will place further pressure on finance costs and other operating expenses. The trust operates a hedging policy to offset interest rate movements, as of December 2022 the hedging cover was 53.3% of the gross borrowings of A$469.4m, with an average term to maturity of 4.1 years. 

During this 1H-23 period operating expenses increased from 2H-22 $4.3 million to $4.5 million in the current 1H-23, mainly due to increases in underlying administration costs, and higher insurance premiums.

Rent reviews are expected to contribute incrementally to property income for the half-year to 30 June 2023. There are 45 leases to be reviewed to the CPI or by a fixed percentage increase during the second half of the 2022/23 financial year. There are also four market rent reviews of Bunnings Warehouses that remain unresolved and are in the process of being finalized. Management has decided the primary focus for the remainder of the financial year will remain on filling any vacancies in the portfolio, moving ahead with progressing store upgrades, re-zonings and extending Bunnings leases through the exercise of options.

The Monthly chart shows BWP remaining with a primary UP trend. The current price remains within a large consolidation area from the 2020 high and midway in the ascending channel.

Directors have stated the Trust will continue to look for opportunities to acquire assets where there is good potential for value creation, the trust remains in a strong capital position to take advantage of discounted property coming to the market.

Summary

The management of the BWP trust (ASX:BWP) have taken the course to steady the ship during this rising interest rate and cost inflation cycle. Current debt facilities remain fluid with a limit of A$605m and A$469.4m drawn, with maturities spread over 3 years from 2025 to 2027 resulting in an impressively low gearing ratio of 15.3%.

We recommend BWP (ASX:BWP) as a Buy for members without exposure as a medium to long term investment.