Australia | Feb 14 2020
Aventus Group posted a robust first half result, benefiting from the spread of resilient tenancies in its portfolio of retail assets.
-Cost of debt declines, income growth outperforms retail peers
-Growth rates above comparable retail A-REITs
-Improved housing outlook should support the company's retail tenants
By Eva Brocklehurst
Aventus Group ((AVN)) continues to benefit from an increasing range of tenants in large format retail assets, its first half results revealing that none of the properties were directly affected by bushfires and foot traffic is still increasing.
The company obtains sales data for around 50% of its tenant base, which indicated manchester and homewares were doing well while robust categories include pet supply, automotive, leisure, sport and food.
Aventus expects to achieve the upper end of its original FY20 growth guidance range of 3-4%. The highlight of the first half result was the cost of debt declining to 3.1% versus prior guidance of 3.3%.
This benefit is material, Macquarie asserts. Moreover, leasing metrics are solid and there are initiatives on funds management. Aventus has sold the McGraths Hill asset into its first syndicate, retaining a 25% co-investment stake. Although this was a transaction that was largely neutral to earnings in FY20, the broker notes it will have diluted the earnings base in outer years.
UBS points out comparable income growth is substantially outperforming retail peers and the company has also done a good job de-leveraging the balance sheet with minimal impact on FY20 earnings.
The broker believes Aventus is well-positioned to deliver net operating income growth of 2.5-3.5% over the medium term. Macquarie observes comparable net operating income growth has moderated, to 3.1% in the first half from 3.5% over FY19. Still, this is a higher growth rate compared to other retail A-REITs under the broker's coverage.
Aventus has been deploying capital into developments, with $15m invested in the first half and a further $25m estimated for the second half. The current major development is at Caringbah (Sydney), expected to open late in 2020. Future developments include Cranbourne (Victoria) and Tuggerah (NSW).
UBS suggests an improved housing outlook will flow through to better household goods retailing, and support those tenants in the company's retail assets. Further cash rate reductions over 2020 are also expected to enhance spending activity.
Housing listing data is supportive and house prices in the major centres are rising. There is an offset in that housing completions are unlikely to improve until after FY22. Nevertheless, UBS believes tailwinds from the housing market, together with the company's intensive asset management strategies, are priced into the the stock.
Given a distribution reinvestment plan (DRP) is dilutive to the earnings base, the company is using the cost of debt advantage to reduce gearing rather than upgrade earnings further. Gearing is at the top end of the range, yet Moelis suggests Aventus can still underwrite its distributions in the near term, which generates $80m a year in new equity.
Moelis, not one of the seven stockbrokers monitored daily on the FNArena database, believes the stock is relatively attractive from an income perspective. This is particularly so in the context of the low interest rate environment, a recovering housing market and interest rates likely to be "lower for longer".
While it is hard to envisage a near-term catalyst to unwind the current multiple, the broker believes, at the current share price, there is limited upside, and retains a Sell rating with a $2.56 target.
Portfolio vacancies have declined, with occupancy now at 98.6%, an increase from 98.4% six months ago. Macquarie considers this a positive outcome, particularly in light of increasing supply.
The company had one tenant in administration in the first half, resulting in occupancy at Marsden Park declining to 91% from 100%. The tenant was an independent baby goods retailer. Macquarie also notes there is limited exposure to discretionary fashion tenants, a category that has faced significant pressure recently.
FNArena's database has two Buy ratings and one Hold (UBS). The consensus target is $3.08, suggesting 5.1% upside to the last share price. The dividend yield on FY20 and FY21 forecasts is 5.8% and 6.0% respectively.
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