Abacus Counts Takeover Benefits

This story features ABACUS STORAGE KING, and other companies. For more info SHARE ANALYSIS: ASK

The company is included in ASX300 and ALL-ORDS

Abacus Storage King shareholders should be pleased about a takeover proposal, but questions arise over the opportunistic offer price.

-Abacus Storage King receives full takeover proposal
-Price opportunistic, but reasonable?
-Valuation discounts deep in storage sector
-Cross-shareholdings complicate the issue

By Greg Peel

Abacus Property Group acquired storage unit operator Storage King in 2020, having previously moved into the storage sector to complement its existing office portfolio. In 2023 Abacus spun out its storage assets into Abacus Storage King ((ASK)), with the remaining business listed as Abacus Group ((ABG)).

Last week Abacus Storage King received a takeover bid for the shares not already owned by Ki Corporation, owned by South African billionaire Nathan Kirsh’s family office, and US-listed Public Storage, one of the largest storage owners and operators globally.

The bid price is $1.47 per share (under the usual indicative, non-binding etc conditions and subject to shareholder and regulatory approvals), which represents an -8% discount to Abacus Storage’s net tangible asset (NTA) valuation but a 27% premium to the last traded price at the time.

Complicating the story are existing cross-shareholdings. Abacus Group holds a 19.77% stake in Abacus Storage, implying Ki Corporation owns 19.77% via its control of Abacus Group, while also directly owning 39.62% of Abacus Storage. If the deal proceeds, Ki Corp will own 50% of Abacus Storage and Public Storage the other 50%.

The transaction also assumes all management rights, currently held by Abacus Group, transfer to the new owners.

Public Storage has previously attempted to make inroads into the Australian storage market, having bid for National Storage REIT ((NSR)) in 2020. But this occurred right before covid and was thus abandoned.

The consortium of buyers has clearly outlined their reasons for the acquisition, highlighting Ki Corp’s frustrations with the performance of Abacus Storage since the de-merger with Abacus Property, many of which would be shared by other Abacus Storage security holders, Moelis suggests.

ASK and ye shall receive

This is a positive outcome for Abacus Storage shareholders, Moelis believes, providing investors with an immediate opportunity to crystallise a price that otherwise might have taken a significant amount of time to achieve. That being said, Moelis still views the offer as somewhat opportunistic, given the -8% discount to NTA, and nil consideration for the management rights, though the latter is more impactful for Abacus Group security holders.

Given Ki Corp controls around 50% of Abacus Group, there is little bargaining power that would see the deal sweetened for Abacus Group. Moelis sees limited hope for a higher bid given the 40%-odd of the Abacus Storage register already owned by Ki Corp.

Yet, the bid price is below Abacus Storage’s FY25 NTA of $1.60/unit, and Shaw and Partners considers the suitors should pay premium to NTA on account that book value does not capture the inherent worth of the market-leading Storage King platform.

The Storage King brand attracts enquiries from strong awareness among consumers, Shaw notes. The proposal does not consider the growth to ensue from FY27 as the Storage King platform is enhanced with a new, powerful dynamic pricing tool. Also not reflected in the current proposal price is that Abacus Storage’s trans-Tasman portfolio of 200-plus stores would take decades to replicate, if possible.

Shaw adds to that the development pipeline which begins to have a meaningful impact on profits in FY27.

Shaw re-iterates its Buy recommendation on Abacus Storage, believing investors may receive a premium to FY25 NTA, representing 21.5% total shareholder return assuming any distribution reduces the consideration commensurately.

The broker has thus set a $1.65 target price, up from $1.35 prior, representing 24x forecast FY26 funds from operations compared to a sector average at about 15x. The target translates to an FY26 yield of 3.8% compared to average of about 5.6% for the ASX200 REIT Index, excluding property fund managers Goodman Group and Charter Hall Group. The sector is also trading at a -10% discount to NTA. Prior to the takeover announcement, Abacus Storage was trading at a -27% discount to NTA.

Moelis has lifted its target to the offer price of $1.47, up from $1.38 prior, and has moved to a Hold rating from Buy. The broker nevertheless suggests security holders might be well served to sell and take profits now, given better value on offer elsewhere in the sector.

Citi suggests the entry of US giant Public Storage into the Australian market may increase competitiveness in the sub-sector with potential increased capital for expansion and development. Citi expects all of Abacus Storage, Abacus Group and National Storage REIT to be relatively supported as valuation beneficiaries of the takeover news.

Citi notes Abacus Group and National Storage trade on discounts to NTA of around -36% and -13% respectively.

Abacus Group

On the asset side, Abacus Group holds a 19.77% holding in Abacus Storage. The proposed disposal is anticipated by Citi to create approximately $382m in cash flow which can be used to pay down existing debt and/or invest in additional assets. The remaining assets include commercial real estate assets (retail, office and other) as well as cash, corporate assets and dividend accruals.

On the capital front, the capital comprises both debt and equity. At the current share price, Citi notes (writing on April 8, bearing in mind share prices of everything are a bit of a movable feast at present), the shares are trading at -37% discount to the overall NTA. Citi’s current target price for Abacus Group is also lower than NTA, providing a margin of safety for investors.

Citi has a Buy rating on Abacus Group with a target of $1.35, and a Buy on Abacus Storage with a target of $1.40.

Shaw believes Abacus Group could receive about $430m for its stake in Abacus Storage, but that is based on Abacus Storage transacting at the $1.65/share price the broker is assuming. Shaw then assumes for simplicity that Abacus Group simply retires debt. FY26 gearing would fall from 34% in Shaw’s base case modelling (as if Abacus Storage had not received a takeover proposal) to 22%.

Shaw has a Buy rating on Abacus Group, leaving its target price unchanged at $1.20. That would translate to a 5.5% FY26 distribution yield assuming Abacus Group divests Abacus Storage and does not immediately re-invest the proceeds.

Shaw acknowledges its target price is far short of the NTA Abacus group can achieve in FY26. The issue is that if Abacus Group divests Abacus Storage and there is a delay in deploying capital back into office, Abacus Group would then be underearning relative to its capital base (high NTA, low funds from operations). Under that situation, says Shaw, which could perhaps persist in an uncertain office market, Abacus Group’s share price may trade below NTA.

Voting Dilemma

The takeover transaction is via a scheme of arrangement, which Moelis understands requires a 75% vote in favour, based on those that can vote. According to Public Storage’s disclosure, both Ki Corp and Abacus Group are unable to vote due to their direct and indirect stakes in Abacus Storage, effectively requiring 75% of the votes from the remaining free float (around 40%).

The five-member board of Abacus Storage includes three independent members, and they will be the ones making the decision.

It is likely then, in Moelis’ view, that on that basis this transaction has a relatively high probability of succeeding in its current form, noting the risk to this may be hedge involvement for a sweetened bid.

The transaction is conditional on (among other things), a period of due diligence, unanimous approval from the independent directors, and various regulatory approvals both in Australia and New Zealand.

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