The Aveo Group (ASX:AOG) share price has risen 11% to $2.70 after the company released its annual results this morning. Here's what you need to know:
- Revenue fell 5% to $421 million
- Net profit after tax (NPAT) rose 118% to $253 million
- Underlying profit rose 22% to $108 million
- Underlying earnings per share (EPS) of 18.9 cents per share
- Dividends of 9 cents per share
- Net tangible assets of $3.37 per share
- Portfolio turnover was 10.9% middle of the target of 10% to 12%
- Resident enquiries dropped 40% in July due to media attention but have been slowly improving
- Outlook for 7.9% earnings per share growth to 20.4 cents per share in 2018
So what?
It was a decent performance from Aveo. Probably most relevant to the investment, in my opinion, is the decline in new resident enquiries as well as the company's efforts to improve compliance. Aveo has responded quickly to public concerns and announced a raft of improvements to its contracts and policies.
Aveo has also committed to an 8-point plan aimed at simplifying contracts and improving the pre-contract signing disclosure process. Notably however, portfolio turnover was barely mentioned in this year's results despite previously being part of management's strategy to lift returns. We commented on Aveo's portfolio turnover strategy here.
If resident departures are an important contributor to earnings then it is necessary for investors to consider what a normal level of churn might be, especially if the Aveo contracts become meaningfully friendlier. 11% portfolio turnover sounds really high to me, especially given the average resident age of ~83 years. However, this could also reflect other things such as the migration of residents from lower to higher care facilities as they age.
Now what?
I would have to investigate both the resident churn and the decline in resident applications further before considering an investment in Aveo. The company is naturally dependent on residents for earnings and if a) too many left and b) the company failed to attract new residents to replace them, that would not be ideal. However, with an outlook for growth, an improving compliance regime, and trading at a 20% discount to its net tangible assets, Aveo could be worth a closer look.
