The forecast of 20.6 cents FFO is predicated, in part, on "current interest rate expectations". What are those exactly, Dexus? Some are predicting no change to the cash rate, whereas (today) cash futures are predicting between 50 to 75 basis points reduction in cash rate over the coming 12 months.
https://www.asx.com.au/markets/trade-our-derivatives-market/futures-market/rba-rate-tracker
Tarvold: Brokers who predicted an increase in FFO might have pencilled in three .25% cuts to the cash rate.
Hopefully, someone on the earnings call pins DXC down on "current interest rate expectations".
Chris60: Current 10-year Aus govt bond yield is 4.05%. The DXC earnings yield needs to trade above that; somewhere between 2 and 4%, where 2% premium is relatively skinny (expensive) and 4% is relatively high (cheap). Currently, DXC is trading on a FY25 7.2% earnings yield (20.6/286), which equals a 3.15 bps premium to the 10-year gvt bond yield. So, probably “about right”, from that perspective. Though, with most market participants obsessed with capital appreciation and not income, they would be focussed on the increasing evidence that the NTA may not decrease any further. With DXC trading at a circa 20% discount to NTA, cap rates peaking this cycle, and a decent yield premium on the 10 year, it’s not obvious that the DXC share price will decrease from here (actually, probably more asymmetric risk to the upside).
On the downside, cost of debt increased from 3.7% to 4.2%. Still a way to go before it reaches 6.35% (200 bps above cash rate). So, if the cash rate does not decrease over the next 24 to 36 months, the roll off of the hedging contracts will be an ongoing headwind to earnings. With no cash rate reductions, my basic calculations suggest DXC should be able to maintain FFO per security at circa 21 cents for the next 3 to 4 years, after which some growth will eventuate. If the cash rate decreases, expect increases in FFO earlier.
A question mark is the Glass House Mountains redevelopment. Estimated yield on cost (stage 1; $20m) of 5.5% to 6%. The estimated yield on cost to buy DXC shares on the market is 7.3% with zero percent execution risk; it would take, say, 3 to 4 months to deploy $20m of a buy-back, but stage 1 isn't expected to be completed until the middle of the first half of 2026. So, a buy-back is better on all fronts. Ideally, DXC would give a better pitch on why this development is a good idea right now.
(20min delay)