May.17 — Federal Reserve Chairman Jerome Powell says the U.S. recovery could take a while and stretch through the end of next year, even as he downplays the risk of a second great depression. Powell’s remarks follow a warning that asset prices could see a significant decline should the Covid-19 crisis continue to deepen. Bloomberg’s Chris Anstey reports on “Bloomberg Markets: China Open.”
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The listed real estate sector is finding support today, but there’s one stock in particular that’s capturing the attention of brokers.
The stock in the limelight is Charter Hall Group (ASX: CHC) as three leading brokers upgraded their recommendation on the stock to “buy” following its latest update released last week.
The Charter Hall share price jumped 2.5% to a two-month high of $8.10 when the S&P/ASX 200 Index (Index:^AXJO) added 1% on Monday.
While the group may not be the best performer in the sector as the Stockland Corporation Ltd (ASX: SGP) share price surged 4.4% and the Vicinity Centres (ASX: VCX) increased 4% to $1.45, experts believe there’s plenty of room for Charter Hall to outperform.
UBS is one that believes in the upside as it upgraded the stock to “buy” from “neutral”.
“A concern of real estate valuations, funds flows/capital raisings and transactions in a COVID-19 world has seen CHC underperform the AREIT market by 11% over the past 3 months,” said the broker who put a 12-month price target of $9.80 on the stock.
“On rebased earnings CHC is trading on a 14x PE multiplied with growth of 6% from FY21.”
The diversified property portfolio of the group will give some protection against the looming structural risks facing retail landlords.
Credit Suisse believes there is too much focus on Charter Hall’s retail exposure.
“At 30 Apr 2020, CHC had A$18.0bn of Office and A$8.1bn of Industrial FUM pre any gross-up from its Long WALE exposure,” said the broker.
“Importantly, we estimate Retail provides only ~25% of ‘base’ earnings (i.e. pre any performance or transaction fees).”
Credit Suisse lifted its rating on the stock to “outperform” from “neutral” with a 12-month price target of $9.17 a share.
JP Morgan also took the opportunity to upgrade its call on Charter Hall to “overweight” from “neutral”. There were a few reasons for this, including management’s update that showed little impact from the coronavirus fallout on group earnings.
It also noted that the group is among the lowest risk and most defensive property stocks in the Australian real estate investment trust (A-REIT) sector.
Further, Charter Hall can grow its industrial platform through transactions like sale and leaseback and JP Morgan sees scope for the stock to re-rate.
The broker’s price target on Charter Hall is $9 a share.
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Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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Since bottoming out at $2.90 on March 25, shares in ASX automotive retailer AP Eagers Ltd (ASX: APE) have almost doubled in price in recent weeks and are now back up to $5.43 as at the time of writing. With sales slumping during the coronavirus lockdowns, new investors have responded positively to the raft of cost-cutting measures the company has put in place to see it through the crisis.
Towards the end of April, AP Eagers announced that it had made the difficult decision to cut around 1,200 employees from its workforce at a saving of around $6 million a month. Those at the top of the company will be feeling the pinch as well, with non-executive directors foregoing their director fees and senior executives taking a 50% pay cut. AP Eagers has also been working with its landlords, suppliers and other key stakeholders to defer lease commitments and other payments. It has also frozen all non-essential capital expenditure.
The company’s balance sheet remains strong, with $270 million worth of cash and undrawn debt facilities still at its disposal. Additionally, the company’s suppliers have provided it with $122 million worth of working capital facilities.
Finally, it’s also worth noting that the sale of the company’s refrigerated logistics business to private equity firm Anchorage Capital Partners is still progressing. However, AP Eagers has now had to settle on a $75 million sale price instead of the originally agreed $100 million due to the negative economic impacts from the coronavirus.
Shares in ASX digital car classifieds business Carsales.com Ltd (ASX: CAR) have also performed well recently, up almost 40% from their 23 March low of $10.47 to $14.27 as at the time of writing. In its most recent COVID-19 update, released to the market on 23 April, it announced a similar range of cost-cutting measures that it hoped would see it through the crisis.
As with AP Eagers, Carsales has decreased the size of its workforce, temporarily standing down around 250 mostly frontline staff. Board and executive remuneration for the remainder of the financial year have also been slashed by 20%.
Interestingly, Carsales noted that traffic to its website had remained high throughout the pandemic, despite lead volumes dropping by 25% in April. The international arms of its operations have seen varying impacts from COVID-19: while the Brazilian geography has suffered in recent weeks after escalating outbreaks in that country, revenues in South Korea have continued to grow.
Even in an economic downturn, people will still have a need for cars and other vehicles. This doesn’t exactly make AP Eagers or Carsales defensive plays, but both should continue to generate revenue even in a prolonged period of economic recession. After all, the AP Eagers company has a history dating back over 100 years.
However, there may still be a shift in demand away from luxury brands and towards cheaper used cars. If this occurs, it could theoretically present a greater rebound opportunity for online classifieds business, Carsales. Consumers may be less inclined to visit dealerships and may instead choose to buy their cars directly from the seller online.
Not only that, but as Carsales is now an internationally diversified company with operations in both Brazil and South Korea, these global revenue streams could also help to keep the company afloat during these uncertain economic times. And with its shares trading almost 25% below their pre-coronavirus highs, Carsales may still offer good value to new long-term investors.
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Motley Fool contributor Rhys Brock owns shares of carsales.com Limited. The Motley Fool Australia has recommended carsales.com Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
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