EUR 850.00 For Business Accounts Only

Morningstar | Charter Hall Remains Overvalued Following Earnings Guidance Update

Narrow-moat Charter Hall Group remains overvalued despite the increase in fiscal 2019 operating earnings growth guidance to 24%, from the previous range of 14% to 17% growth. Considering the fiscal year has already ended, guidance is unlikely to be changed again before the formal financial result is announced next month. We have therefore increased our fiscal 2019 earnings forecasts accordingly. However, we’ve maintained our earnings forecasts beyond fiscal 2019 and our fair value estimate at AUD 6.80 per share, well below the current share price of AUD 11.00.

We believe the main reason for our valuation discount to the current share price is because of more conservative assumptions over the discount rate, and the long-term growth rate in assets under management, or  AUM, and outer-year performance fees. The recent growth in AUM has been outstanding, but we see many impediments to sustaining this, and after recent strong growth there is an increased risk of retracement that we don't believe is appropriately priced by the market.

We assume Charter Hall will encounter two years of slowing AUM, growth from June 2020, followed by two years of asset values declining by 15% on the expectation that credit risk will be repriced. We expect this to weigh on the values of all property assets and cause wholesale investors to reduce property exposures and increase bond exposure. Further, we are seeing evidence of increased competition in property funds management, diluting the expected growth rate of incumbents. The timing of these factors is uncertain, but we believe it’s prudent for our long-term forecasts to incorporate a removal of the prevailing monetary stimulus, which we expect will eventually cause interest rates to rise and asset values to fall.