EUR 850.00 For Business Accounts Only

Morningstar | Corporate Action: We Recommend Charter Hall Education Trust Unit Holders Subscribe to the UPP

As foreshadowed in our note of Feb. 13, 2019, we recommend Charter Hall Education Trust unitholders subscribe for new units under the unit purchase plan, or UPP. The UPP subscription price of AUD 3.35 is close to our fair value of AUD 3.34, which implies the price is fair. The appeal of the offer is also enhanced by the 7% discount to the current market price of AUD 3.57. The offer is open to registered unitholders as at 7:00pm on March 25, 2019 and closes on April 16, 2019.

We have maintained our fair value estimate for Charter Hall Education at AUD 3.34 following the institutional placement which implies the trust is acquiring the new centres at a fair price. Our distribution forecasts are in line with management guidance and, at the equity placement price of AUD 3.35, imply an unfranked distribution yield of 4.8%. We also forecast a distribution compound annual growth rate of 4.3% over the next decade.

The UPP will raise AUD 5 million and follows the institutional placement which raised AUD 120 million, also at AUD 3.35, on March 26, 2019. The decision to raise new funds to buy 13 child care centres is a sensible move which capitalises on positive sentiment towards the child care sector and yield stocks. The acquisition of 13 centres is not particularly material for Charter Hall, with the AUD 76 million portfolio cost increasing the book value of real estate by around 8%. The childcare portfolio will increase by just 3% to 426 and is around double the size of Arena’s portfolio of 211 centres. The remaining funds raised will mainly be used to reduce debt, which will help reduce pro forma gearing as at Dec. 31, 2018 to around 25% from 30%. This is comfortably below the target gearing range of 30%-40%. The increase in the debt facility, by AUD 50 million to AUD 397 million, implies around AUD 90 million in undrawn debt facilities.