Company Reports

Narrow-moat Charter Hall Group trades at a price/earnings multiple of 16 times our forecast 2024 operating earnings per security of AUD 0.75, in line with guidance reaffirmed at its first-half result. That’s a low P/E ratio, given our view that this is a trough in earnings, down 35% since fiscal 2022, with long-term growth ahead. We increase our fair value estimate by 2% to AUD 16.25, driven by the time value of money.

Charter Hall Group manages retail and institutional listed and unlisted property investments. It typically co-invests, aligning itself with its funds management clients. This gives Charter Hall diversified property exposure, so rental income produced accounts for about a fifth of the group’s EBITDA. A smaller portion of EBITDA comes from development, including development fees for managing projects for clients, and development profits on its own stake in each project.

The federal government’s migration review was released on Dec. 11 and it suggests high population growth remains the status quo. The review tinkers with various visa rules, but contains no major reduction in migrant numbers, suggesting high migration will persist, relative to precoronavirus levels and versus other developed countries.

Charter Hall Group manages retail and institutional listed and unlisted property investments. It typically co-invests, aligning itself with its funds management clients. This gives Charter Hall diversified property exposure, so rental income produced accounts for about a fifth of the group’s EBITDA. A smaller portion of EBITDA comes from development, including development fees for managing projects for clients, and development profits on its own stake in each project.

We reduce our fair value estimate for property fund manager Charter Hall Group by 2% to AUD 15.90 following fiscal 2023 results. Operating earnings per security of AUD 93.3 cents per security was lower than our AUD 99.9 cps estimate, with the main driver lower than estimated transaction and performance fees. We revise our fiscal 2024 estimate from AUD 103 cps down to AUD 75 cps, in line with new guidance. However, we raise our outer-year estimates, driven by health across the underlying property portfolio. We think it sets Charter Hall up well once current commercial property ructions fade, and reinforces our confidence in their narrow moat.

Charter Hall Group manages retail and institutional listed and unlisted property investments. It typically co-invests, aligning itself with its funds management clients. This gives Charter Hall diversified property exposure, so rental income produced accounts for about a fifth of the group’s EBITDA. A smaller portion of EBITDA comes from development, including development fees for managing projects for clients, and development profits on its own stake in each project.

Charter Hall Group manages retail and institutional listed and unlisted property investments. It typically co-invests, aligning itself with its funds management customers. This gives Charter Hall exposure to a diversified property portfolio, so rental income produced accounts for about a third of the group’s EBITDA. About 5% of 2020 EBITDA came from development, including development fees for managing projects for clients, and development profits on its own stake in each project.

We see risks to Australian office demand as widely overestimated, despite our expectation that work-from-home will endure post-pandemic. Several REITs remain modestly undervalued, particularly those focused on prime grade offices, with long leases, and solid balance sheets. We raise our fair value estimates for three particularly high-quality office-heavy REITs: Dexus, GPT, and Mirvac.

Charter Hall Group manages retail and institutional listed and unlisted property investments. It typically co-invests, aligning itself with its funds management customers. This gives Charter Hall exposure to a diversified property portfolio, so rental income produced accounts for about a third of the group’s EBITDA. About 5% of 2020 EBITDA came from development, including development fees for managing projects for clients, and development profits on its own stake in each project.

We retain our AUD 10.70 fair value estimate for narrow-moat Charter Hall Group, or CHC, following the company’s annual general meeting and provision of updated guidance. CHC upgraded guidance for fiscal 2021 earnings per share 4%, versus prior guidance, to AUD 0.53 and maintained guidance for distributions to grow 6% year on year. We considered previous guidance too conservative and maintain our forecast for fiscal 2021 earnings per share to decline 25% to AUD 0.52 relative to an extraordinary fiscal 2020 result. We still expect earnings growth to resume in fiscal 2022. We maintain our forecast for fiscal 2021 distributions to grow 6% to AUD 0.38 per share, representing a payout ratio of 73%. CHC screens as overvalued and offers investors a modest fiscal 2021 dividend yield of 2.8%. In our view, the market is pricing in ongoing rapid growth in AUM, which we think is unrealistic.

Charter Hall Group manages retail and institutional unlisted property investments, and listed REITs. It typically co-invests in its funds, aligning itself with its funds management customers. This gives Charter Hall exposure to a diversified property portfolio, and the relatively predictable rental income produced accounts for nearly a third of the group’s EBITDA. About 5% of 2020 EBITDA came from development, with Charter Hall charging its fund investors a development fee for managing projects, and earning development profits for its own stake in the projects.

We increase our fair value estimate for Charter Hall Group by 13% to AUD 10.70 from 9.50, as we transition coverage to a new analyst. Our narrow moat, medium uncertainty and Standard stewardship ratings are unchanged.

Narrow-moat Charter Hall reported strong fiscal 2020 results that were in line with our expectations. Much of the news was telegraphed in prior announcements, notably a massive AUD 98 million performance fee on the Charter Hall Office Trust.

We’ve long warned that an end to the property cycle, or a plateauing, could hurt narrow-moat Charter Hall’s earnings, and in our view the stock had been priced for perfection. We didn’t expect a commercial property shock so soon or savage, and we anticipate COVID-19 will hurt Charter Hall’s earnings for the next three years. However the group’s funds management earnings are so sticky that we estimate the pain won’t be that bad. Further, we believe Charter Hall’s balance sheet and well-oiled funds management machine places it in a strong position to pick and choose attractive deals, which should add value for long-term shareholders.

Narrow-moat-rated Charter Hall delivered a strong result for the first half of fiscal 2020, and substantially upgraded its guidance for the full year. The previous expectation was for operating earnings per share to grow 30% from fiscal 2019 levels. Management upgraded this to 40% growth. We increase our fiscal 2020 estimates to be in line with the new management guidance.

Narrow-moat-rated Charter Hall substantially upgraded its earnings guidance for fiscal 2020, due to acquisitions and growing assets in its funds management vehicles. The group said it expects to grow post-tax operating earnings per security by 30%. Our estimates were slightly above the lower bound of the previous guidance range of 18%-20%. We upgrade our 2020 earnings forecasts to be in line with the new guidance. However, we make no changes to our AUD 7.40 fair value estimate, and we think Charter Hall looks expensive.

Narrow-moat Charter Hall’s proposed acquisition of Australian Unity Office Fund, or AOF, will not proceed, after effectively being voted down by AOF unitholders at their November 2019 scheme meeting. Unitholders did not pass all resolutions with the requisite majorities.

Narrow-moat Charter Hall delivered a strong fiscal-year result that outdid our expectations. More impressive was the group’s continued performance after the balance date and very strong guidance for fiscal 2020. The result and guidance prompted a 9% increase in our fair value estimate to AUD 7.40, but the stock still screens as expensive.

Narrow-moat Charter Hall Group remains overvalued despite the increase in fiscal 2019 operating earnings growth guidance to 24%, from the previous range of 14% to 17% growth. Considering the fiscal year has already ended, guidance is unlikely to be changed again before the formal financial result is announced next month. We have therefore increased our fiscal 2019 earnings forecasts accordingly. However, we’ve maintained our earnings forecasts beyond fiscal 2019 and our fair value estimate at AUD 6.80 per share, well below the current share price of AUD 11.00.

We have maintained our earnings forecasts and fair value estimate for narrow-moat rated Charter Hall Group at AUD 6.80 per share following its takeover offer for Australian Unity Office Fund, or AOF. At the current market price of AUD 10.55, we continue to believe the shares are significantly overvalued.