The merger between retail shopping centre landlords Novion (NVN) and Federation Centres (FDC) creates material economic value

The merger between retail shopping centre landlords Novion (NVN) and Federation Centres (FDC) creates material economic value. Approximately 60% of the ~ 12%earnings upgrade delivered is very high quality, stemming from economies of scale, specifically reducing overhead costs and enhancing development capabilities. The balance of the earnings upgrade comes from interest expense savings, which we argue is fairly low quality given it may not be permanent. Overall, we like the deal, but we think the security share prices have reacted positively enough and are trading at near fair value now. We also caution that conditions for retailers remain difficult, with margins likely to come under significant pressure due to the lower Australian dollar. With many retailers buying most of their goods from offshore, their cost of goods sold will increase. Unless retailers can increase prices, margins will fall significantly - mitigating the ability for retail landlords to drive rents higher as they have historically. Disclosure: Freehold has interests in securities discussed. Please visit: (VIEW LINK)