What has changed?
FY22 Results lead to market upgrades. CHC reported a clean result which led to 5-6% earnings upgrades for FY23. Whilst FY22 was a blowout year for transaction and performance fees, CHC remains very confident that the Group can continue to grow despite what is likely to be a tougher operating environment.
Slowing earnings, not stalling earnings. CHC has managed to grow earnings by almost 20% CAGR since 2015, excluding transaction and performance fees.
Removing the benefits of property revaluations which have driven around a third of Funds Management income over the same period, leaves underlying earnings growth at 10-15%. Even in slower growth, higher interest rate world (with falling property prices), CHC can still grow earnings in our view.
Falling property prices and falling transaction values are unlikely to fall in tandem. In our view, a dramatic fall in commercial property prices is unlikely to occur without a pick-up in transaction volumes, providing some insulation to CHC earnings.
Balance sheet funding capacity is strong. CHC is in a $600m net cash position, ~$300m of retained earnings, and >$7.5bn of platform liquidity. This gives CHC optionality to pursue opportunities if the operating environment deteriorates. This also provides an area for earnings upgrades over FY23-25 as the balance sheet is deployed.
We would expect CHC to continue to focus on deploying capital with third parties given the higher returns on capital that co-investment opportunities provide.
Share price ascribes little value to future growth prospects. In our view, the market is being too aggressive at discounting the impact of higher interest rates, and the potential slowing of fee income associated with a potentially more difficult operating environment.
Earnings multiples have fallen from 25x to <15x, and now trading in-line with equity asset managers like Pendal (PDL) and Perpetual (PPT), despite the superior economics of property-based funds managers. We upgrade CHC to Buy.
Investment view
We upgrade CHC to a Buy rating. In our view, the share price is factoring a significant decline in asset values and transaction income.
Whilst underlying earnings growth (ex-performance and transaction fees) is likely to slow from almost 20% CAGR since 2015, earnings can still grow between 10-15% pa even in a tougher environment for asset managers with property-related earnings.
Over the last 6 months, the earnings multiple has de-rated from a peak of 27x to 14x (now around the long-term average), solely driven by the fall in the share price.
Investor perceptions around property-based asset managers are likely to remain mixed over the next 6-12 months. Whilst this suggests a level of volatility may continue in the share price, evidence of earnings momentum should be the catalyst for a share price re-rating.
Risks to investment view
The two most significant risks for CHC; 1) the continued ability to source capital across the CHC platform; and 2) the ability to deploy with appropriate returns across acquisition and development opportunities. A decline in AUM, lower investment/transaction fee income would likely be perceived as negative by investors.
CHC’s acquisition of equity fund manager Paradice changes the risk profile of earnings (more volatile). Further moves into non-property-related income potentially risk a derating of earnings multiple for CHC.
Recommendation
We have upgraded our recommendation from Hold to Buy.
Figure 1: Property base FUM growth. FY23 has seen $3.5bn added post Jun 30
Figure 2: PER has derated by ~40% on fears of rising rates and falling property prices
