Company Overview: Cromwell Property Group (ASX: CMW) is a real estate investment and management firm with a property portfolio in Australia and AUM in New Zealand, Australia, and Europe. The company has three business segments which include – (1) Co-investments, (2) Investment Portfolio, and (3) Funds and asset management. The company started trading on ASX in February 1973.

CMW Details

A Diversified Business Model Aids CMW: Despite the ongoing COVID-19 pandemic, the company’s 1HFY22 results reflect its platform's stability and resilience.

Key Strategies; Analysis by Kalkine Group

Sneak Peek at 1HFY22 Results:

• Profits Highlight: For the first half of FY22, the company reported a statutory profit of $132.5 million, down by 8.7% on pcp, due to higher tax expenses incurred during the same period. Further, the company reported an operating profit of $96.4 million, down from $99.1 million reported in pcp, due to the sale of non-core assets and impacts of new gross leasing deals. Nevertheless, the underlying profit depicted a rise of 3.5% in the prior six months.
• Liquidity Position: For 1HFY22, the company distributed per security of 3.25 cps, depicting a pay-out ratio of 88.3%. As on 31 December 2021, the company had cash and cash equivalents of $105.8 million. Liquidity remains robust with $632 million, including an undrawn facility of $526 million.
• Other Details: Portfolio value inclined by 1.3% on FY21 and clocked $3.1 billion in 1HFY22 at a weighted average capitalization rate (WACR) of 5.3% and portfolio occupancy of 93%. Total revenues for the period stood at $190.2 million, up from $184.5 million reported in the prior corresponding period.

Segmental Highlight (Source: Analysis by Kalkine Group)

Key Metrics: For 1HFY22, CMW reported a gross margin of 80.6%, higher than the industry median figure of 68.3%.  Current ratio for H1FY22 stood at 0.69x, higher than the industry median figure of 0.61x, demonstrating that the company is well equipped to pay its short-term obligations.

Profitability Profile (Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 56.18% of the total shareholding, while the top four constitute the maximum holding. ARA Real Estate Investors XXI Pte. Ltd. and Tang (Gordon) are holding a maximum stake in the company at 23.57% and 7.18%, respectively, as also highlighted in the chart below:

(Analysis by Kalkine Group)

Sale of Non- Highlights (Analysis by Kalkine Group)

Dividend Track Record: The company has been consistently paying distributions to its stakeholders for the past five years. In 1HFY22, the company paid a total distribution of 3.25 cents per share, representing a pay-out ratio of 88.3%. For the March 2022 quarter, the company intends to pay a distribution of 1.625 cents per security. At a CMP of $0.78, the company’s annual dividend yield stood at ~8.22%

Dividend History (Source: Analysis by kalkine Group)

Key Risks:

• The company is exposed to the risks related to the COVID-19 challenges, including government-mandated store closures, vaccination requirements, etc.
• A downturn in economic activity, slower employment growth, office-based employment, interest-rate levels, higher cost and low availability of credit, tax, stringent regulatory policies, and geo-political environment remain significant headwinds for the industry players.
• Due to the global supply chain conditions, the freight and other sourcing costs have increased, which might place additional downward pressure on margins.

Outlook: The company expects its existing infrastructure, including systems, processes, people and regulatory approvals and licences, to support decent growth in funds under management.  CMW seeks to maximise NOI and minimise vacancy rates in the core Australian portfolio to drive growth in dividend pay-out. It plans to launch an externally managed, listed REIT in Australia along with Cromwell Polish Retail Fund (CPRF), Cromwell European Logistics Fund (CELF) and Wooden Building Funds in Europe. With a refocused and simplified vision for the business, the company carries out new initiatives to grow its funds and asset management business and deliver additional value for its security holders.

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 ~12% and is trading at 52-week low price level of $0.78, offering a decent opportunity for accumulation. 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 some discount as compared to its peer, considering reduced performance fees and transactional activities, higher debt levels, challenges associated with the COVID-19 pandemic, and other macro-economic factors, etc. For valuation purposes, peers like Waypoint REIT Ltd (ASX: WPR), HomeCo Daily Needs REIT (ASX: HDN), and Hotel Property Investments Ltd (ASX: HPI) have been considered. Considering the diversified business model, higher revenue base, increased portfolio value, focus on minimising vacancy rates, decent long-term outlook, and indicative upside in the valuation, we give a “Buy” recommendation on the stock at the closing market price of $0.78, down by ~1.265 as on 26 May 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.

CMW 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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