ANALYST’S NOTE

Aveo Group (AOG) reported a solid FY18 result, with underlying profit up +17% to $127.2m, mainly driven by the delivery of 506 new units and Newstead achieving higher than expected development margins, and NTA up +16% to $3.92.

The current share price is at approximately 40% discount to the NTA. Given this significant gap and the board’s view that the market is significantly undervaluing its assets (likely due to potential regulatory risks and sustainable sales growth), the Company has announced a strategic review to examine ways to close this gap. This could include introducing capital partners which could unlock capital (i.e. the Company sells down a substantial stake in the retirement business).

In our view, the Company could use this for capital management initiatives such as a buyback. Retirement sales remain subdued on the back of negative press the Company received earlier in the financial year. The Company is also targeting FY19 EPS of $0.204, which is slightly ahead of current consensus estimates of $0.20. No change to our Buy recommendation.

We like AOG for the following reasons: 1. remains an attractive thematic play on ageing Australian population which provides continuing demand; 2. strong development pipeline to drive future earnings; and 3. strong managerial response to the public inquiry.

• FY18 results key points. 1. Underlying profit up +17% to $127.2m and underlying EPS up +16% to 22cps. Underlying profit was mainly driven by the delivery of 506 new units and Newstead achieving higher than expected development margins. 2. Retirement Established Business settlements continued to be impacted by the negative press AOG received during the year, with sales down -38% on pcp. 3. NTA per security increased +16% to $3.92.
• NTA – mind the gap. Over the past 5-years, AOG’s NTA has increased from $2.78 to $3.92, representing a CAGR of +9.0% p.a. However despite this, AOG’s share price is trading significantly below its NTA, likely driven by: 1. Sustainable sales levels; 2. Downside risk to the industry from further industry regulatory changes; and 3. Outstanding class action against AOG. Management has announced a strategic review which will examine ways to close this gap, which may include the introduction of potential capital partners (domestic or international) into the retirement business. The results and implementation process is expected sometime next year.
• Introduction of a capital partner could see potential capital management. With gearing of 16.8% well within management target range of 10-20%, any capital unlocked from this strategic review is likely to be return to shareholders, in our view.
• Outlook. 1. Management expects sales rates to normalize (i.e. +10% or more for the year). 2. AOG is on track to deliver 418 major development units in FY19 and targeting 500 units in FY20. 3. Based on current market conditions, the Company is targeting FY19 EPS of $0.204 per security. 4. Targeting full year distribution payout range of 40-60% of underlying profit.