ASX code: ENN
Share price: $2.11
Industry: Diversified Financials
Forecast FY2017 Distribution: 15c
This week we return to Elanor Investors Group (ENN), which we highlighted as one of our preferred income stocks this time last year.
ENN made shrewd investments over last the 12 months, substantially expanding its funds management business. The share price followed, however we see the business maintaining its trajectory in the near term. With a distribution yield of 7.2 percent, the stock provides a sound balance of income and growth.
ENN invests in tourism, leisure and commercial property assets as manager of third-party-owned funds and syndicates, and through direct investments on its balance sheet, which include assets held for funds origination as well as special situation investments.
The company’s main focus is scaling funds management operations to grow annuity-type management fee revenue (fees are typically 1 percent of gross assets), which should be coupled with margin expansion via operating leverage on its largely fixed-cost base. It also collects an asset acquisition fee for each addition to its managed funds, typically 1.5 percent of the purchase price. ENN co-invests in its funds to retain underlying exposures and align its interests with investors.
The last 18 months has been a busy period with total funds under management (FUM) and balance sheet investments increasing by 27 percent to $592 million during fiscal 2016, split between $485 million FUM and $107 million direct investments. In the first half of fiscal 2017 ENN seeded properties for two new vehicles including the Elanor Commercial Property Fund and the Elanor Retail Property Fund (ASX:ERF), which listed in November. These activities have taken the Group’s FUM to over $800 million now.
As a result funds management operations are set to contribute over half of Group earnings this year, up from a third in fiscal year 2015.
Australian tourism fundamentals remain strong and should support demand across tourism assets held within the newly established Elanor Hospitality and Accomodation Fund, as well as ENN’s wholly-owned hotels and Featherdale Wildlife Park assets.
A potential near term driver is ENN’s wholly owned ‘John Cootes Furniture Merrylands Property’, which received development approval this year. This asset is carried on the balance sheet at $16m, however its market value could be north of $40 million, providing a one-off boost to reported earnings.
Balance sheet risk is low with corporate debt of $9 million well covered by operating earnings of approximately $15 million. With supportive industry tailwinds, balance sheet flexibility and management’s strong track record we see FUM growth continuing towards $1 billion, which should drive incremental distributions growth for investors.