EUR 850.00 For Business Accounts Only

Morningstar | Cromwell Still Faces Challenges Growing European Funds Management. FVE Increased to AUD 1.00

Cromwell Property Group reported first-half fiscal 2019 operating earnings of AUD 82.6 million, or AUD 4.10 cents per security, or cps, down 5% on the previous corresponding period, or pcp. Guidance for fiscal 2019 was maintained for earnings of at least AUD 8.0 cps and distributions of AUD 7.25 cps. We’ve slightly increased our medium-term earnings outlook to capture the expected earnings accretion from converting the legacy Tuggeranong office building on the fringe of Canberra to a 390-apartment retirement living community. Our fair value estimate increases to AUD 1.00 from AUD 0.98, with no-moat-rated Cromwell continuing to screen as overvalued, currently trading around AUD 1.12.

The major initiative during the period was Cromwell’s expansion into retirement living. Capital invested to date is modest, with Cromwell acquiring a 220-home seniors village in North Turramurra Sydney for AUD 60 million through its LDK Healthcare joint venture. We view retirement living as having very favourable long-term growth prospects, but this is not without risk as Sydney is the worst-performing region in the Australian retirement villages industry, reflecting the significant fall in house prices. Further declines in dwelling prices, would impact the price Cromwell will achieve on the resale or redevelopment of existing units.

While there are positive aspects of the Cromwell business, there is considerable uncertainty around growth of European funds management platform. The major uncertainty is what will become of the AUD 3.3 billion of third-party assets that are in wind-down. Cromwell is optimistic about having some of its other funds acquire many of the assets, but this will require these funds raising more equity and this will be difficult. We have no reason to give the firm the benefit of the doubt given the protracted wind-down process and modest progress on garnering new investment mandates. Cromwell CEO, Paul Weighman stated, "We see downside risk in all markets in which we operate." Against this backdrop, we suspect many investors will be keeping their powder dry rather than face elevated risk of capital losses.

Gearing declined slightly from 37% at June 2018 (43% on a look-through basis) to 33.7% at December 2018 (or 40.4% on a look-through basis). Even though this is below Cromwell’s target gearing range of 35% to 55%, we’d prefer more conservative settings as much of the gearing decline reflects asset revaluations which could quickly reverse in the event of a credit crisis.