Aveo Group (ASX: AOG) released its FY 2018 results today with the retirement community provider reporting underlying profit growth of 17% to $127 million and statutory profit of $365 million.
Net tangible assets per share were up 16% to $3.92 while funds from operations were $115 million.
The result was driven by the delivery of 506 new units and its development in Newstead Brisbane achieving higher-than-expected development margins.
Undervalued shares?
The real story however was the announcement of a strategic review by the Board to focus on, "closing the gap between the price of Aveo's listed securities and the underlying value of Aveo's retirement properties".
Aveo's Board view the market to be "significantly undervaluing" the company and they provided the following points to support their view
- Aveo currently trades at a 44% discount to net tangible assets (NTA)
- Aveo trades on a FY 19 earnings yield of more than 9%
The review will also look into the possibility of introducing capital partners into the retirement business (followers of Elon Musk on Twitter might be wondering whether that means the funding is secured).
Aveo shares were up 10% today following the announcement.
It's certainly hard for me to argue against that because I took the same view in a previous article when I wrote that Aveo could be trading at a bargain price.
However, it might just be worth pausing and reflecting why exactly the market is taking this view and discounting Aveo's share?
Well, there are a number of concerns including the state of the residential housing market (particularly units in Brisbane), the regulatory & conduct risks (Aveo's share price has dropped by 20% over the last year primarily due to negative publicity following Fairfax media investigations of its treatment of elderly residents. The company is currently subject to a class action).
I still think Aveo shares look cheap but its could be a long time before they fully recover.
Outlook
Going forward, Aveo expects the sales rate to normalise at rates over 10% with 418 major development units delivered in FY 19. The company confirmed FY 19 EPS guidance of 20.4 cents per share and a full year distribution based on a payout ratio of 40% – 60% of underlying profit.
