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. As on 20 July 2020, the market capitalization of the company stood at ~$859.78 million. 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 growing 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 FY19, group revenues exceeded $100 million, and CNI recorded a net operating profit of $45.7 million, up from $45.1 million in the preceding year with operating earnings of 12.7 cents per stapled security. In the same time span, profit from property funds management went up by 13% to $25.1 million, reflecting the expansion of the company’s real estate platform. Recurring profits have also been supplemented by co-investments, which totalled to $419 million and generated an annualized total return of 26.6%. The Board retained a focus on reliable, growing distributions with total distributions of 9.25 cps, reflecting an increase of 12.7% on FY18. During the year, the company also reported a healthy balance sheet with a cash balance of $87.8 million, providing funds for transaction initiatives and future growth opportunities.

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 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. 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.

FY19 Financial Metrics (Source: Company Reports)

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of Centuria Capital Group. ESR Cayman Ltd. is the largest shareholder in the company, with a percentage holding of 18.81%.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Stable Balance Sheet and Reductions in Costs: 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 27.9%. Stable Gross margin and increasing net margin 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 3.8%. 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 4.51x and debt/equity ratio of the company stood at 0.42x as compared to the industry median of 0.56x. 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)

Decent Investor Returns and Growth in AUM: During 1H20, Centuria’s platform delivered decent growth and created value across the platform. During the half-year, the company reported decent 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 the first half, the company reported a record period with organic real estate acquisitions of $1.2 billion. In the same time span, 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.

Growth in Earnings and Distributions (Source: Company Reports)

Takeover Offer to Acquire Augusta Capital: The company has recently 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. With the acceptance of the offer, AUM of the company will increase by 24% to $8.9 billion. The Independent Directors Committee of Augusta has recommended accepting the Centuria Offer for all their Augusta shares in the absence of a superior offer.

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: 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 remained fully operational and provided continued support to tenants and investors. CNI has entered FY21 with a decent capital position and high recurring revenues.

The company seems to be well prepared to face the challenging global financial markets and is expected to benefit from the available growth opportunities. The Australian commercial, industrial and healthcare markets remain compelling and well supported with a decent demand from investors, seeking to deploy into Centuria funds. It retains a stable balance sheet that will support its platform expansion. CNI also has a decent distribution network and is successfully deploying skills and systems. It is aiming to expand from 22 to 30 investment options and has witnessed interest from newly established and existing non-aligned adviser groups.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)

Price to Earnings Multiple Based Relative Valuation (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 ~$859.78 million from approximately $80 million around 2016. 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 the investors to enter the market. We have valued the stock using the price to earnings 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 $1.65, down by 1.786% on 20 July 2020.

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

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