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Cromwell Earnings: Gradual Deleveraging Progress, but Two Steps Forward and One Step Back

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Cromwell CMW delivered fiscal 2023 operating earnings of AUD 158.6 million (AUD 6.06 cents per security), down from 2022′s AUD 201 million. Disposals reduced revenue, and higher interest rates boosted debt costs. The result lagged our estimate of AUD 175 million due to lower performance and transaction fees, and higher than expected costs in its Polish retail portfolio. Distributions were AUD 5.5 cps, and management expects distributions for the September quarter of 0.83 cps. We assume a constant distribution rate, implying 2024 distributions totaling AUD 3.3 cps. We assume fiscal 2024 operating earnings of AUD 155 million, or AUD 5 cps.

Our fair value estimate for no-moat Cromwell is unchanged at AUD 0.85 per security. That’s in line with Cromwell’s net tangible assets of AUD 0.84, which fell from AUD 1.04 a year ago. The NTA decline was driven by office devaluations and a big decline in the valuation of the Polish retail assets. The book value of AUD 508 million for the Polish assets was set in line with the offer price made by a potential buyer. Any deal remains subject to due diligence, but our base case is that the deal proceeds. That would reduce gearing from 42.6% back within the target 30%-40% range. Even with asset sales and Cromwell’s covenant gearing limit of 60% (higher than the typical 50% limit most REITs have), we still factor in an equity raising, because we expect more asset price falls. We assume Cromwell will raise AUD 500 million at AUD 0.50 per security in fiscal 2024.

Even so, Cromwell securities screen as significantly undervalued. The market looks overly bearish on the office sector and doesn’t factor in the value of Cromwell’s funds management business. It accounted for 17% of group EBIT but is not incorporated in the group’s NTA.

Despite headwinds in 2023 from lower transaction fees and elevated operating expenses in the Polish portfolio, there was some encouraging growth in recurring earnings streams, particularly in funds management.

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 for Morningstar Australasia Pty Ltd, a wholly owned subsidiary of Morningstar, Inc. He covers real estate companies and developers 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, leading Morningstar's research on Australian and global property funds and on passive and exchange-traded funds. 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 in client and advisor services, 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.

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