Company Overview: Centuria Office REIT (ASX: COF) is a pure-play office REIT that invests in commercial office property within Australia. The company’s portfolio is mainly exposed to metropolitan and near city office markets. It offers a range of investment opportunities, including listed and unlisted real estate funds as well as tax-effective investment bonds. COF was listed on ASX on 10 December 2014.

COF Details

H1FY22 Results Highlights: During the half-year ended 31 December 2021 (H1FY22), the company witnessed continued leasing momentum across the portfolio. Some of the key highlights of the period are as follows:

• Improved Profitability: For H1FY22, the company reported statutory net profit of $63.6 million, up from $21.5 million in H1FY21. Further, the company reported Funds from Operations (FFO) of $54.7 million.
• Completed Strategic Acquisitions: Over the half-year period, the company expanded its portfolio by completing strategic acquisition of two high-quality modern office buildings for a combined value of $273 million.
• Raised Equity: During H1FY22, the company raised $201 million of equity and added an additional $100 million to its debt facilities.

FY21 Results Highlights: For FY21, the company reported gross property income of ~$170.6 million, up by $21.4 million from the previous year, benefited from the Foxtel surrender payment at 35 Robina Town Centre Drive. Despite the impact of COVID-19 pandemic, the company’s portfolio achieved an average 98.3% rent collection, demonstrating the resilience of the COF portfolio and quality of the underlying tenants. The company reported a statutory net profit of ~$76.93 million, up from ~$23.05 million in FY20.

5-Year Financial Summary (Source: Analysis by Kalkine Group)

Dividend History: The company has a track record of paying a decent distribution to its shareholders. For H1FY22, the company has paid a distribution of 8.3 cents per share, slightly up from 8.25 cents per share in H1FY21. At CMP of $2.15, the company’s annual dividend yield stood at 7.69%, higher than the 5-year average dividend yield of 7.25%.

DPS Trend (Source: Analysis by Kalkine Group)

Key Metrics: Net margin for FY21 stood at 47.5%, up from 15.7% in FY20. ROE for FY21 stood at 6%, up from 2.1% in FY20. Current ratio for FY21 stood at 0.43x, down from 0.74x in FY20. Debt to Equity ratio for FY21 stood 0.58x, down from 0.61x in FY20.

Net Margin Trend (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 55.85% of the total shareholding, while the top four constitute the maximum holding. Centuria Capital Group and PEJR Investments Pty. Ltd. are holding a maximum stake in the company at 17.19%  and 10.68%, respectively, as also highlighted in the chart below:

(Source: Analysis by Kalkine Group)     

Key Risks: The company is exposed to the risks and uncertainties caused by the COVID-19 pandemic. The company’s results can be impacted by the changes in the valuations of its assets. COF is also exposed to the risk of vacancy and low occupancy.

Outlook: COF is focused on generating sustainable and quality income streams. It is also focused on executing initiatives to create value across a portfolio of quality Australian office assets. The company’s portfolio continues to benefit from high-quality modern office buildings leased to strong tenant covenants.  Due to the Concentrix renewal, and other positive portfolio leasing outcomes, the company has increased its FY22 FFO guidance from 18.0cpu to 18.3cpu. Further, the company has reiterated its FY22 distribution guidance of 16.6cpu.

Valuation Methodology: P/E  Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by ~5.6%. The stock is trading lower than the average 52-week price level band of $1.91-$2.608. The stock has been valued using P/E multiple-based illustrative relative valuation and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight discount to its peers, considering the uncertainty surrounding the COVID-19 pandemic and property valuation risk. For the valuation purpose, peers such as Mirvac Group (ASX: MGR), Dexus (ASX: DXS), Shopping Centres Australasia Property Group Re Ltd (ASX: SCP), etc., have been considered. Considering the company’s decent performance in H1FY22, rise in FY22 FFO guidance, modest long-term outlook, current trading level, and indicative upside in valuation, we give a “Buy” rating on the stock at the closing price of $2.15 as on 10 February 2022, 10:30 AM (GMT+10), Sydney, Eastern Australia.

COF Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and is subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and the uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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