ALEX - Alexander & Baldwin: Multiple Catalysts

2023-11-03 11:19:28 ET

Summary

• Alexander & Baldwin's current P/FFO valuation multiple is way below its historical average.
• Alexander & Baldwin's potential catalysts include a faster pace of share repurchases, initiatives to maximize the value of portfolio assets, and earnings beats for Q4 2023 and 2024.
• I retain my Buy rating for ALEX in consideration of both valuations and catalysts.

Elevator Pitch

Alexander & Baldwin, Inc. ( ALEX ) shares continue to warrant a Buy investment rating. With my prior May 22, 2023 article , I highlighted the major growth drivers for ALEX in the long run.

I identify a number of re-rating catalysts that are likely to be realized for Alexander & Baldwin in the latest write-up. These catalysts include potential above-expectations 2024 results, further value-accretive portfolio optimization moves, and accelerated share buybacks. Considering these catalysts, I maintain a Buy rating for Alexander & Baldwin.

Upwards Revision In Guidance

Alexander & Baldwin announced the company's financial results for the third quarter of 2023 on November 2 after the market closed. Core FFO (Funds From Operations) per share for ALEX expanded by +15% YoY from $0.26 for Q3 2022 to $0.30 in Q3 2023. The strong core FFO growth for the recent quarter prompted Alexander & Baldwin to raise the company's full-year fiscal 2023 guidance.

Specifically, the mid-point of ALEX's FY 2023 core FFO per share guidance was revised upwards from $1.120 earlier to $1.145. This implies that Alexander & Baldwin expects to achieve positive FFO expansion for the current fiscal year, as ALEX's actual FY 2022 FFO per share was lower at $1.13 .

At the company's Q3 2023 results briefing (event transcript sourced from S&P Capital IQ ), Alexander & Baldwin emphasized that "Hawaii continues to demonstrate its resilience" as evidenced by the fact that Q3 "same-store NOI was up 6.3%." ALEX also mentioned at the most recent quarterly earnings call that its General & Administrative (G&A) costs declined by -21% YoY as a result of "lower personnel-related expenses."

Moving ahead, I am of the opinion that the stability of the Hawaiian economy and the company's ongoing cost-control efforts put ALEX in a good position to beat the market's expectations relating to its performance for the remainder of this year and 2024. As such, I view above expectations for Q4 2023 and FY 2024 financial results as potential catalysts for the stock.

The re-rating catalysts for Alexander & Baldwin aren't just restricted to the company's financial performance, as ALEX's portfolio optimization and capital return activities could also help to push up its share price as detailed in the next two sections.

Portfolio Optimization

In my previous March 7, 2023 update for ALEX, I noted that Alexander & Baldwin "is transforming into a real proxy for Hawaii real estate with the planned sale of its (non-core) infrastructure business" referred to as Grace Pacific.

ALEX's proposed divestiture of Grace Pacific remains on track. Alexander & Baldwin revealed at its third quarter results call that "we continue to make progress on this goal (of divesting Grace Pacific)." The sale of Grace Pacific is one example of how Alexander & Baldwin is optimizing the company's portfolio by maximizing the value of its assets.

ALEX disclosed at the company's Q3 2023 earnings briefing that its "refresh at Manoa Marketplace, the only grocery-anchored neighborhood center in the Manoa area was substantially complete" by the end of September this year. Alexander & Baldwin has invested about $8 million in the rejuvenation and redevelopment of the Manoa Marketplace asset thus far with a targeted 8.0%-8.5% return on its investment in this project. This serves as another example of how ALEX can increase the value of specific assets it owns by increasing their earnings potential with relevant enhancements.

Apart from allocating excess capital to portfolio optimization opportunities such as those highlighted in this section, Alexander & Baldwin is also considering the return of a larger proportion of its capital to shareholders which is the focus of the subsequent section.

Share Buybacks

At its third quarter results call, Alexander & Baldwin stressed that its "share repurchase plan provides an additional capital allocation tool" and it emphasized that "to the extent that our stock is underappreciated in the market, that will be another opportunity for us to invest."

ALEX's recent management commentary sends a clear message that the company is willing to execute more share repurchases.

Alexander & Baldwin spent $1.5 million to buy back its own shares in the third quarter of this year, and the company has the financial capacity to do a larger amount of share buybacks going forward. ALEX has $11.8 million of cash on its balance sheet as of September 30, 2023, and its liquidity as of end-Q3 is as high as $430 million including credit facilities. Furthermore, 84% of Alexander & Baldwin's debt is on fixed-rate terms, so the company's earnings and cash flow are less affected by rising rates.

In terms of the price and valuation levels conducive for share buybacks, ALEX's mean share repurchase price was $16.72 for Q3 2023, or slightly higher than Alexander & Baldwin's last done share price of $16.28 as of November 3, 2023. This indicates that ALEX is keen to do share repurchases at current price levels. Also, Alexander & Baldwin's current consensus forward the next twelve months' Price-to-FFO multiple of 14.3 times (source: S&P Capital IQ ) is much lower than its 10-year historical average of 25.0 times.

Concluding Thoughts

Alexander & Baldwin is deserving of a Buy rating. ALEX's current Price-to-FFO metric is at a discount to historical averages, and there are potential catalysts that can drive valuation multiple expansion for the stock.

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