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Abacus Property share price lower on flat earnings result

Real Estate shares

The Abacus Property Group (ASX: ABP) share price is down 1% on the ASX on Friday morning after the company reported a 6.9% decline in first-half underlying profit.

The earnings rundown

The company reported a statutory net profit after tax (NPAT) of $127.8 million, up 9% on 1H18 results, but underlying profit for the half-year fell 6.9% to $72 million. The company also reported weak funds from operations (FFO) which fell 18% to $65.3 million as the company registered an $8.28 million writedown on the fair value of its investment properties.

Despite the writedowns, the company increased its net tangible asset (NTA) per share by 3.5% from year-end to $3.29 per share while also increased total assets marginally in the half.

The company saw its average cost of drawn debt decrease slightly to 4.1%, down from 4.3% in FY18, while gearing also decreased marginally by 50 basis points.

The ongoing headwinds in the Australian retail sector continue to rear their head in the February reporting season, with Abacus writing down its Retail portfolio valuation by 46% during the half to $228 million in 1H19.

The share price reaction was fairly muted on the result, in part because the company increased its dividend per share (DPS) by 2.8% to 9.25 cents per share (cps) in the half-year. This represents a payout ratio of 82%, but the company doesn’t attach franking credits for its investors.

The Wrap

I remain wary of retail shares at this point in the cycle, particularly given the weak data that we’ve seen in recent months. There have been several real estate investment trusts (REITS) that have reported thus far including Shopping Centres Australasia Ltd (ASX: SCP) which have shown signs of weakening retail demand.

The Abacus share price is up over 12% on the ASX so far this year which is in line with the broader market, but any retail slowdown could hit its short to medium-term earnings pretty hard.

I think the Retail portfolio writedowns should be a warning signal to keep clear, and I’d be looking at more capital stability or countercyclical stocks such as AGL Energy Limited (ASX: AGL) in the meantime.

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Motley Fool contributor Lachlan Hall has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of Shopping Centres Australasia Property Group. 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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