Why Aveo Group (ASX:AOG) was among the big winners on the ASX on Friday

Last Friday was a sluggish day for the ASX200, with the index sliding 1.6% lower. However, retirement village operator Aveo Group (ASX: AOG) bucked the trend, posting a 4.3% gain. This was a sharp turnaround for a company whose share price has slid over 35% lower this year, and came on the back of a market update concerning the company’s ongoing strategic review.

For the past five years, Aveo has been transforming itself from a diversified property business into one focussed solely on the retirement sector. The intent behind the change in strategy seems to have been to create a leaner, more robust business model, but the market hasn’t responded as positively as the company had hoped for. A softening property market has only compounded Aveo’s woes, and its shares are now trading at their lowest point since 2013.

However, at Aveo’s recent AGM, its CEO Geoff Grady flagged that the company was considering remixing its property portfolio through a disposal of some of its regional assets while expanding its developments in suburban Melbourne and Sydney. He also indicated that the company was considering capital partners from overseas as a means to grow their business.

This is what the update released to the market on Friday related to. While light on details, the update noted that there were a “significant number” of parties from Asia, North America and Australia who had indicated they would be interested in partnering with Aveo. Actual bids aren’t due to be submitted to Aveo until January, and even then they are only indicative and non-binding – but the fact that Aveo has got a bunch of overseas parties willing to provide them with extra capital definitely helps with their potential growth prospects.

There are a number of reasons to be quietly optimistic about Aveo, especially if they have increased capital at their disposal to grow their business. The company delivered solid underlying profit growth for FY18, with NPAT up 17% to $127.2 million. Aveo’s shares also currently trade at around a 50% discount to their net asset value per share, meaning they could represent good value.

I see Australia’s ageing population trend as a potential source of long-term value to investors. The Australian Government’s Institute of Health and Welfare projects that by 2057 22% of the population, or 8.8 million people, will be aged 65 and over. These shifting demographics will increase the need for healthcare, residential retirement facilities, certain financial products and services, and even tourism services.

This could be a boon for healthcare companies like Cochlear Limited (ASX: COH) and annuity specialists Challenger Ltd (ASX: CGF). Even caravan companies like Fleetwood Corporation Limited (ASX: FWD) and Apollo Tourism & Leisure Ltd (ASX: ATL) that appeal to the growing legions of “grey nomads” could be set to benefit over the longer term.

Aveo will have to do a fair bit more before I’m assured of its long-term investment value. At present, there is a little too much uncertainty around its FY19 earnings – in the same speech to the AGM in which the CEO provided an update on Aveo’s strategic review he failed to confirm the company’s FY19 EPS guidance. This doesn’t inspire a great deal of confidence in the company’s shareholders.

However, if Aveo is able to find some capital partners willing to fund the business’ growth its fortunes could turn around very quickly.  I would say Aveo might at least be an interesting company to add to your watch lists for FY19.

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Motley Fool contributor Rhys Brock owns shares of Cochlear Ltd. The Motley Fool Australia owns shares of and has recommended Challenger Limited. The Motley Fool Australia has recommended Cochlear Ltd. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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