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Company: Abacus Property Group

ASX Code: ABP

Market Cap: $679m

Share Price: $0.45

Recommendation: ‘Buy’

At a time where old warhorses can be heard murmuring ‘this market has gone too hard’ or ‘these gains are simply unsustainable’, the logic behind their arguments may actually have some credence. A ‘mixed’ market implies that outstanding value is now harder to find with most companies already experiencing a significant re-rating and/or have attracted the ‘fair value’ tag. In times such as these investors may be well served in sticking to plays with a clear growth path or recognisable value proposition.

A corner of the market where notable opportunities may still exist is the listed property (or AREIT) sector. This being said, it is important to differentiate betweens those AREITs still ensnared by complicated debt arrangements and those that have managed to clean up their act in a limited amount of time. It was the debt mountains that saw listed property go from records to ruins during the worst of the downturn. However, the re-capitalisation of balance sheets and removal of many skeletons has triggered a rebuilding of investor confidence. While most property trusts could not escape the clutches of the financial crisis and asset values took an almighty hit, the sector was priced for an end-of-the-world scenario. As it turns out, most should actually survive and as a result of the shake-up many are trading at significant discounts to their net tangible asset (NTA) backing.

We highlight Abacus Property Group (ABP) as a standout in the sector. Following a $211m equity raising and $123m worth of property sales, Abacus’s gearing levels have been reduced to 26.6% – now at the lower end of the spectrum. Strong operating cashflows from rents means that interest repayments are under control and management has even flagged strategic additions to the portfolio. With existing assets spread across the storage, office, retail and industrial sectors, Abacus has a ‘defensive’ alignment and the stock is currently trading at a 25% discount to its NTA backing of 62c per share.

Abacus’s FY09 results indicated the robust operating position even considering the slump in the economy. Underlying NPAT came in at $72m, equating to underlying EPS of 8.3c. Over the course of the FY09 period, management instituted a number of capital management initiatives in order to reduce gearing levels. The $211m equity raising was conducted which also saw long term cornerstone investor Kirsh Group increase its stake to 27.35% The Kirsh buy-in sparked rumours that the Group might try and take Abacus private. Whilst these ruminations still exist they are no basis from which to make an informed investment decision.

Abacus has several bank covenants in place which it must continue to maintain. Covenant gearing requirements stand at 32.7% so with current gearing at 26.6%, the company is within its limits – asset values could withstand a further 27.4% fall (which would be unprecedented). With no further debt required in the short term, the capital management situation is maintainable and the company has an interest cover ratio of 2.5 times. The total value of Abacus’s assets stands at $1.45bn and operating cashflows should continue to add to the current cash balance of $9m.

As mentioned, management has flagged that it will consider utilising its balance sheet capacity to take advantage of deflated asset values, adding to its current portfolio of properties. This will be a key driver to earnings growth and the company has pinpointed a long term gearing target of around 30%. Following the equity raising and a re-negotiation of financing facilities, the company is well positioned to capitalise on the acquisition front.

So is Abacus worth buying? Currently trading on a forecast dividend yield of 6.6% and a PE of 5.4 – based on 2009 underlying earnings of 8.3 cents per share – the combination of a handsome attractive yield, conservative valuation and a steep discount to NTA, provides the clear value proposition. Upside potential also lies in gradual improvements to property valuations and higher rents, which should move in tandem with ongoing stabilisation to the wider economy and property markets. ‘Buy'”.

Joshua Terlich is an analyst at wise-owl.com. All views in this article are those of wise-owl.com, not of TheBull.com.au and do not constitute advice.  

 

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