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Elevator Pitch
I continue to have a Buy investment rating assigned to CBRE Group, Inc. (NYSE:CBRE) shares. I previously wrote about CBRE's defensive business mix ("downside protection") and its capacity for investment ("upside potential") in my prior article published on July 18, 2023.
My focus is on CBRE's recent investment and the company's fiscal 2024 guidance in the current write-up. I have a favorable opinion of CBRE's recently announced investment in a carbon accounting software business, and I expect CBRE to continue making wise investments going forward. Separately, CBRE has a good chance of surprising the market in a positive manner, if it meets its FY 2024 earnings target. These factors mentioned above explain why I still rate CBRE as a Buy.
Recent Investment In Carbon Accounting Software Business
I highlighted that CBRE has the "financial capacity to invest" in my earlier July 2023 update. Recently, CBRE also stressed at the Barclays (BCS) 2023 Global Financial Services Conference on September 13 this year that it is "very focused on building a pipeline of potential (investments) targets" that "can build out capabilities across our company."
As such, it is no surprise that CBRE announced a new deal last week. Seeking Alpha News reported on September 20, 2023, that it has invested in "Emitwise, a provider of carbon accounting software." The company didn't provide details about the size of its equity interest in Emitwise or the actual investment consideration.
The investment in Emitwise is positive for two key reasons.
Firstly, CBRE has put itself in a better position to cross-sell the company's advisory or consulting services relating to decarbonization by utilizing Emitwise's emissions tracking capabilities.
Secondly, CBRE will make itself more attractive in the eyes of ESG-focused investors with its stake in Emitwise. The company has a goal to "achieve net zero carbon emissions by 2040" as per its previous announcement in October 2021. The collaboration with its investee Emitwise is likely to boost CBRE's ongoing decarbonization efforts.
There might be more investments down the road for CBRE, taking into account both management intention and the company's key credit metrics.
At the recent Barclays investor event in mid-September, CBRE emphasized that it is "very focused on building a pipeline of potential targets" that "can build out capabilities across our company."
As indicated in its Q2 2023 earnings presentation slides, CBRE has no debt maturing for the next three years (2023-2025), and its net debt-to-EBITDA ratio (0.8 times) as of June 30, 2023, is way below 2.0 times, the upper limit of its net leverage target.
2024 Bottom Line Guidance
CBRE guided that there is a "reasonable path to achieve record Core EPS in 2024" in its second quarter results presentation.
The market is skeptical that CBRE can deliver on its 2024 bottom line guidance. According to consensus financial data taken from S&P Capital IQ, Wall Street analysts expect CBRE to report a normalized EPS of $5.47 for FY 2024, which will be lower as compared to the company's core EPS of $5.80 and $5.69 for FY 2021 and FY 2022, respectively. This means that there is room for positive surprises, assuming that CBRE's earnings reach a new historical high next year.
In my view, CBRE's GWS (Global Workplace Solutions) and REI (Real Estate Investments) businesses are well-positioned to achieve better-than-expected results to allow the company to meet its 2024 earnings target.
Net revenue for CBRE's GWS segment grew by a reasonably strong +13% YoY from $1,956 million in the second quarter of 2022 to $2,205 million for Q2 2023. Looking ahead, the two sub-segments of the GWS business, Facility Management and Project Management, have significant growth potential.
CBRE disclosed at the Barclays 2023 Global Financial Services Conference this month that an estimated 30% of companies have outsourced the management of their facilities to external organizations. This implies that there is still ample room to expand the GWS business' Facility Management operations.
Separately, CBRE's acquisition of a 60% interest in Turner & Townsend Holdings in 2011 has allowed its Project Management business to penetrate the infrastructure space. Infrastructure projects tend to take multiple years to complete and are less affected by economic weakness, which lends resilience to the GWS business' Project Management sub-segment.
For the REI segment, it is worthy of note that Assets Under Management or AUM has been relatively stable despite financial market volatility and economic uncertainty. The REI business' AUM even increased by +0.5% YoY from $146.9 billion as of end-Q2 2022 to $147.6 billion at the end of June 2023.
Core-plus assets accounted for more than 90% (source: September 13, 2023, Barclays conference) of the REI segment's AUM. Property company CaliberCos Inc. (CWD) defines core-plus assets as "income-producing properties that are well leased." As such, the quality of the REI business' asset portfolio should provide support for the financial performance of the GWS business' REI segment.
Concluding Thoughts
A Buy rating for CBRE is justified. I think that CBRE's FY 2024 guidance is realistic, and the company has the ability to execute value-accretive growth investments.
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