Firm Foundations Underpin Charter Hall

Australia | Aug 24 2021

This story features CHARTER HALL GROUP. For more info SHARE ANALYSIS: CHC

Fund manager Charter Hall remains the beneficiary of demand for logistics assets and, in a low interest-rate environment, has probably provided conservative guidance

-Strong track record, so market quickly prices in guidance upgrades
-Performance fees should be a material contributor again in FY22
-Main risk lies with a significant increase in bond yields

 

By Eva Brocklehurst

Fund manager Charter Hall Group ((CHC)) provided a bullish outlook for FY22, and what many brokers suspect is conservative guidance. The business remains a beneficiary of the demand for logistics assets along with low interest rates.

UBS points out Charter Hall undertakes projects that traditionally do not fit into existing fund development mandates while realising profits from the legacy Folkstone fund. The projects in focus that should deliver earnings going forward as they are de-risked include properties in Adelaide, Parramatta, Brisbane and logistics developments at Horsley Park and Bringelly.

The market quickly moved to price in guidance upgrades, as Charter Hall has a strong track record of achievement. Its market-leading position is the envy of many platforms yet, at current pricing on revised forecasts, UBS cannot justify a Buy rating and downgrades to Neutral.

The broker was most impressed with guidance, which signals more than 23% growth in earnings per security (EPS) in FY22. The main drivers are performance fees, with UBS now expecting $144m, as well as development investment income. The broker increases estimates for funds under management (FUM) by 8% and expects this will reach $72bn in FY24, factoring in diversified capital sources and a range of asset types.

Citi anticipates upside to guidance, given the potential for strong transaction activity and increases in book values, particularly in the case of industrial or long WALE assets.

Furthermore, there are seven funds that will generate performance fees for Charter Hall in FY22. The broker forecasts earnings per share of 80.9c and expects the market will also upgrade forecasts as the year gets underway.

Credit Suisse asserts a large amount of confidence is required in backing management's track record, given Charter Hall does not disclose its target FUM amount or all-in management fee expectations for the year ahead.

Nevertheless, the broker assesses there is plenty of capital to fund turnkey acquisitions as well as developments and there is a high degree of visibility over the base earnings in FY22, noting 97.7% occupancy with a WALE of 9.1 years across the investment platform.

Sale and leaseback remains the potential driver of growth, with management indicating reductions to fees in order to grow FUM is not part of its strategy.

Finding capital partners has also not been a problem, with the main uncertainty being timing and quantum. Credit Suisse believes there is scope for continued improvement in management margin as economies of scale are achieved.

Macquarie notes, too, while several groups have flagged an intention to increase fund initiatives, Charter Hall is not observing any pressure on its fees. The main highlights for the broker in the results were the 29% growth in FY21 FUM and guidance for 23% growth in EPS.

Macquarie calculates guidance can be reached via a combination of $100m in performance fees and $4bn in acquisitions. In terms of the latter the broker forecasts $6bn, and, therefore, has higher forecasts for operating earnings per security, at 82.1c.

Performance fees are typically lumpy items yet should be a material contributor again in FY22 and Ord Minnett suggests Charter Hall's ability to deploy capital is better than other property fund managers, with notable success in sourcing sale and leaseback opportunities.

Guidance is slightly below prior forecasts yet, the broker agrees, it is typical for Charter Hall to guide conservatively and upgrade throughout the year. For FY22, Ord Minnett assumes 16% growth in FUM and continuing modest margin expansion.

Risks

In Citi's view the main risk is a significant increase in bond yields and UBS agrees the risk lies in the macro environment, rather than execution. Moreover, the outlook for performance fees has substantially improved given cap rate compression in logistics and long WALE assets.

While revenue margins could decline, this should be offset by improvement in property funds management margins. UBS forecasts, for the latter, an earnings (EBIT) margin of 68% over FY22-25.

The risk of growth slowing down is limited, in Jarden's view, and accrued performance fees could be significant. While earnings may be a little more volatile than some peers, the broker welcomes the company's tendency to book profits as they occur rather than smoothing them out.

Hence, despite the strong outperformance, Jarden, not one of the seven stockbrokers monitored daily on the FNArena database, reiterates a Buy rating and retains a $20.30 target.

Moreover, Jarden envisages 10-11% potential upside to its new target and a price/earnings discount to other fund managers. While the incentive for corporate and governments to sell assets could be limited, given the low cost of debt, the broker suspects more and more management teams will be looking for ways to crystallise value.

Macquarie observes, on the negative side, headwinds to tenant demand for office space could have implications for Charter Hall, not only in the case of property investment earnings but also valuation and acquisitions. Deployment into office has historically been a key driver of growth.

Still, the main impact from the pandemic is via shopping centre retail, and Macquarie points out, in Charter Hall's case, this segment comprises just 7% of FUM. The majority of the exposure is more defensive as well.

Morgan Stanley suggests the challenge for Charter Hall centres on utilising the platform to capture capital deployment opportunities as it currently has around $6.7bn of cash and undrawn debt as well as an undisclosed amount of committed and unallocated equity.

Guidance implies a pay-out ratio of just 54% in FY22 which would help ensure that gearing remains low as the business continues a capital-light approach, the broker adds.

FNArena's database has four Buy ratings and two Hold. The consensus target is $19.85, suggesting 8.5% upside to the last share price. Targets range from $18.87 (Credit Suisse) to $21.00 (Citi).

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