EUR 850.00 For Business Accounts Only

Morningstar | Abacus to Shed Higher-Risk Activities. FVE Unchanged at AUD 3.75

No-moat-rated Abacus Property Group's fiscal 2018 earnings had been pre-released, so there were no surprises in the underlying earnings of AUD 183 million or AUD 31.7 cents per security, or cps. Under the stewardship of new CEO, Steven Sewell, Abacus will shed its higher-risk activities in its property ventures division over the next two to three years, thereafter resembling a more traditional REIT. The key focus areas will be self-storage and office, with minor exposures to retail. Funds management activities will become a more prominent part of the business, but this is a crowded area and we don't see Abacus having a competitive edge over peers. Our fair value estimate is unchanged at AUD 3.75, with Abacus screening as fairly valued at current levels.

A prospective share price catalyst could potentially come from market evidence of rent growth in the recently acquired city fringe office sites. A second possible catalyst is evidence that the solid rental growth in the self-storage portfolio can be sustained over the medium to longer term.

Earnings guidance is traditionally not provided, but our fiscal 2019 earnings forecast drop to AUD 21 cps as we push back the expected profit from the sale of the Camellia site. We've also factored in modest  gains from recently sold stakes in three shopping centres. Abacus continues to pay dividends in line with what it expects to generate from recurring earnings, guiding for a 2.8% increase in distributions to AUD 18.5 cps for fiscal 2019.

The major forecast revisions include the modelling of the complete wind-down and exit of Abacus' property ventures business. We've assumed the entire AUD 450 million of capital allocated to this division is returned to Abacus over the next three years, with around AUD 50 million redeployed to self-storage each year and the balance deployed to debt reduction.

The exiting of the property ventures business means earnings will remain volatile for the next few years. Thereafter, investors will have greater visibility on the merits of the strategy to pivot towards city fringe office assets. The large mixed used site in Camellia, in West Sydney is the most significant site in the property ventures division. Given the proximity to upgraded rail infrastructure the site has significant embedded value, but permitting and rezoning remains a drawn out affair. We've pushed back the expected sale of the site by a year to fiscal 2020 and forecast pretax development profits around AUD 100 million. We've also slightly reduced expected profits on the remaining residential sites in property ventures, reflecting a softening in house prices. We've assumed the property loans business that comprises AUD 292 million in loans paying 11% is completely wound down in three years. This will dilute earnings, but the effect will be neutral all-up as Abacus will have a lower weighted average cost of capital.