Charter Hall: an inflation hedge with earnings growth?

The market wide correction has left many investors asking themselves whether it's an opportune time to ‘buy the dip’.

Ord Minnett thinks that real estate fundamentals remain sound despite the S&P/ASX 200 Real Estate Index falling -10.4% year-to-date. 

The broker views that the current economic climate as supportive of REIT earnings growth, with Charter Hall (ASX: CHC) taking the spotlight with a Buy rating and a $23.00 target price. 

Inflation hedge 

Underlying inflation in Australia spiked to 2.6% in the year to 31 December, years ahead of the Reserve Bank of Australia’s forecasts. 

Subsequent rate hike fears and the expectation of rising bond yields drove much of the market’s recent selloff. Though, Ord Minnett thinks real estate can act as a store of value amid rising prices. 

Last year, Charter Hall reinforced this view by saying “assets with long Weighted Average Lease Expiries (WALE) and quality income streams from strong tenants are well placed to absorb any sustained rise in bond yields.” 

“Further strength can be found in assets that benefit from leases with fixed annual rental escalations, as this hedges against any significant and sustained increases in inflation.”

Valuations on the rise 

Charter Hall has recorded two guidance upgrades since its FY21 results.

In November 2021:

• FY22 earnings per share (EPS) upgraded to 83 cents, up 36% from last year

• Property valuation increased to $3.4bn, up 9.6% over the 4-month period since June 2021

In December 2021:

• FY22 EPS upgraded to 105 cents, up 72% from last year

• Property valuation increased to $3.5bn