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Morgan Stanley tipping this property stock will outperform into 2020

The Charter Hall Group (ASX: CHC) share price is bucking the sell-off in the property sector after two brokers published upbeat reports on the stock.

The CHC share price jumped 3.9% to $11.42 during morning trade when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index gained a modest 0.4%.

The stock is outperforming its peers too. The Goodman Group (ASX: GMG) share price slumped 1.8% to $13.82, the Mirvac Group (ASX: MGR) share price lost 2.6% to $3.20 and the Stockland Corporation Ltd (ASX: SGP) fell 2.1% to $4.74 at the time of writing.

Charter Hall to outperform through to January

There’s a 70% to 80% chance that shares in Charter Hall will outperform over the next 60 days, according to Morgan Stanley.

“This is because the stock has traded off recently, making short term valuation much more compelling,” said the broker.

“In addition, the company’s FY20 earnings upgrade, from 18-20% growth to 30% growth, on the back of the acquisition of the BP Service Station portfolio, and Arnott’s Huntingwood site, suggests that CHC’s ability to grow its AUM [assets under management] platform remains strong in a low yield environment.”

Morgan Stanley rates the stock as “overweight” with a price target of $12.80 per share.

Broker upgrade

But it isn’t the only one that’s bullish on Charter Hall. UBS upgraded the stock to “buy” from “neutral”. The broker is becoming increasingly confident in the company’s ability to raise and use third-party equity and debt.

Further, it cited an improved outlook on cap rate compression through to 2020, Charter Halls greater exposure to floating rate debt (which has fallen with interest rates) and ongoing capital raisings in the high margin Direct Property business.

“CHC’s ability to access long WALE [Weighted Average Lease Expiry] assets backed by strong tenant covenants has far exceeded our expectations,” said UBS.

“The ability to sustainably gear these assets (~50%) allows CHC to grow AUM with less equity required. FY20 YTD acquisitions have already surpassed FY19 with substantially less equity raised. We expect AUM growth to moderate post FY20 to $3-4b pa versus $9b in FY20.”

Increasing dividends

The broker increased its price target on the stock to $12.50 from $12.10 per share. It also believes that management can increase dividends every year for the next few years.

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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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