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Morningstar | Charter Hall Continues to Target Growth With Australian Unity Office Bid

We have maintained our earnings forecasts and fair value estimate for narrow-moat rated Charter Hall Group at AUD 6.80 per share following its takeover offer for Australian Unity Office Fund, or AOF. At the current market price of AUD 10.55, we continue to believe the shares are significantly overvalued.

Charter Hall has already acquired 19.9% of AOF through a joint venture with Abacus Property Group at AUD 2.95 per unit, costing AUD 96 million. The joint venture has also made an offer for the remaining units in the trust, also at AUD 2.95 per unit and implying a 10.5% premium to the AUD 2.67 net tangible asset value by December 31, 2019, and an 8.5% premium to the 30-day volume weighted average price of AUD 2.72 per unit. However, we think the offer has a low chance of success considering the offer price is equal to the Starwood offer made late in 2018, which was rejected by the AOF board of directors. We have therefore excluded the acquisition of the remaining units from our financial model at this stage.

From Charter Hall’s perspective, the acquisition of the AOF stake through the joint venture is relatively small because it’s worth just AUD 48 million or about 1% of Charter Hall’s market capitalisation. If the offer is successful, Charter Hall will require a further AUD 192 million, however, funding the investment will not be an issue considering Charter Hall has about AUD 2.6 billion available in cash and undrawn debt facilities. We don’t expect an acquisition to materially impact Charter Hall’s credit metrics or fair value. If the joint venture successfully acquired AOF, we doubt Charter Hall would retain its ownership stake in the joint venture. We expect Charter Hall is more interested in the potential to generate management fees from the assets and is likely to ultimately reduce its stake in, and restructure, the joint venture. However, at this stage it’s too early to speculate over the likely eventual structure or effect on Charter Hall Group.