Centuria Capital Group: Initiating Coverage Amid Headwinds but Long-Term Value at Current Prices

We initiate coverage on property fund manager Centuria Capital Group CNI, or Centuria, with a fair value estimate of AUD 1.75 per security. The securities screen as 21% undervalued at present—the market appears too focused on near-term outflow risks and is ignoring long-term growth opportunities from new funds and inflows. We assume funds under management stagnate for three years, with new funds and inflows offset by redemptions from mature funds and declining commercial property prices. We assume annual FUM growth recovers to 5% for the rest of our 10-year discrete forecast period. We assign Centuria a no-moat rating as it lacks the economies of scale of larger fund managers Charter Hall and Goodman Group, and its track record is mixed. For example, it has strong returns on some of its direct property funds, but returns on the listed Centuria Office REIT lag listed office rivals. We assume long-term returns on invested capital in line with an estimated weighted average cost of capital of 8.5%.

Base funds management fees contribute half of group operating earnings, and co-investments in its funds are about a third—both reliable income streams due to redemption limitations in the funds, and leases securing the rental income derived from co-investments. Nevertheless, we assume Centuria’s operating earnings and distributions per security fall roughly 15% in fiscal 2024, compared with 2023, mainly due to lower performance fees and higher debt costs. Offices are about one-third of the fund manager’s property portfolio, and that portion also faces rental headwinds.

FUM growth should drive low- to mid-single-digit revenue growth over the next decade, though it’s likely to be uneven year to year due to volatile performance fees and development profits. A key attraction is that as scale increases, we assume operating margins improve to 50% over the next decade, up from about 40% currently. We assign Centuria a Medium Uncertainty Rating.