I spent a few hours today running through the past ten or so Annual Reports for this company, and performing an assessment of the quality of its financials.
As I said in an previous post, this is a delightfully simple company: it is a essentially a single-asset business with a long successful operating history. It's financial accounts are consistently presented from one year to the next, and are straightforward and transparent, without any signs of financial wizardry.
One of it's major appeals is that it is a highly cash-generative business, with Operating Cash Flow covering Stay-in-Business Capex by a factor of almost 5 times.
One of the consequences of this strong free cash flow generation is that the Issued Capital has remained unchanged for as far back as I checked (namely, 2000). That's even despite a major, $300m re-development ($150m for CDP's account) undertaken in 2011/12 which was funded without recourse to shareholders for a single cent (what's more, the distributions weren't even reduced over that period).
Any property trust with just one property in its portfolio will struggle to grow, but CDP has not fared too badly on that score, with Revenue and Earnings delivering real growth over the past 2 decades:
[2012-2013 period warrants some mention: that was the period of the re-development of the centre, which disrupted business at the time, but the benefits can be seen in subsequent periods.]
So, all in all, a high-quality asset and a well-managed company.
Certainly investment -grade.
That now established, onto the matter of valuation:
For context, at a market cap of around $230m, CDP is today valued at very similar levels to what it was during the throes of the GFC. That's despite it currently generating 65% higher Net Property Income (a proxy for Gross Profit), and 40% greater Net Profit compared to the GFC period, and the value of its property asset being some 90% higher.
[That earnings growth has lagged asset growth is something worthy of remark, and is one of the brickbats to be leveled against the company... but more on this later.]
With the impact on Covid-19, the question to be answered is, "What is CDP's new normalised level of earnings?"
Make no mistake: it is a mature asset and has been experiencing a degree of margin compression due to a sluggish top line for the past 4 years, combined with modestly-rising input costs, offset to a degree by falling interest expenses (lower cost of debt more than offsetting increased debt levels).
Note: this ignores any property revaluation or gains/losses on interest rate derivatives, i.e., it is looking only at operating earnings.
On this basis, Trust Profit for 1H2020 was $12.1m, but given the absence of any precedent for what is currently happening, it is hard to know what the figure might look like for 2H2020.
If a rather harsh 20% reduction in JH2020 Revenue is assumed, and assuming no cost relief, that would result in Profit for JH2020 of around $7.0m, which would be a 41% reduction on pcp!
Now that is clearly some kind of horror outcome (assuming 20% Revenue collapse is bad enough, but to combine that with the company achieving no sort of cost response is unlikely), but let's run with it for the sake of conservative-ness:
That means full-year profit for FY2020 of ~$19m, down 22% on FY2019 (1H was down 3%, 2H to be down 41% based on the assumed bearish scenario).
Which, at the current $228m market cap, places the stock on a current P/E multiple of less than 12x
For context, it has never been that low, not even during the longer-term history when prevailing interest rates were several multiples higher than they are today:
(If one had to adjust for the structural change in terms of a dramatically lower cost of capital over that 20-year period, I strongly suspect that CDP's current valuation multiple will be close to half of its long-term average!)
Ad then, on an asset backing basis, as you alluded in your post, the under-valuation looks even more pronounced (and I suspect that will still be the case, even after the inevitable impairment in the property valuation, such is the current steepness in the discount-to-NTA):
So, undeniably cheap.
No matter how it is viewed.
To introduce some balance to the discussion, there are a few unwelcome trends/features of CDP's financial metrics:
Earlier in this post, reference was made to earnings growth lagging asset growth.
The extent of this is represented by the following chart which shows that, over time, the company is getting less earnings "bang" for its property valuation "buck":
While part of the reason for this is the lowering of cap rates, as interest rates have declined.
But one of the unintended outworkings of it is - because management fees are levied based on NTA, as the property value have been ratcheted up (by 90% over the past decade, recall, although that does reflect, in part, the major re-development programme in 2011/12) - that management fees are chewing into Property Income:
I'm unsure what is to be done about it, apart from the Manager, Scentre Group, agreeing to lowering the Management fee arrangement, but I can't see why they should volunteer to do that.
As it is, the Manager is currently offering its services at a steep discount compared what it could charge:
I'm unsure of the history of why this is the case, but it has been that way for as long as they've published those details (which is to 2012; and, actually, after the re-development, from 2013 the management service fee actually increased from 0.4% to 0.6%, where it has remained since).
The other little niggle I have (not a major one, just a little one) is this:
Every non-payment of a distribution has the effect of reducing that leverage by around 3%, which goes to explain why the last distribution was cancelled. Despite that, I suspect that the likely reduction in the property valuation will see that cart continue to trend up after the full-year balance sheet is published.
Of course, when this happens it is almost certain to lead to talk/speculation about the need/desire to issue fresh equity capital; but I think such thinking is unfounded. CDP's are reliable, predictable, and therefore highly-bankable, cash flows, and the gearing level is still modest and the cost of debt is likely to remain low for many years to come.
So, I'd say there's a 5% chance of them raising capital.
(More of a consideration, I think, is the prospect of a continued overhang on the entire property sector due to funding requirements for capital raisings by some of the more leveraged listed companies.0
Finally, the other bugbear with the stock is that it is almost impossible to buy unless you spend a lot of time monitoring a screen, an activity for which I have a strong disliking.
The good thing is that I don't think the share price is going anywhere in a hurry, so there is time to accumulate CDP stock.
So, in summary, egregiously cheap.
Like several other property-derivatives which have been somewhat indiscriminately discarded by the market.
(20min delay)
