BWP Group’s (ASX: BWP) fiscal 2025 distributable earnings increased by 11% to $133 million due to the Newmark acquisition and solid rent growth. Earnings per security increased a more modest 3% to 18.64 cents because of equity dilution from the all-scrip takeover.

Why it matters: A solid result close to our expectations. We downgrade our fiscal 2026 distributable earnings forecast by 5% as several properties will be vacant temporarily while being upgraded for Bunnings and other tenants. Development work is expected to decrease significantly in fiscal 2027.

  • Management will use debt to prop up fiscal 2026 distributions with an $6 million capital profits release to maintain an upward trajectory. We have no problem with this, given the balance sheet is in excellent shape, with pro forma gearing of just 23.2%.
  • Like-for-like rent growth averaged 3.0% in fiscal 2025. We expect growth to slow marginally over the medium term, given that more than 40% of rents are inflation-linked and inflation is slowing. Most remaining leases grow rents at a fixed rate, averaging 3%.

The bottom line: We maintain our $3.80 per security fair value estimate for no-moat-rated BWP Group. The stock is fairly valued, offering a forward distribution yield of 5.2%.

  • We forecast distributions to grow by about 2% per year on average over the next five years as solid rent growth is tempered by rising costs of debt.
  • The threat of Bunnings vacating older stores has been removed for the medium term by the recent leasing agreement, which results in minimal Bunnings lease expiries until fiscal 2033. Weighted average lease expiry was 4.5 years on June 30 and increased to 7.7 years following the agreement.

Key stats: Net tangible assets increased 5% to $3.98 per security in the year to June 30, 2025, mainly on rising property values. However, NTA falls to $3.85 per security after adjusting for the management internalization payment in early fiscal 2026.

Solid outlook as rent uplifts and management internalization drive distribution growth

For over 20 years, BWP Group (formerly BWP Trust) has consistently applied a strategy of generating rental income from long-duration leases over warehouse properties predominantly tenanted by home improvement retail business, Bunnings. Although BWP Group is proposing to transition some Bunnings Warehouse stores to alternative uses, the strategy is to have 80%-90% of rental income from Bunnings. Wide-moat Wesfarmers owns 100% of Bunnings and 23% of BWP Group.

Concentration risk from having Bunnings as its primary tenant is less of a concern given the benefits from having a strong and growing tenant. Bunnings is well managed and dominates the industry in Australia. Also, home improvement retailing is typically resilient to the business cycle. We also like that Wesfarmers divested its Australian grocery business, Coles, and sold its home improvement business in the UK, making Bunnings its key growth business. Wesfarmers stated intention is to open 10 to 14 Bunnings stores per year into the foreseeable future and invest in upgrading its existing Bunnings properties, including those owned by BWP.

Rental income generally grows on a like-for-like basis a little over the Australian inflation rate as measured by the consumer price index, or CPI. Leases are typically for an initial period of 10 to 12 years, with multiple options to renew for a further five to six years. The lease terms provide for annual rental growth linked to CPI or for a fixed annual rate, typically about 3%. They also provide for midlease market rent reviews, which usually have a cap-and-collar that limits the rent increase/decrease to 10%. Lease terms have been getting worse lately as Bunnings flexes its strong bargaining power.

BWP bulls say

  • BWP’s core properties are key to Bunnings’ business, and provide the foundations for a defensive rental income stream that underpin growing distributions.
  • Wesfarmers’ focus on its Bunnings business has the potential to lead to upgrades and acquisition opportunities which could foster further incremental rental income.
  • BWP’s warehouse properties have low capital maintenance expenditures that allow BWP to maintain a high distribution payout ratio without the need to access capital markets.

BWP bears say

  • BWP’s external management and fee structure is a potential source of conflicts of interest, though this is being addressed by an attempt to internalize management.
  • Bunnings has vacated some of BWP’s older, smaller properties, resulting in higher vacancies and a drag on earnings.
  • Higher interest rates weigh on the distribution outlook.

Subscribe to get Morningstar insights in your inbox

Terms used in this article

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.