Aveo Group

AOG Details

Changed Methodology for Calculating Underlying Profit: Aveo Group (ASX: AOG) is a leading and trusted operator, manager and owner of retirement communities throughout Australia. The market capitalisation of the company stood at ~A$1.14Bn on 25^th June 2019. Recently, the company, via a release dated 24th June 2019, updated the market on FY19 trading, annual distribution and strategic review.

In terms of FY19 trading, it was mentioned that, at the Annual General Meeting 2018 which was conducted on November 14, 2018, the company advised that it would not be confirming FY19 EPS guidance in light of deteriorating residential property market conditions throughout Australia and uncertainty around the future retirement sales and settlement levels.Aveo also updated as part of HY 2019 results on February 13, 2019, that the residential property market conditions throughout Australia have continued to negatively affect the time frame for settlements and that the number of settlements was expected to be weighted to 2H FY19.

AOG added that the resident interest remained strong with 1,111 total written sales to the end of Week 51 in AOG’s retirement product.The momentum had continued to build in the fourth quarter of FY19 with an average of 23 net sales written per week which was up from 19 in each of Q1 and Q2 and 20 in Q3. The estimated annual distribution for the year ending 30^th June 2019 would be 4.5 cents per stapled security.

At present, the company recognises revenue from major development units on a delivered basis in order to calculate the underlying profit. But from 1^st July 2019, it would change the timing of recognition of revenue in Underlying Profit for major development units to a settlement basis from a delivery basis.

The company has witnessed a rise of 3% in total established business revenue in 1H FY19. DMF/CG and profit contribution was in accordance with settlement volumes. The freedom conversion buybacks have been reduced in accordance with sales to manage working capital because of decreased settlements. The buyback sales proceeds have witnessed a rise because of increase in average sale value.


Established Business Results (Source: Company Reports)

The net valuation of the retirement portfolio witnessed a decline of $61Mn and stood at $1,931Mn in HY19. The movement in retirement portfolio valuation was mainly driven by the update of resident data, new DMF income stream created on the delivery of new units and overall unit prices adjusted downwards by 0.4%.

What to Expect: The company remains focused on furthering its position as the leader in the retirement living market by innovation in the provision of accommodation and integration of care that residents are seeking. It is committed to current initiatives in order to deliver further growth and value. Even though there are current challenges in the market environment, Aveo’s product remains attractive.

Stock Recommendation: The management is focused on obtaining settlements from the increased level of deposits.It is planning to progress the strategic review process in order to bridge the value gap for securityholders and to review free cash flow position and consider value add options like buyback of securities.

The gross margin of the company stood at 62.4% in 1H FY19 against the industry median of 38.5%. With respect to stock’s past performance, it generated returns of 26.69% in the time span of six months. However, on YTD basis it had witnessed a return of 29.61%. Hence, considering the above-stated facts and looking at current trading levels, we maintain our “Hold” rating on the stock at the current market price of A$1.925 per share (down 2.284% on 25^th June 2019).
 

AOG Daily Chart (Source: Thomson Reuters) 

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