EUR 850.00 For Business Accounts Only

Morningstar | Charter Hall Grows Funds Under Management at Staggering Pace. FVE Increased to AUD 6.80. See Updated Analyst Note from 22 Feb 2019

Charter Hall Group delivered an expectedly strong first-half fiscal 2019 result, with operating earnings of AUD 107.5 million or AUD 23.1 cents per security, or cps, up AUD 12.4 million or 13% on the previous corresponding period, or pcp. The main driver of the growth was a large increase in transaction and performance fees to AUD 53 million versus AUD 39.6 million in the pcp, reflecting a AUD 20 million of the AUD 105 million performance fee that will be received from Charter Hall Office Trust, or CHOT. A further accrual of AUD 20 million will be made in the second half, the major reason for the upgrade guidance to growth of 14%-17% from 8%-10% growth previously.

Growth in external funds under management, or FUM, was up a staggering 22% to AUD 28.4 billion. Of this, AUD 1.6 billion or 7% was due to the acquisition of Folkestone, with the balance of AUD 3.6 billion or 15% coming from a acquisitions, development and revaluation gains. This growth looks set to continue for the medium term, underpinned by AUD 2 billion of committed projects and a further AUD 3.3 billion of potential projects. Charter Hall’s property platform continues to attract strong inflows, raising AUD 1.2 billion in the six months to December 2018. We’ve upped our growth assumptions for FUM which (after a lag of 12 to 18 months) flows through to higher fees for management, leasing and development activities. The raised growth FUM growth assumptions are the main reason for the upgrade in our fair value estimate by 13% to AUD 6.80 from AUD 6.00. Securities in narrow-moat Charter Hall have surged 29% over the past three months to AUD 8.90, so at these levels the stock screens as overvalued.

In recent months, there has been very strong appreciation in the shares of listed "aggregators," being firms who manage income generating assets on behalf of third parties and generate a series of annuity-style and high margin fees in the process. As with Charter Hall, most of these firms have reported very strong growth in FUM of late and also exceptionally high performance fees. We think this level of growth and the corresponding spike in performance fees are both unsustainable, driven by asset revaluations as global bond yields have retraced. We forecast a far slower growth in FUM in outer years on expectation there will inevitably a repricing of credit risk. This will weigh on the values of all property assets, but also cause wholesale investors to allocate less towards property and more towards bonds. Further, we are seeing evidence of increased competition in property funds management, diluting the expected growth rate of incumbents. We speculate that our view of a retracement in asset values and FUM growth being impacted by increased competition as the major reason for our fair value estimate being approximately 20% below Charter Hall’s current security price.