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

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Centuria Capital Group

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.

The author or authors do not own shares in any securities mentioned in this article. Find out about Morningstar’s editorial policies.

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Alexander Prineas

Equity Analyst
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Alex Prineas is an equity analyst, ANZ, at Morningstar*. He covers real estate companies, developers, and airports, in Australia and New Zealand.

Before joining Morningstar's equity research team in 2019, Prineas was an associate director in Morningstar's manager research division, most recently leading Morningstar's research on Australian and global property funds and on passive and exchange-traded funds. He previously covered asset classes including global equities, fixed income and small-caps. He spent a decade in manager research and investment consulting in Australia and the United Kingdom with Morningstar and Old Broad Street Research (now a Morningstar company). Before that, Prineas spent six years with Mercantile Mutual working with retail and adviser clients, in marketing, product development, and advice research.

Prineas holds a Bachelor of Commerce with a double-major in accounting and finance from the University of New South Wales. He also holds a graduate diploma in applied finance and investments from the Financial Services Institute of Australasia. In 2023, he passed the level 2 CFA exam.

* Morningstar Australasia Pty Ltd (“Morningstar”) is a wholly owned subsidiary of Morningstar, Inc

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