Philosophically, for growth focused portfolios, we seek to acquire a part share in a range of high quality businesses at discounts to value. Embedded in this process is, among other things, a fundamental belief that the business we are buying can be substantially larger in the future. While risk remains omnipresent when it comes to equity investing, we believe Elanor Investors Group (ASX: ENN) is one such business.
We believe that ENN has the platform, management team and opportunity set to become a substantially larger business over the coming 3 to 5 years.
ENN listed on the ASX in mid-2014 with aggregate funds under management (FUM) and balance sheet investments (BSIs) of less than $200m. Within the space of three and a half years, management has judiciously invested to grow group FUM and BSIs substantially. Inclusive of new funds launched since 30 June 2017, gross FUM and BSIs now totals nearly $1bn.
 

Figure 1: ENN FUM growth since IPO.
Source: ENN FY2017 Presentation
 
While still early in the growth phase of the business, ENN has further developed since listing to now encompass four divisions, organised by business type:

  • Funds Management: manages third party owned investment funds and syndicates. We believe this division to be a core driver of longer term earnings growth.
  • Hotels, Tourism & Leisure: originates and manages tourism focused investment and fund management assets such as Featherdale Wildlife Park, Ibis Styles Albany Hotel and numerous co-investment stakes.
  • Real Estate: originates and manages investment and fund management assets such as the ASX-listed Elanor Retail Property Fund (ASX: ERF) and the unlisted unit trust, Elanor Commercial Property Fund.
  • Special Situation Investments: contains the John Cootes Furniture business and the property associated with John Cootes Furniture business at Merrylands, NSW.

Simplifying this structure further, as highlighted in ENN’s recent FY2017 full year result presentation, illustrates that management is acutely focused on funds management and directly held investments.
 

Figure 2: ENN Overview.
Source. ENN FY2017 Presentation
 
ENN could well be described as a value investor that tends to focus on tangible assets with stable cash flows and longer-term repositioning and/or development upside. Recent transactions have only acted to solidify this view. For instance, the newly established Bluewater Square Syndicate, which wholly owns the Bluewater Square Shopping Centre in Redcliffe (Brisbane), presents well as an income focused investment, one anchored by a strongly performing Woolworths supermarket.
Taking a longer-term view, this investment also has significant development upside in a coastal region that is becoming an increasingly ‘densified’ mixed-use precinct. ENN CEO Glenn Willis noted this potential at the time of acquisition; “The property has a favourable zoning and 27m height limit, or 9 storeys, across the majority of the 1.356ha site, providing significant expansion opportunities.” Exploiting such opportunities adds to the total return for both ENN (as a co-investor) and that of its investor base.
Taking a closer look at ENN’s balance sheet also underlines why we believe ENN continues to be modestly priced when compared with its intrinsic value.
 

Figure 3: Adjusted ENN Balance Sheet as at 30 June 2017.
Source: ENN FY2017 Presentation
NB: Securities on issue have marginally increased since balance date, hence updated NAV is now $1.74 per security.
 
Pricing large tracts of wholly owned land (Merrylands & Featherdale, Blacktown) that are strategically well located in Sydney growth corridors at market would yield a post-tax uplift in ENN’s asset base by between $20m and $30m, in our view. This translates to latent (unrealised) per security value of between $0.23 and $0.34 per security.
When added to ENN’s existing net asset value (NAV) of $1.74, most of which is tangible asset backing, we can see that the market value of ENN’s asset base is between $1.98 and $2.09 per security. In turn, this therefore suggests that the market is valuing ENN’s funds management business, which produced EBITDA of $11.3m in FY2017, at about $15m. This appears a little conservative to us. Concurrently, we believe this provides a good degree of downside protection at current prices.
Turning the above discussion into a basic sum of the parts valuation, detailed below, drives a per security value of approximately $2.46 per security.
 

Figure 4: ENN sum of the parts valuation.
Source: ENN Annual Report & Presentation, Clime.
 

Figure 5: ENN Valuation.
Source: SIV
 
When overlaid with SIV’s equity multiple valuation of $2.35, we can see that ENN trades at a discount to blended valuation of about 10%. When coupled with the forecast distribution yield of 6.4%, we believe ENN offers the prospect of a sound forward return.
Clime Asset Management owns shares in ENN on behalf of mandates for which it acts as investment manager.