AGM sales update – trending in the right direction
Aveo Group (AOG) provided a Retirement Sales update following recent negative media. AOG had previously noted that sales based enquiries were down 40% in July and down 25% in August on the previous corresponding periods. Since the introduction of improved product and contract initiatives launched in August, sales rates (in terms of quality and volume) have improved from September onwards. We expect the recent marketing campaign has also assisted interest levels.
Management expects sales to recover to normal rates by 1H18-end and be maintained at that level through 2H18. Total sales volumes of 500+ are being targeted for 1H18, with management flagging a 40%/60% 1H/2H skew. This implies FY18 sales volumes of 1250+.
While sales rates in the Established Business are likely to be at or below the bottom end of AOG's 10-12% portfolio turnover target, this is expected to be offset by the (previously guided to) 110 Freedom conversion sales and 70 minor development sales.
Regulatory update; Gasworks sale expected in FY18
AOG provided a regulatory update and noted that it 'anticipates no significant issues for its business model'. AOG noted that amendments to the SA and QLD legislation have been passed, the VIC Parliament inquiry outcomes are yet to be drafted into legislation, and the recommendations of the NSW inquiry are to be delivered in December 2017. There have been no further updates from the ACCC.
AOG also noted that the sales process of the Gasworks precinct has commenced, with AOG targeting financial completion in April 2018. We anticipate this sale could realise meaningful upside to the current A$180m Book Value.
FY18 guidance maintained; composition altered slightly
AOG reiterated its Earnings Per Share guidance for 20.4cps (+7.9% growth) and its Retirement ROA target of 7.5-8.0%. Retirement EBIT was reiterated at A$143-152.5m, however as expected, the composition was slightly altered (Established now expected to be at the lower end of A$71.5-76.5m; Development now expected to be at the upper end of A$70-74m).
We view the reiteration of Established earnings guidance as a positive and shows that management are confident that normal conditions will return in the division post the media impact. AOG continues to target a FY18 distribution payout ratio or 40-60% of FY18 underlying NPAT. While the composition of our Retirement EBIT has moved slightly, our EPS forecasts remain unchanged.
The announcements were largely anticipated but we view it positively that the Established divisional guidance was not downgraded. This should see the stock in a better position to close the material PE and discount/NTA gap vs its peer group. We continue to believe that this discount is looking increasingly unsustainable given our view that NTA will likely increase materially in coming years. Key risks include brand damage, a softer housing market, build-up of inventory/working capital.
Our share price target remains unchanged and we maintain our Add recommendation.
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