Income And Valuation Lift For Aventus Group

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With all categories of large format retail continuing to perform, Aventus Group revises up funds from operations guidance and announces an independent net valuation gain.

-Aventus Group has upgraded FY21 guidance for the second time, but is it already priced in?
-Cap-rate compression drove 10.6% of asset revaluations, with potential for more
-Analysts see additional development opportunities

By Mark Woodruff

Aventus Group ((AVN)) has upgraded FY21 funds from operations (FFO) guidance and announced a 12% net valuation gain from an independent portfolio valuation.

The group is Australia's largest fully integrated owner, manager and developer of large format retail (LFR) centres. It has around $2.2bn of assets under management across 20 LFR centres. The portfolio is weighted towards metro properties, predominantly in Sydney.

Income is underpinned by leases to a diverse range of tenants with structured rental growth, as 84% of properties are subject to annual fixed/CPI rent increases. 

Appealing to yield investors, Morgans assesses Aventus has low vacancy rates and incentives, sustainable rents and the ability to re-mix tenants (eg food, health and services). There’s also considered low maintenance capex requirements, limited new supply and opportunities for consolidation in a fragmented market, of which the group has around 13% market share.

Goldman Sachs expects all categories of the LFR portfolio to continue to perform relatively well. The group derives 37% of income from everyday needs tenants, with the balance from homewares, electrical, furniture, bedding and hardware.

Increased FFO guidance

FFO guidance was upgraded to 19.4cps from 19cps, equating to 7% growth on FY20. The announcement comes after a 3% guidance lift, to at least 19.0cps, at the first half results.

The upgrade was in line with UBS' estimates, with the main drivers being continued income growth across the portfolio and lower cost of debt. Macquarie agrees on these twin drivers, and as the company had previously alluded to the potential for increased tenant competition, the upgrade news is welcomed.

Macquarie makes minor upgrades to earnings forecasts, driven by the FFO upgrade, and partially offset in FY22 and beyond, by the previously announced sale of MacGregor Home.

Aventus also announced a final dividend of 4.37cps, bringing the total FY21 pay-out to 17.47cps. This is around 7% ahead of the broker’s expectation, driven by a quicker return to a full-year payout ratio of 90%.

Increased Valuation

Ord Minnett believes the $254m (12%) net valuation gain from an independent portfolio valuer is already priced in by the market and retains a Hold rating, while lifting its 12 month target price to $2.90 from $2.83.

Macquarie calculates cap-rate compression (rent income to operating cost) drove 10.6% of the revaluations, with other cashflow impacts driving the remaining 1.7%. The broker expects further cap-rate compression to drive additional value uplifts in LFR. Strong revaluation outcomes were expected and the broker sees additional upside to come from the deployment of balance sheet capacity.

Gearing

The valuation uplift results in gearing falling to around 28%, and Goldman Sachs expects this to decrease further upon above-mentioned settlement of the sale of McGregor Home in July for $42m.

Macquarie estimates the new gearing level allows 200m of balance sheet capacity, providing upside risk to FFO via the deployment of capital. The broker maintains an Outperform rating and increases the 12 month target price to $3.23 from $3.15.

While UBS agrees on the $200m debt capacity figure, if the company re-gears back to 35%, the broker retains a Buy rating and $3 target.

Peer comparisons

In line with Goldman Sachs’ coverage average, Aventus currently trades at an estimated FY22 FFO multiple of 14.8x, despite a two-year growth rate of 6.6%, above the Australian REIT coverage average (ex fund managers). Moreover, the group is considered to remain attractive when screened against retail REIT peers. The broker, not one of the seven stockbrokers monitored daily on the FNArena database, has a Buy rating and a target price of $3.27.

Moelis begs to differ in relation to the peer comparison, as the current share price implies a further circa -55bps cap rate compression. This is seen as optimistic, in the context of the valuations of peers. For example, Shopping Centres Australasia ((SCP)) has a weighted average capitalisation rate (WACR) of 5.9% for predominantly neighbourhood shopping centres, while the Charter Hall Retail REIT ((CQR)) has a shopping centre cap rate of 6.12%.

While the group will continue to benefit from sector tailwinds and net tangible asset (NTA) valuation support given the strength of recent transactions, Moelis sees these as being more than priced into the current share price. The broker, also not one of the seven stockbrokers monitored daily on the database, retains a Sell rating and lifts the target price to $2.90 from $2.77.

The group is well positioned for growth to exceed retail REIT peers according to UBS. This reflects high annual rent reviews of 3.8%, expected positive leasing spreads and high occupancy of around 98.5%. Additionally, there are high cash development yields and upside from debt funded acquisitions.

Tailwinds for household goods retail sales remain strong as the renovations and housing completion cycle kicks in, concludes the broker.

Other opportunities and risks

Goldman Sachs believes there are also opportunities outside the box. The group’s site coverage stands at a relatively low 44% as of December 2020. This leaves potential to develop high-quality, large-format retail assets, driving both NTA growth and earnings accretion.

Some risks include weaker retail sales conditions, particularly in the household goods category, an increase in online sales penetration and fluctuations in property values.

The database has three Buy and two Hold ratings. The consensus target is $3.01, signalling -4.1% downside to the last share price.

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