Company Overview: Cromwell Property Group is a global real estate investment manager. The Company is engaged in property investment, funds management, property management and property development. Its segments include Property investment, Property/internal funds management, External funds management-retail, External funds management-wholesale and Property development. Property investment segment is engaged in the ownership of investment properties located throughout Australia. The Property/internal funds management includes property and facility management, leasing and project management for its managed investment schemes. The External funds management-retail segment includes external funds for retail investors. External funds management-wholesale includes establishment and management of external funds for wholesale investors. The Property development segment includes property development, including development management, development finance and property development related joint venture activities.


CMW Details

Outpaced the EPS Guidance for FY 2018, Capital Raising, and More: Cromwell Property Group (ASX: CMW) is a small to mid-cap REIT company with the market capitalization of about $2 Bn as of December 06, 2018. The company has reported 3.2% revenue CAGR and 2.8% NPAT CAGR over FY14-18 under the volatile macroeconomic environment which was negatively revised. The top line and bottom line were mainly supported by the diverse range of products across key property sectors at the global platform and robust business strategy in relation to building fund management business over the same period. Moreover, the company has managed to outpace the earnings per share or EPS guidance for FY 2018 on the back of the strategy of reinvestment as well as recycling. It also wrapped up the capital raising activities on the successful note and ended FY 2018 with the robust balance sheet. The company also possess significant cash position, low gearing as well as long-debt tenor. CMW’s assets under management or AUM witnessed the YoY growth of 14% and stood at $11.5 billion. The company had also made deployments towards people, platform as well as technology so that it can witness robust growth momentum moving forward. However, the company generated statutory profit amounting to $204.1 million in FY 2018 which implies the fall of 26.5% on the YoY basis as in FY 2017 it generated $277.5 million. The company managed to witness a YoY growth of 3% in its operating profit in FY 2018 to $156.8 million. Keeping in view that the company is paying dividends consistently with 8% dividend yield on five-year average basis and focus on building fund management business, we have valued the stock using premium 1-standard deviation to five-year average P/E of ~12x for FY20E EPS (close to prevailing EPS) and have arrived at a target price upside of about single digit in mid to long term.

 
Key Financial Metrics:


Source: Company Reports, Thomson Reuters
 
Growth in Pay-out Ratio Further Supports Confidence: Over the past five years, Cromwell Property Group has managed to maintain its healthy dividend payout ratio in the range of 90% to 100%. In FY14, the CMW’s dividend payout ratio stood at 90.0% and finally, in FY18 the payout ratio came in at 100.2%, signifying the growth of 255 bps on an average of five-year basis. Despite the muted performance in FY18, the company declared dividends amounting to 8.34 cents per share which is in-line with the previous year. Further, the management stated that they would be working towards maintaining payout ratio around 90% of the operating earnings in FY 2019. In our view, this level of the payout ratio is decent which ensures that the company delivers significant value to the shareholders through dividends.
 

Cromwell’s Dividends (Source: Company Reports)

Asset Sales Impacted Property Investment Division’s Operating Profit: In FY 2018, CMW’s property investment division managed to garner operating profit amounting to $115 million which was a YoY fall of 7.8% mainly because of asset sales which were of $154 million. In the release which contained information related to FY 2018 results, the company stated that its portfolio could be further seen as three parts i.e., Core, Active, and Core+ which contributed to about 58%, 6%, and 36% respectively of total group property investment in FY18. By looking at its FY18 property investment portfolio, we presume that the Core portfolio will drive NOI or net operating income which stands at 4.6% in FY18 along with leasing upside on the Core+ assets and the Active portfolio and ensure the value adds opportunities in years to come.
 

Property Portfolio Snapshot (Source: Company Reports)

CEREIT’s IPO Supported Funds Management’s AUM: Cromwell Property Group’s funds management division garnered $39.6 million of the operating profit in FY18, implying a rise of 25.2% on a YoY basis as in FY 2017 the segment generated $27.7 million in terms of operating profit. However, the division ended FY 2018 with $11.5 billion of total assets under management or AUM thanks to the CEREIT’s initial public offer or IPO. Of the total AUM, retail AUM amounted to $2 billion, wholesale AUM stood at $6.7 billion while $2.8 billion was the internal AUM.
 
 
CMW’s Funds Management Division (Source: Company Reports)

Retail Funds Witnessing Decent Performance: Cromwell Direct Property Fund or DPF has managed to buy fourth direct asset amounting to $42 million. This has been bought in Brisbane. As per the company’s presentation, this fund has been garnering a decent amount of traction, and some of the market players have also given favourable views regarding the fund. Further, the company’s other funds have also been witnessing favourable momentum like Cromwell Phoenix Property Securities Fund which has been garnering robust inflows and, on the other hand, Cromwell Phoenix Opportunities Fund would not be making any further deployments, and this fund has garnered over 20% of the returns on the annualized basis considering the time period from the very inception (i.e., 2011).

Strong Performance Witnessed in CEREIT: The forecasts related to the IPO or initial public offer have surpassed all the important metrics related to the performance. As far as gearing of CEREIT or Cromwell European Real Estate Investment Trust is concerned, it has witnessed a decline and stood at 31%. CEREIT has maintained its focus towards the organic value creation. However, CEREIT is working towards numerous portfolios so that the growth opportunities which are inorganic can help the business objectives going forward. Also, it happens to have a strong as well as diversified exposures across the geographies. 


CEREIT’s geographical exposure (Source: Company Reports)

Raising Proceeds for Debt Repayment, CEREIT’s Investment: At the end of November 2018, CMW came forward and made an announcement that it had planned to raise around $300 million in capital. The company also stated that equity raising has also been underwritten partially and it believes that it would be able to garner at least $210 million. In the press release, the company also stated the areas in which it would be deploying the proceeds which would be garnered. It stated that the proceeds would be utilized for financing the equity commitment of Cromwell Property Group which amounts to around $124 million. This commitment was made in the entitlement offer of CEREIT. Moreover, the proceeds would also be utilized towards the debt repayment so that the growth opportunities which might arise moving forward can be tapped.

Public investments, Business Confidence to Support Cromwell Moving Forward: As per the FY 2018 results presentation, Cromwell stated that there has been a favourable momentum in the business confidence and also the surveys related to the capital expenditures are showing favourable momentum with respect to the deployments in the non-mining businesses. Also, the public investments are witnessing the positive movement as some of the giant projects related to the infrastructure are on-going.

However, the company mentioned about few concerns related to the unfavourable momentum in the Chinese economy, the impacts of the trade battle as well as several other risks which have the potential to impact the CMW’s growth prospects. The company also stated that the growth in the Australian GDP might be between 2-3% p.a. as the there is a high probability that the Reserve Bank of Australia would not be raising the rates till the end of 2019.


Historical P/E Band (Source: Company Reports)

Stock Recommendation and Analysis: In the last three months, the stock has fallen 9.68% and is trading at decent PE multiple of 9.240x, indicating undervalued scenario at the current juncture. From the technical analysis front, two technical indicators, Moving Average Convergence Divergence or MACD and Exponential Moving Average or EMA has been applied on the daily chart of Cromwell Property Group and the default values have been considered. As per the observation, the MACD line has crossed the signal line and is moving upwards representing a bullish momentum. It would not be wrong to say that the crossover has just occurred. Therefore, the bullish momentum might build up. Moreover, the stock price has also crossed the EMA and it is moving in the upward direction. The crossover can be termed as bullish crossover. On the analysis front, the company saw a rise in the gross margins from 86.9% in FY 2017 to 88.2% in FY 2018. However, the company’s EBITDA margin fell from 57.3% in FY 2017 to 32.2% in FY 2018. The decline was also witnessed in the net margin. In FY 2018, the net margin was 63% while in FY 2017 it was 88.6%. Despite this, the company is well-positioned to witness favourable momentum as it has a robust balance sheet and it can tap key growth opportunities moving forward. Furthermore, the company has been maintaining decent levels of dividend payout ratio which could attract market participants. On the other hand, the company is paying dividends consistently with 8% dividend yield on five-year average basis and focus is on building fund management business, thus we have valued the stock using premium 1-standard deviation to five-year average P/E of ~12x for FY20E EPS (close to prevailing EPS) and have arrived at a target price upside of about single digit in mid to long term. Based on the foregoing, we give a “Buy” recommendation on the stock at the current market price of $1.020 (up 1.493% on December 06, 2018).
 

CMW Daily Chart (Source: Thomson Reuters)

 
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