Supermarket Income Reit raises dividend despite challenges

Supermarket Income (SUPR) swung to a hefty pre-tax loss in its full year due to a valuation hit caused by high inflation. However, the company opted to increase the dividend by 1 per cent to 6p a share after its net rental income surged by a third, largely due to the acquisition of nine supermarkets over the reporting period.

Chief investment officer Steven Noble told Investors' Chronicle that the company isn't likely to repeat this move over the next 12 months. One reason for this is that the money used to fund those acquisitions was a one-off windfall from its sale of 21 supermarkets to Sainsbury’s, from which it netted £431mn. By contrast, the company now has much less cash to spare, with net debt much higher than last year.

Another reason Supermarket Income may struggle to grow at the same pace is that, as Noble puts it, “the total size of the market has been declining” as supermarkets look to buy back some of their own shops. Private equity is also muscling in on the sector, which could spell trouble for SUPR as it competes against buyers with deeper pockets and a greater appetite for risk.

However, we do not see these bear points as justifications for SUPR’s discount to net asset value. The money pouring into the sector implies its valuations will return. And, even if it cannot grow by acquisition, its long leases to blue-chip tenants – Tesco (TSCO), Sainsbury’s (SBRY), Morrisons, Asda, Aldi, Waitrose and Marks & Spencer (MKS) – means its rental growth for years to come is baked into its leases. This gives us confidence that it can keep growing the dividend as planned and that the share price will respond. Buy.

Last IC View: Buy, 123p, 14 Jul 2022