You'll have to ignore all previous profits CER has reported as CER will be a new entity and will deriving all its revenue from Aust shopping centres.
Any amalgamation with the other Centro syndicates will bring synergy in the form of no management fees being funnelled out to CNP. This is where most of the synergisitc benefits lie. The lower expenses will increase the NOI of each of its properties, which will lead to a subsequent higher valuation of its portfolio.
We will also be able to negotiate lower margins on our debt facilities mainly due to our lower gearing.
Rental income is growing strongly across all of CER's Aust assets and is expected to grow in this HY at the same pace as the Dec 10 HY, which was 4.4%.
Cap rates are at a very high 7.5%. Compared to its Aust peers , this is extremely high. CFX and WRT have cap rates 100 basis points lower. Fair enough that CER's association with CNP and going concern risk conveyed by its auditors, led to an exaggerated softening of cap rates. However, the removal of these concerns plus strong rental growth and Occupancy rates in excess of 99%, should see a tightening of cap rates closer to its peers.
I posted the below 2-3 weeks back on here. There is plenty more upside for CER and this will continue into the long long term.
Ive looked at what the balance sheet, gearing, NTA and underlying profit will most likely look like post sale of the US assets to blackstone.
According to the announcement, NTA is expected to be 41c and gearing 43%. Keeping this in mind, I have come up with the likely look of the balance sheet.
Cash.... 85000 (000s) Aust Property (Equity Controlled)...... 1,443,475 Aust Property (Controlled Operations).....107,650 Option Karingal.....48,600 Total Assets..... 1,684,725
Debt Facilities (prior to sale)...1,126,600 Loan to CNP....111,000 Total Liabilities....1,237,600
Pay down of Aust debt (from sale of US Assets)...500,000
Revised liabilities total....... 737,600.00
Net Equity....947,125.00 NTA per share....41c Gearing.....43.8%
The Aust Property values come from page 16 of the Appendix 4d announcement. It also agrees with the HY presentation. The Option to purchase Karingal is noted in note 3(iv) of the appendix 4d announcement.
The cash balance is about $12m lower than the 31 Dec 10 balance shown in the balance sheet. Ive assumed that the cash balance remained constant after taking into account the closure of the equity hedge at the beginning of Jan for about $12m.
The Debt facilities prior to sale is the total amount of Aust debt facilities are shown in the HY supplemental. Below is a summary of these debt facilities.
The only other meaningful liability would be the $111M loan to CNP, which I am assuming would be paid to CNP once the sale proceeds are received. What CNP does with this I am not sure but I assume their debt holders would take possession of this as the pie allocated to CNP shareholders does not include this.
The revised liabilities total would be approx $737M after the $500M sales proceeds have been apportioned to CER?s Australian debt.
Please note for materiality purposes I have not looked at accounts receivable nor payable so there may be a slight discrepancy in the total liabilities above I have quoted.
However as the NTA and the gearing I have come up with matches CER?s announcement, I?d say Im in the ball park with regards to the balance sheet items.
Estimated P&L:
NOI: $120M (Taken from Page 1 of Aust property supplemental. HY NOI shows $60.6M but I have assumed an annualised $120M)
Expenses:
Aust Debt $737M
Weighted avg cost of debt: 7%
Annual interest charges: $51.59M
Underlying profit: $68.41M or 3c per unit (earnings yield of 9.4% on current share price)
Points to note:
Amalgamation of funds has not been considered. It is assumed that any amalgamation that takes place would be to the benefit of CER unitholders so the analysis conducted here is a base case scenario.
The NOI of $120M assumes no rental growth in the HY ending June 2011.
It also assumes no reduction in management charges as Centro MCS surrenders its RE status and possibly gets transferred to CER or a CER subsidiary. Presently 10% of our annual base rent gets paid to the RE for management related costs. Annual Base Rent was $142M as at 31 Dec 10.
A weighted average cost of debt of 7% is fair. This will still be about 200 basis points above the cash rate. The gearing of 43% will allow CER to negotiate lower margins on its debt. Also if they go down the CMBS debt issue route, demand will be there, which will push margins down also. It has already been documented that margins on debt have lowered across the board as a result of Centro?s US sale.
If CER elected to payout 75% of its profit as distributions, then it would pay out approx $51M or 2.2c per unit. This is a div yield on current share price of 6.9%. The retained earnings could be used to further pay down debt and increase underlying profits for future periods. Also CER should continue to generate strong rental growth on its portfolio.
Still very much looking forward to CER's future!
Cheers
CER Price at posting:
35.5¢ Sentiment: Buy Disclosure: Held
