Abacus Group Earnings: Under Review To Take a Deeper Dive After Storage Separation
We place our fair value estimate for Abacus Group ABG under review following its fiscal 2023 result. We plan to perform a more detailed assessment of the group now that it has completed the separation of Abacus Storage King into a listed REIT. Abacus Group delivered funds from operations of AUD 19.8 cents per security. Distributions for the fiscal year totalled AUD 18.4 cps, up 2.2%. The REIT faces some short-term headwinds, but long-term fundamentals look reasonable.
Rising interest costs are likely to weigh on earnings for the next couple of years, with Abacus in a similar position to many REITs that are seeing revenue growth offset by higher debt costs. Once debt costs peak, we’d expect revenue growth to drive earnings growth.
Abacus also manages and retains a 20% stake in Abacus Storage King which is performing well, though showing signs of slowing under the weight of higher interest rates. Unlike commercial property, storage has few leases. In the short term, it could be more sensitive to a downturn in the economy, but it benefits from the long-term tailwind of population growth.
Since separating out the storage business, Abacus Group’s portfolio mainly comprises commercial property, about 70% of which is office assets. Management has endeavoured to improve the quality of the portfolio, maintaining 95% occupancy with 76% of the offices being A-grade. Weak office leasing conditions could prevail for a while. A key risk is that the office portfolio’s average 3.7-year lease duration is relatively short compared with peers, and some of the buildings are older assets with Nabers energy ratings below office heavyweights such as Dexus and Mirvac. The REIT, therefore, faces higher-than-average leasing risk over the next few years.
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