Company Overview: Centuria Capital Group (ASX: CNI) is engaged in the marketing and management of investment products including investment bonds and property investment funds as well as direct interest in property funds and other liquid investments. The company reports its performance in 4 segments, namely Property Funds Management, Investment Bonds Management, Co-Investments and Corporate. The Centuria Diversified Property Fund is an open-ended unlisted property fund of the company which offers monthly tax-effective income and long-term capital growth by investing in a diversified portfolio of property assets located within Australia.

CNI Details

Increasing Returns to Shareholders with Consistent Distributions: Centuria Capital Group (ASX: CNI) is engaged in the marketing and management of investment products including investment bonds and property investment funds as well as direct interest in property funds and other liquid investments. 2019 marked a successful year for the company with pleasing results and continued growth of the business. During FY19, property funds platform of the company went up by 27% to $6.2 billion in Assets Under Management. With the expansion in CNI’s platform, the company experienced increasing support from domestic and international equity fund managers. Decent appreciation in security price, along with consistent distributions, generated a total security return of ~34.4% in FY19 and has given an averaged return of over 24% p.a. in the past five years.

During 1H20, the company had an increased focus on a dual strategy of organic and inorganic expansion. HY20 was a record period with organic real estate acquisitions of $1.2 billion across its listed and unlisted divisions. The company’s platform delivered decent growth and create value across the platform. During the half-year, the company reported growth in AUM, with an increase to $7.3 billion, primarily driven by the growth of 21% in real estate AUM and gross acquisitions. CNI is on track to become one of the largest fund managers in New Zealand and is focused on a dual strategy of organic and inorganic expansions. During 1H20, the group reported a statutory profit of $77.0 million and operating NPAT of $33.4 million. This resulted in an EPS of 8.1 cents. The company has confirmed a final distribution of 5.20 cents per Stapled Security. It has enhanced its asset diversification and delivered increasing investor returns.

The company has exceeded a CAGR growth of 34% p.a since 2017 with AUM growth of over 50% since the start of FY20. Despite the current conditions, the company has experienced rapid growth in AUM and retains a robust business model. The company has released its results for its real estate division, Centuria Industrial REIT (CIP) which reported staggered debt profile to diversified lenders, a weighted average debt maturity of 3.3 years and no debt maturities until FY22.

The real estate platform of the company has specialized in commercial and industrial sectors and has also expanded into the healthcare real estate funds management sector with the creation of Centuria Heathley. The newly established partnership will pave the path for CNI’s growth in the healthcare real estate sector.

Growth in Earnings and Distributions (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Centuria Capital Group.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Margins: Over the past three years, gross margin has been broadly stable and stood at 94% in 1H20. During the half-year, EBITDA margin of the company witnessed an improvement over the previous half and stood at 47.6%, up from 44.6% in 2H19, indicating increased profitability. In the same time span, the company reported a net margin of 98.1%, higher than the industry median of 20.2%. This indicates that the company is managing its costs well and can convert its revenue into profits. During 1H20, Return on Equity of the company stood at 12.9% as compared to the industry median of 3.6%. This indicates that the company is well managing the capital of its shareholders and can generate profits internally. In the same time span, assets/equity ratio of the company was 2.13x, lower than the industry median of 4.55x and debt/equity ratio of the company stood at 0.42x as compared to the industry median of 0.57x. This indicates that the business is financed with a significant proportion of investor funding and a small amount of debt, resulting in a financially stable balance sheet.

Key Margins (Source: Refinitiv, Thomson Reuters)

Full Takeover Offer of Acquire Augusta Capital: The company issued a takeover notice confirming its intention to make a full takeover offer to acquire the remaining shares in Augusta Capital Limited for NZ$130 million. Recently, the company has received acceptances for 90.8% of the total ordinary shares in Augusta Capital Limited and will hold more than 90% of the voting rights in Augusta from 12 August 2020. The company expects that the full takeover will be completed by mid-September 2020. CNI expects Augusta’s return to profitability to be ahead of schedule.

CIP Financial Highlights for FY20: Centuria Industrial REIT, the real estate division of the CNI has recently released results for FY20 and delivered strong portfolio metrics with an increase in AUM to $9.4 billion. During the year, it reported funds from operations of $63.5 million and statutory net profit of $75.3 million. In the same time span, the company distributed 18.7 CPU and delivered total unitholder return of 10.0%. The company has strengthened its balance sheet with a gearing of 27.2% and has significant covenant headroom with ICR (interest coverage ratio) 5.2x and LVR (Loan to Value Ratio) 28.4%. During the year, CIP made an acquisition of over $300 million, increasing its total portfolio value to $1.6 billion. The rising trend of e-commerce is driving leasing demand along with manufacturing and packaging because of which CIP has benefitted from its tenancy base.

During FY20, CIP entered into agreements to acquire three industrial assets for $447.1 million, which are partially funded by a fully underwritten entitlement offer of $340.8 million. Post this transaction, Portfolio WALE is likely to increase to 10.2 years from 7.2 years and occupancy to increase to 98.2% from 97.8%.

FY20 Financial Highlights for CIP (Source: Company Reports)

Key Risks: The group is exposed to a variety of financial risks because of its activities. These risks include market risk (including interest rate risk and price risk), credit risk and liquidity risk. The impacts of rental relief applications because of COVID-19 are likely to impact future distributions.

Outlook: The company has started FY21 in a decent capital position and seems to be well-positioned to execute its strategy of delivering long term secure income and capital growth to investors. Despite the uncertainty surrounding the financial markets because of COVID-19 crisis, CNI seems to be well-equipped to fulfil and maintain business requirements. It has provided guidance for CIP for FY21 and expects FFO of 17.4 cents per unit and DPU guidance of 17.0 cents per unit. The company has the potential to expand its asset footprint, grow its recurring revenues and offer investors stable returns through a range of wholesale and retail unlisted healthcare real estate funds. Centuria Capital Limited is likely to release its FY20 Financial Results on 12 August 2020.

The company seems to be well prepared to face the challenging global financial markets and is expected to benefit from the available growth opportunities. It retains a stable balance sheet that will support its platform expansion. CNI also has a decent distribution network and is aiming to expand from 22 to 30 investment options.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Cash Flow Multiple Based Relative Valuation Approach (Illustrative)

Price to Cash Flow Multiple Based Relative Valuation Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company has seen growth in market presence with market capitalization increasing to ~$936.51 million. The total security holder return has also exceeded 20% in the last five years. CNI has shown progressive trends and is supplemented by future growth opportunities, which are likely to complement the group’s platform. As per ASX, the stock of CNI is trading close to its 52-weeks’ low level of $1.355, proffering a decent opportunity for accumulation. We have valued the stock using the price to cash flow multiple based illustrative relative valuation approach and have arrived at a target price, offering an upside of lower double-digit (in percentage terms). Considering the current trading levels, increasing market presence, and resilient financial position, we recommend a ‘Buy’ rating on the stock at the current market price of $1.835, up by 1.944% on 10 August 2020.

CNI Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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