EUR 850.00 For Business Accounts Only

Morningstar | CBRE Raises Its Full-Year Guidance, but We Perceive Signs of Caution

CBRE increased its full-year guidance along with reporting double-digit growth in revenue and adjusted EPS in the second quarter, but first-half margins are trailing the company's 2018 initial outlook and we detect hints of caution for the medium term. Total revenue increased 15% to $5.1 billion in the quarter, and adjusted diluted earnings per share increased 10% to $0.74. Revenue growth was broad based with a range of 11% growth in Asia-Pacific and the Americas and 29% in Europe, Middle East, and Africa. That said, EBITDA growth was relatively low in Asia-Pacific and EMEA of 4% and 5%, respectively, from the previous year. The low growth was due to tough property sales comparables, some unusual items, and currency headwinds. For the first half of the year, adjusted EBITDA margins were 16.4% compared with management expectations at the beginning of the year of 17.5% for 2018. Given a seasonally stronger fourth quarter and the margin dampening effect of the recent FacilitySource acquisition, 17.5% margins are still reasonably achievable. Along with earnings, management increased its adjusted earnings per share guidance to a range of $3.10-$3.20 from previous guidance of $3.00-$3.15. We don't expect to make a significant change to our $56 fair value estimate for wide-moat CBRE and believe that shares are fairly valued.

Some capping of investment spend and low leverage are arguably signs of management caution. Management stated that it doesn't intend to increase its level of run-rate investment for the foreseeable future. Part of this may be to bring the company closer to its 17.5% EBITDA margin outlook, but it could also partly be due to global uncertainties, such as Brexit and global trade discussions. CBRE's net debt/adjusted EBITDA is also sitting at 1.1 times, which is near the lower end of the company's 1-2 times long-term target. Management seems to believe, and we agree, that we're closer to the end of the current industry cycle than beginning.

In June, CBRE acquired FacilitySource, a provider of facilities maintenance services, for about $290 million. FacilitySource had 2017 revenue of approximately $150 million, but management is aiming for a 2018, year-end run rate for revenue of $270 million. In four to five years, CBRE hopes the acquisition will generate $50 million in EBITDA.