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. COF provides a broad range of investment prospects, which incorporate listed and unlisted real estate funds and tax-effective investment bonds. COF was listed on ASX in December 2014.

COF Details

A Quick Look at 3QFY22 Trading Update: COF remains on track to meet changing tenant demands given a healthy balance sheet, reduced near term debt expiry risk, and quality of the COF portfolio, which comprises young, modern office buildings leased on robust tenant agreements.

Quarter Highlight (Source: Analysis by Kalkine Group)

Digging into 1HFY22 Results Highlight: The company witnessed continued leasing momentum across the portfolio during the half-year ended 31 December 2021 (H1FY22). Some of the key highlights of the period are as follows:

• Increased Profitability: For H1FY22, the company reported a statutory net profit of $63.6 million, compared to $21.5 million reported in the pcp. Further, the company reported Funds from Operations (FFO) of $54.7 million. The positive results depict solid operating metrics and continued leasing impetus across the portfolio. This, in turn, has resulted in a robust average rent collection of 97.8% in 1HFY22, demonstrating the resilience of the COF portfolio and the quality of the underlying tenants.
• Strategic Acquisitions: Over the period, the company expanded its portfolio by completing the strategic acquisition of two high-quality modern office buildings for a combined value of $273 million. These buyouts provide robust momentum to the COF’s portfolio, including high occupancy, an enhanced portfolio WALE and innovative office space.
• Raised Equity & Decent Liquidity Position: During H1FY22, the company raised $201 million of equity, with a further $100 million to its debt facilities. In addition, the company has reported an increase in its cash balance to $109.2mn as on 31 December 2021 against $22.63mn as on 30 June 2021.

Financial Highlight (Source: Analysis by Kalkine Group)

Key Metrics: For 1HFY22, COF reported a net margin of 73.3%, higher than the year-ago figure of 23.4%.  Current ratio for H1FY22 stood at 1.59x, compared to 0.61x of the industry median.

Liquidity Profile (Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 52.57% 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:

(Analysis by Kalkine Group)

Dividend Track Record: Recently, COF informed the market that the interim distribution payable for the quarter ending 31 March 2022, stood at $2.2328 per unit. 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 $2.02, the company’s annual dividend yield stood at ~8.16%.

Dividend History (Source: Analysis by kalkine Group)

Key Risks:

Risk Highlight (Source: Analysis by kalkine Group)

Outlook: COF remains focused on producing sustainable and quality income streams by implementing plans to create value across a quality Australian office assets portfolio. The company’s portfolio continues to benefit from high-quality modern office buildings leased to effective tenant covenants. Due to the positive portfolio leasing outcomes, the company has re-affirmed its FY22 FFO guidance of 18.3cpu. Further, the company has reiterated its FY22 distribution guidance of 16.6cpu, indicating an FY22 distribution yield of ~7.5%.

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 nine months, the stock has been corrected by ~21.8% and is trading lower than the average 52-week price level band of $1.955 - $2.608. The stock has been valued using the P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). The company can trade at a slight discount as compared to its peer, considering the property valuation risk, challenges associated with the COVID-19 pandemic, lower revenues base, etc. For valuation purposes, peers like Mirvac Group (ASX: MGR), Dexus (ASX: DXS), and others have been considered. Considering the company’s decent growth in H1FY22, synergies from the acquisition, diversified business model, encouraging long-term outlook, and indicative upside in the valuation, we give a “Buy” recommendation on the stock at the closing market price of $2.02, down by ~0.492% as on 2 June 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

COF Daily Technical Chart, Data Source: REFINITIV 

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

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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 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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