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On Friday, JPMorgan analyst Solomon Zhang upgraded Cromwell Property Group (CMW:AU), an Australian real estate investment trust, from Neutral to Overweight while maintaining a price target of AUD0.45. Zhang noted that Cromwell Property Group has become a much simpler business following its recent strategic moves. The company now focuses on a $2.1 billion Australian office investment portfolio, which has a weighted average lease expiry (WALE) of 5.1 years, and a $2.3 billion third-party property funds management business operating across Australia and New Zealand.
Cromwell Property Group has successfully streamlined its operations by divesting non-core businesses, including European funds management, Polish retail investment assets, and retirement living. This strategy has also allowed the company to significantly reduce its balance sheet gearing from nearly 50% to less than 30%.
Despite these positive changes, the company’s shares have underperformed compared to its A-REIT peers, with a three-month return of -19%, compared to the ASX200 REITs’ -2%. This underperformance was further impacted by ESR’s discounted sale of an 11% stake in the company.
JPMorgan sees the current situation as an attractive opportunity for investors, highlighting that Cromwell Property Group’s shares are trading at nearly a 40% discount to book value. The analyst also pointed out that no value is currently ascribed to the company’s sizable funds management business, which is estimated to contribute approximately 40 basis points of EBIT on Gross Asset Value (GAV). With an implied capitalization rate of 10% and an approximately 8% dividend per share yield, the valuation appears compelling.
The analyst also suggested that there could be potential for strategic takeover interest in Cromwell Property Group, especially considering ESR’s plans to eventually sell its remaining 19.9% stake in the company. The upgrade to Overweight is based on these valuation grounds, with the price target remaining steady at AUD0.45.
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