Company Overview: An integrated property group, Charter Hall Group (ASX: CHC), is engaged in accessing equity from listed, wholesale and retail investors and then creating value through attractive investment opportunities. The company has carefully curated over a $61.3 billion diverse portfolio of over 1,516 high quality, long leased properties. The company was listed on ASX in 2005.

CHC Details

CHC Rides on Partnership Strategies & Stable Dividend Policy: The company is well-positioned for the future, supported by a high-quality team focused on delivering results for its securityholders and capital partners, positioning it well for resilient performance.

Key Discoveries from 1HFY22 Results:

• Decent Dividend History: The company maintains a strong track record of paying regular distributions to its shareholders. From FY17 to FY21, the company’s distribution per security has increased at a CAGR (grossed up) of 10.5%. For 1HFY22, the company paid a total distribution of 19.7cps, up 6% from last year. This represented a pay-out ratio of 35%. In the future, the company intends to maintain the same growth rate in distribution.
• Impressive Statutory Profit & EBITDA: In 1HFY22, statutory profit after tax attributable to stapled security holders came in at $517.8 million, depicting a rise of 199% year over year. During the same period, the company’s operating earnings amounted to $263.9 million, compared to $129.3 million reported in 1HFY21, an increase of 104.1%. In 1HFY22, the company reported a 115.6% growth in EBITDA to $355.1 million.
• Robust Property Investment Portfolio: In H1FY22, the Property Investment portfolio grew by 18% to $2.85 billion, and funds under management (FUM) increased from $52.29 billion reported in the year-ago period to $79.49 billion. The company achieved these results while maintaining returns for its investor customers and through continued partnership with its tenant customers.
• Partnership Synergies: In 1HFY22, CHC entered a new strategic alliance with a 50% investment in Paradice Investment Management. The move augments CHC’s Funds Management capability and aids it to serve investor customers across various equity segments. Additionally, the strategy of partnering with tenant and investor customers continues to deliver robust returns for security holders.
• Higher Cash Receipts & Capital Management: CHC generated $464.1 million cash receipts in 1HFY22 vs $260 million in 1HFY21. The net cash from operating activities increased to $219.9 million in 1HFY22 from $90 million in 1HFY21. In 1HFY22, CHC completed $9.4 billion of financings in managing over $23 billion of debt across the fund portfolio. The company currently has a balance sheet liquidity of $6.7 billion and weighted average gearing across the funds of 28%, thus maintaining financial flexibility and substantial funding capacity across the fund’s platform.

Distribution Highlight; Analysis by Kalkine Group

Indicative Proposal: Recently, CHC managed partnership, comprising Dutch pension fund PGGM (PGGM) and Charter Hall inked a non-binding indicative proposal to acquire all of the stapled securities in Irongate Group (IAP) for A$1.90 cash per IAP stapled security. Under the Indicative Proposal, IAP securityholders will be allowed to retain up to 4.67 cents per IAP stapled security for the period ending 31 March 2022.

Key Metrics: The company reported a net margin of 93.9% in 1HFY22, compared to the industry median of 88.2%. The company's liquidity improved in 1HFY22, with the current ratio at 1.86x compared to 0.73x of the Industry Median.

Profitability Profile; Analysis by Kalkine Group  

Top 10 Shareholders: The top 10 shareholders together form around 40.78% of the total shareholding, while the top 4 constitute the maximum holding. Vanguard Investments Australia Ltd. and Colonial First State Investments Limited are holding a maximum stake in the company at 10.19% and 6.88%, respectively, as also highlighted in the chart below: 

Top 10 Shareholders; Analysis by Kalkine Group 

Risk Analysis: The company faces the risk of changes in interest rate, liquidity crunch/excess supply, and credit risk on its financial instruments. As an investment management company, CHC faces regulatory reforms /changes by authorities. The company is exposed to the threats of the COVID-19 Pandemic, as it could impact the operating environment and the company’s overall results. Further, foreign currency fluctuation risks, might hinder the company’s business model.

Outlook: Based on no significant change in the market conditions, CHC expects post-tax operating earnings per security to be no less than 112 cents per security (cps). Further, it anticipates FY22 distribution per security to grow 6% over FY21. The company continues to witness robust demand from capital partners. It remains on track to develop a strong product pipeline and retain earnings, thanks to CHC’s investment capacity of $6.7 billion across the platform. The company’s development pipeline continues to grow and now stands at $13.2 billion, thus offering valuable opportunities to deploy its investment capacity into a new product.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative) 

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks. 

Stock Recommendation: The company’s stock went down by ~14.44% in the past three months. Currently, the stock is trading slightly below the average of its 52-week high and low levels of $22.18 and $11.53, respectively. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some premium compared to its peers, considering decent fundaments, enhancing shareholder’s value, robust cash flow, etc. For the purpose of valuation, peers such as Goodman Group (ASX: GMG), Dexus (ASX: DXS), Vicinity Centres (ASX: VCX), and others have been considered. Considering impressive bottom-line growth, positive long-term outlook, projects and pipeline development, stable dividend policy, indicative upside in valuation, and current trading level, we recommend a ‘Buy’ rating on the stock at the current market price of $16.55, as on 1 March 2022, 11:30 AM (GMT+10), Sydney, Eastern Australia. Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

CHC Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above. 

Technical Indicators Defined:-

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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