Charter Hall Education On Strong Growth Path

This story features CHARTER HALL SOCIAL INFRASTRUCTURE REIT. For more info SHARE ANALYSIS: CQE

Charter Hall Education Trust has acquired 13 early learning centres in various stages of development, providing an attractive growth path.

-Stock trading at historically expensive levels versus net tangible assets and yield spreads
-Fixed cost of debt declines to 1.75% between FY20-25
-Distribution guidance of 16.5-16.6c per unit provided
 

By Eva Brocklehurst

Charter Hall Education Trust ((CQE)) continues to provide brokers with an attractive outlook, based around a low level of risk and high earnings visibility. The company has acquired 13 early learning centres for $75.3m, mostly in inner city Melbourne, Sydney and Brisbane locations. Two of the centres are completed, while five will be acquired on completion and six will be funded through development.

The portfolio is being acquired with an average yield of 6.5%, a 7.5% coupon being achieved on those centres that are funded through development. This, Moelis calculates, implies a 5.8% yield is being paid for the completed centres.

The benefits of the transaction, the broker assesses, include 2% net tangible asset (NTA) accretion, 2% accretion to unit earnings in FY20/21 and a re-set of the balance sheet. The broker raises its target to $3.09 from $3.03 and retains a Sell rating, as the stock is trading at a 20% premium to NTA.

Charter Hall Education Trust is a very strong business, that offers low risk and an attractive investment, Canaccord Genuity asserts, while acknowledging the stock is trading at historically expensive levels when compared with NTA and yield spreads. As the valuation is now slightly stretched, the broker has a Hold rating with a $3.37 target, increased from $3.19 largely as a result of near-term development assumptions.

With the stock trading at a meaningful premium to NTA, Shaw and Partners believes it makes sense to take advantage of relatively cheap equity to fund growth initiatives. The transaction will increase the scale of the company's portfolio, reduce gearing and provide scope for further growth.

The broker lowers FY20-21 estimates by -1.5% and -0.6% respectively, partly because of a revision to the timing of the rolling out of developments and raises the target to $3.09 from $3.03. A Hold rating is maintained, as Shaw and Partners assesses market expectations and/or the asset valuation uplift are largely reflected in the share price.

The company is also in due diligence on a further $14m in acquisitions. The broker now assumes around $30m per annum of acquisitions over the next 3-4 years in its estimates. Shaw and Partners estimates, if the company fully redeployed its $108m in debt capacity to acquire assets on a 6.2% yield, there could be an estimated 0.7c per share per annum of earnings benefit.

Transaction Details

The acquisition will be funded by a fully underwritten $120m institutional placement at $3.35 per unit. A non-underwritten $5m purchase plan will also be offered to retail investors. The company has increased its available debt facilities by $50m and re-set its hedge book. This results in the fixed cost of debt declining to 1.75% between FY20-25. As part of the transaction distribution guidance of 16.5-16.6c per unit has been provided which reflects growth of 3-4%.

Canaccord Genuity assesses its leverage ratios have improved dramatically, despite increased development assumptions. Had the company not raised the equity, the broker calculates the FY19 loan to valuation ratio (LVR) would have risen to around 35%, the highest it would have been since FY12 when the business was recovering from tenant issues.

The centres being acquired will have a weighted average lease expiry (WALE) of 17.9 years. This raises the company's WALE by 6%, to 10.1 years. Occupancy is 100%. The company's portfolio continues to be weighted 33% to Queensland, 29% Victoria and 22% NSW and Goodstart Early Learning remains the largest tenant by rent, at 45%.

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