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Financial Analysis of Property Business

3134 words (13 pages) Essay in Finance

23/09/19 Finance Reference this

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Financial Analysis of Property Business

Table of Contents

Introduction

Financial Structure

Development funding; $23.2 Billion

Average weighted cost of capital (AWCC)

The internal rate of return (IRR); annualized total returns;

Unit price

Tax exposure

Cash Flow

Market Capitalisation:

Gearing ratios and leverage:

Net tangible assets (NTA)

Micro property

Acquisitions

Occupancy

Weights Average Lease Expiry (WALE)

Property as a percentage of assets (property value/total assets)

Return on the property (EBIT % of property value)

Charter Hall Group (source: Morningstar)

Cromwell Property Group (source: Morningstar)

Property value increase/decrease over the previous financial year

Recommendation

Conclusion

Reference

 

Introduction

Charter Hall Group (CHC) known as a property fund manager and developer managing a suite of institutional, which provide a wholesale and retail unlisted property funds in which Charter Hall holds an investment. Charter Hall funds have diversified across four sectors such as Office, Retail, Industrial and Residential. Charter Hall has four office bases in each state such as NSW (Sydney), VIC (Melbourne), QLD (Brisbane), SA (Adelaide) and Western Australia (Perth). Charter Hall also comprised into two divisions were named in different such as property investments and property funds management. Charter Hall Groups listed in the ASX market in 2005. Charter Hall Groups were a stapled security comprising with Charter Hall Limited (CHL) share. This report we will look into deeply with the fund’s development and the financial structure and property micro property to see how the company has improved or at risk.

Financial Structure

This section we will look at the detail about the Charter Hall Group management funds, as it mentions the company revenues in 2017 has increased from $213.4 million to $246.2 million in 2018. According to the NTA $3.85 in 2018. The company is on a better position.

Development funding; $23.2 Billion

Comment:

According to Charter Hall Group annual report 2018, the company has to provide fives management such as investment management, development management, property management, asset management, and Leasing & Transaction service to the company $23.8 billion under their fund’s management portfolio. Charter Hall Group using this integrated property service model, to earning a fee from providing these services under the company portfolio, which can increase the company return from the capital investment. Also, Chater Hall has provides services segregated mandated to finding a capitalized on property and funds management dexterity. Within this, the company has contributed around $71.9 million to operating eaning to business. During the year, Charter Hall total funds have increased by $3.4 Billion up to $23.2 billion under their fund’s management. Within this growth has comprised the development capital expenditure, net valuation uplifts, acquisition around $2.5 billion and Charter Hall diverted around $1.0 billion on the property.

Average weighted cost of capital (AWCC)

The Charter Hall Group AWCC we look into a company debts cost and equity cost. According to data from Morningstar, Charter Hall equity is $3,223 million with weight 99.7% and Charter Hall debts is $8.9 million with the weight of 0.3%. according to the previous year 2017, Charter Hall Group has borrowed money around $6.48 million for investment but this year 2018 the company has borrowed more about $2.42 million, together with a cost of debts after company borrow is $8.9 million, with an interest paid is $3.2 million, which gave company with a total average 41.6 cost of debts. Charter Hall cost of equity, their risk-free rate 2.7%, Beta 0.78 and the company risk premium 2.6%, which give a total cost of equity 4.7% see data provide below:

(source: Morningstar Data)

Comment:

According to Charter Hall Group AWCC is 4.8%, as mention company can still borrow more to expand their company property and a new acquisition. Also, Charter Hall can still investment more property.

The internal rate of return (IRR); annualized total returns;

(Source: Charter Hall annual report 2018)

Comment:

The discount rate could also be speculated as the IRR rate, within data provide the IRR rate for Charter Hall range are about 6.8%-9.5% while compared to the previous year in 2017 range was 7.5%-9.3%, which is there nothing much increasing regarding the result. As for the annualized total return, according to Charter Hall annual report, we can look into two performance that applied for vesting such as:

  • Absolute TSR (50%) – with the vesting occurring on a straight line with bais of compound total return between 9% and 12% per annum, within 50% of vesting is lower than 100% range vesting.
  • Relative TSR (50%) – vesting occurring of compound total return between the 50th and the 75th percentile, Charter Hall Group return are ranking against the comparator group of the S/P/ASX 200 A-REIT Accumulation Index (XPJAN) (see CHC annual report)

Unit price

According to Morningstar data, the unit price for Charter has increased from $6.81 to $7.00 per unit. However, their company is unlisted of risk unit price. The risk has arisen within their own management group investment in unlisted property funds. The Charter Hall has managed all the company funding has to invest in and understanding the underlying property trends and value that would give a companies prices at risk rising. The investment has to carried values to associated with the company fair values via their profit or loss funds price unit according to the constitution respective funds.

Comment:

Since the risk has arisen for Charter Hall group with the data provided it is proved that Charter Hall Groups are not doing well this year. This might lead Charter Hall to a bankruptcy.

Tax exposure

The Charter Hall Group has policies to ensure that their services sales which made to the customer are appropriate with a credit historical. So as mentioned in Charter Hall report about 57% of company income is from the fee management and other section parties fee. While another 41% of the companies equity investment account in property funds and companies distribution investment which providing from fair value in the company profit and loss statement. Therefore, Charter Hall has maintaining to make their balance between their incomes interest and their gross rental incomes.

Comment:

Base on the current market conditions their no changed material for operating earnings per security post-tax which there will not be less than 3% growths in 2017 with OEPS 35.9 cents as per security, Charter Hall equivalent 37.0 cents per security. The distribution for charter hall payout ratio is expected to stable normalized and fall within company longer-term range about 85%-95% of OPES post-tax with the full-year basis and credit franking will continue to distribution.

Cash Flow

According to data provide Charter Hall Cashflow is not doing well as lead to serious at risk. By looking to a data compare from 2016 to 2018 the data show Customer Receipts are doing well from $175 million in 2016 increasing rapidly to $260 million in 2018,  the company net operating cash flow also increased as well from $130.3 million in 2016 to $169.1 million in 2018. However, by looking at the company net investing cash flow the company have shown a negative figure from -$50 million in 2016 and -$132 million in 2018 but the worst year is the last year 2017 the company has decreasing rally down up to -$258 million when compared to another 2 years, with this position of negative figure has to give Charter Hall were at-risk which is not good for a company. Even the company can manage to increase their net financial cashflow which is a negative figure -$87 million in 2016 to $130 million in 2017, but this situation hasn’t given company gets rid-off their risk position as this year 2018 Charter Hall has received a negative impact with -$177 million. See data below:

(Source: InvestSMART. 2018. Charter Hall Group)

Comment:

As we look into Charter Hall Group information deeply, as we found so far this company does not have a short-term and long-term of the company bearing interest assets, also Charter Hall external risk arise up to $220 million property facilities with a converter from USPP fixed interest rate variable. Therefore, according to this year annual report 2018 there no further more borrowing. Borrowing is drowned from a fair value at a fixed rate to exposing the value of the company risk interest rate. The company policies are to tolerable of risk interest rate by making sure the interest rate company borrowing participated in debts were matching and used these funding to the core.

Market Capitalisation:

According to the Charter Hall data, their Market Cap is $3,037 HY18 (Half Yearly) 6months period, so, therefore, FY18 (Full Year) the average company market cap is $3,260 which is a good lead to the businesses. The company has earned more whiles compared to the last 2 previous year in 2016 the company market cap is $2,088 million and in 2017 market cap is $2,562 million (see CHC Market and Earning Table).

Gearing ratios and leverage:

According to the Charter Hall gearing ratio, according to the investSMART data as you can see in the table below show that it a bit better in 2016 is negative -11%, in 2017 is -10.9% only 0.1% which has been improving much throughout this period, but from 2017 to 2018 HY18 (Haft Yearly) the company has improved a lot throughout this period as it increasing from -10.9% in 2017 to -4.9% in 2018 which give Charter Hall a big chance up to 6% in their equity. According to Charter Hall annual report 2018, the gearing has come to NIL in FY18 (Full Year) (see CHC Market and Earning Table). The company debts covenants are to monitoring as regularly to make sure that compliance and the debts report to the six-monthly debts periods. The responsible for this is treasury for negotiation a new debts facilities and need to monitor the compliance with the concordat (Charter Hall annual report 2018).

Leverage for Charter Hall Group is 1.08 in 2018, according to Morningstar data Charter Hall leverage are not much change by comparing to the last 4 years from 2014 also 1.08

Net tangible assets (NTA)

According to Morningstar data and Invest SMART data Charter Hall NTA is 3.85 in 2018. By comparing to the previous 4 years period their NTA has been improving as increasing rapidly according to data shown from $2.38 in 2014 to $3.85 in 2018.

(Source: InvestSMART. 2018. Charter Hall Group)

Comment:

According to the data, provide Charter Hall has improved that the company is improving a lot, at data provide the market cap as increasing to $3,260 and their net gearing ratio is increased too -4.91%, which gave Charter Hall opportunity still had more income in equity rather than in debts. Therefore, even the company are faced with an issue with financial crisis Charter Hall still got this income to solve out an issue. With the leverage either good or bad but at the moment Charter Hall position is stable. Lastly, NTA for Charter Hall is also improving and it good for the company to continue to operate.

Micro property

Acquisitions

According to Charter Hall information 2018, the company has acquired Folkstone company in Aug 2018 with a deal of $205 million cash. Also, Charter Hall offering Folkestone with shareholders $1.354 per share plus the dividend of 0.036 per share, total of $1.39 under an implementation arrangement that will be funded from cash reserves. Regarding information Folkestone shareholders are registered in 11/09/2018 with an entitled of $0.03 per share ordinary dividend, it still unpaid if their fails from approval. Within the property, evaluations to boosted Charter Hall FY18 statutory profit with $250.2 million and the company operating earnings was $175.8 million which is up to 16.2% in the 2017 (Simon Johanson. 2018).

Occupancy

Charter Hall Occupancy is around 98.1%

Weights Average Lease Expiry (WALE)

The Charter Hall WALE is around 7.7 Years and their total asset are $2,013.60

Property as a percentage of assets (property value/total assets)

FY18 Charter Hall Group – $63.40/$2,013.60 = 3%

FY17 Charter Hall Group – $40.4/1873.04 = 2%

Comment:

According to the data by comparing both there not changing much regarding the result as increasing by 1%

Return on the property (EBIT % of property value)

Charter Hall Group (source: Morningstar)

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

EBIT

79.25

21.26

18.21

68.46

67.58

73.93

78.06

119.5

113.4

289.9

271.6

Cromwell Property Group (source: Morningstar)

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

EBIT

106.9

104.5

100

107.8

133.8

168.1

201.4

173

217.7

209.5

213.6

Comment:

As comparing Charter Hall Group and Cromwell Property Group, both companies have a different start. Therefore, from 2008 charter has a lower start by comparing to Cromwell with a higher start. In the end, Charter Hall has the highest property value with 271.6 which is better than Cromwell Property Group 213.6.

Property value increase/decrease over the previous financial year

(source: Charter Hall annual report)

Comment:

According to the data provided above in 2017 Charter Hall has closing balance with $40.4 million compared to 2018 with a closing balance of $63.4 which is the company has improved gain a lot of profit and gain much income by increasing by $23 million.

Recommendation

With the recommendation, I don’t think Charter Hall need to improve in any section as it mentions Charter Hall Group has enough income in their equity so they can provide my much as they like as it enough income to invest.

Conclusion

In conclusion, the general finding the option right for the business. Therefore, Charter Hall Groups are initially managed. As mention in annual report Charter Hall has long-term performance, so at this point, we will raise in equity financing which it looks in long-term performance. The purpose of this report is to see how the Charter Hall Group performance, also Charter Hall Group have a strongly finiancial statement and need to focusing on the outstanding outcome for their shareholder.

References

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