Income Report / Income Report: We’re adding another property stock to the portfolio (ABP, GMA, SGP)

By Market Matters 21 August 19

Income Report: We’re adding another property stock to the portfolio (ABP, GMA, SGP)

Market Matters Income Report 21st August 2019

The market has opened on the back foot this morning, giving back the majority of yesterday’s gains – a stronger market yesterday than seemed warranted and a weaker one today. This morning we’ve seen stronger than expected data with Westpac’s leading economic indicator along with skilled vacancies up on the month – that’s prompted a decent move higher in the AUD which is now trading at 67.84c. A higher AUD often prompts futures led selling of the local market.

Economic data this AM

A barrage of earnings out this morning with a mixed bag across the board, ultimately some very big moves playing out at the stock level.

Here’s a quick rundown of the share price performances as at 11.27am this morning.

Overall, the ASX 200 is trading down -67pts or -1.03% to 6477. 

ASX 200 Chart

The Income Portfolio had another solid week, adding +0.39% with a strong performance from mortgage insurer Genworth (GMA) being the clear highlight – the stock up +9.8% on the week - more on that later. The portfolio is breakeven financial year to date, flat on the period versus its absolute return benchmark of +0.69%, although against a backdrop of the ASX 200 which is down by -1.12%. Since inception  the portfolio is up +16.21% vs the benchmark of +11.61%.

For those interested in investing for income in a low rate environment, Market Markets does run an Separately Managed Account (SMA) which is open for investment. The portfolio is based on the MM Income Portfolio below. The SMA has now passed its first anniversary and performance has remained sound.  The July update can be viewed - Click Here.

Abacus Property (ABP) $3.90 - up weighting property  

Abacus is a diversified property group that provides exposure to a portfolio of office, retail and self-storage real-estate assets. They are reducing exposure to retail and increasing exposure to self-storage & office assets and recently raised $250m in an institutional placement through Macquarie & Shaw & Partners*. The placement was done at $3.95 a share and considerably oversubscribed. The proceeds of the placement are being used to buy a number of growth assets in the office and self-storage sectors.  

Since the placement, Credit Suisse has downgraded the stock to a neutral rating and $3.87 price target on valuation grounds. While that argument has some merit with property stocks generally on the expensive side, particularly those with office exposure, ABP now has a very good pipeline of growth with a reduced exposure in retail and an increased exposure to the better growth prospects of office and self-storage. They have very low gearing (~15% post placement) however that will increase as they deploy funds from the recent raise into growth assets.

They’ve guided to dividend growth of 2-3% in FY20 (although we’d view that as conservative), on a yield of ~5% and a good pipeline of growth.

ABP fits the bill for inclusion in the MM Income Portfolio with a 4% weighting.

*Shaw & Partners acted as joint lead manager & underwriter for the placement and was paid a fee.

Abacus Property Group (ABP) Chart

Genworth Mortgage Insurance Australia (GMA) $3.13 – maintaining the range

A reasonably complicated set of circumstances playing out for GMA in Australia at the moment, however the underlying takeaway is a positive one. Genworth Financial is a US based insurance company that was formed out of general electric in early 2000’s. Genworth Financial owns 55% of GMA in Australia along with major stakes in other Genworth businesses globally, one being Genworth MI Canada of which they own 57%. Recently, private equity operator Brookfield Business Partners launched a deal to buy Genworth Financials stake in Genworth MI Canada for a strong price – about 9-22% above its 12 month trading range but importantly, at a 4% premium to its book value.

In Australia GMA was trading at 0.7x its book value however after a recent run its now at around 0.8% of book – still significantly below the valuation implied by the Canadian transaction which provides a good reference point for the value of GMA locally.  There was also some concern that Genworth Financial (which owns 55% of GMA in Australia) would need to sell their Australian stake at an inopportune time to improve their balance sheet, however the sale of the Canadian business (at a good price) would also remove / reduce that threat.

At their recent 1H results, GMA reconfirmed guidance and announced a large capital management program, with more likely in the coming 12 months.

While the position in the income portfolio is now up +30%, We remain positive on GMA

Genworth Mortgage Insurance Australia (GMA) Chart

Stockland (SGP) $4.60 – Result inline / guidance inline

SGP was out with full year earnings this morning and the stock is trading down ~4% at time of writing. The result was broadly inline with market expectations with the main number we look at being funds from operations per share (FFOPS), which printed 37.4cps v 37.1cps expected. That represented a 5.1% increase on FY18  and a reasonable outcome given tough operating conditions. The dividend was slightly below expectations (-1%)  at 27.6cps for the full year with the 2H dividend at 14.1cps. Guidance was for FFO to be up +1% in FY20. On 12.7x with next to no growth, it’s hard to get excited about SGP at this point although  the sustainable ~6% fully franked yield remains appealing for an income portfolio like ours.  

We remain positive on SGP for income despite today’s weakness.

Stockland (SGP) Chart

Conclusion

We are adding Abacus (ABP) to the Income portfolio with a 4% weighting
We remain keen on GMA & SGP for income

James & the Market Matters Team

Disclosure

Market Matters may hold stocks mentioned in this report. Subscribers can view a full list of holdings on the website by clicking here. Positions are updated each Friday, or after the session when positions are traded.

Disclaimer

All figures contained from sources believed to be accurate.  All prices stated are based on the last close price at the time of writing unless otherwise noted. Market Matters does not make any representation of warranty as to the accuracy of the figures or prices and disclaims any liability resulting from any inaccuracy. 

Reports and other documents published on this website and email (‘Reports’) are authored by Market Matters and the reports represent the views of Market Matters. The Market Matters Report is based on technical analysis of companies, commodities and the market in general. Technical analysis focuses on interpreting charts and other data to determine what the market sentiment about a particular financial product is, or will be. Unlike fundamental analysis, it does not involve a detailed review of the company’s financial position.

The Reports contain general, as opposed to personal, advice. That means they are prepared for multiple distributions without consideration of your investment objectives, financial situation and needs (‘Personal Circumstances’). Accordingly, any advice given is not a recommendation that a particular course of action is suitable for you and the advice is therefore not to be acted on as investment advice. You must assess whether or not any advice is appropriate for your Personal Circumstances before making any investment decisions. You can either make this assessment yourself, or if you require a personal recommendation, you can seek the assistance of a financial advisor.  Market Matters or its author(s) accepts no responsibility for any losses or damages resulting from decisions made from or because of information within this publication. Investing and trading in financial products are always risky, so you should do your own research before buying or selling a financial product.

The Reports are published by Market Matters in good faith based on the facts known to it at the time of their preparation and do not purport to contain all relevant information with respect to the financial products to which they relate. Although the Reports are based on information obtained from sources believed to be reliable, Market Matters does not make any representation or warranty that they are accurate, complete or up to date and Market Matters accepts no obligation to correct or update the information or opinions in the Reports. Market Matters may publish content sourced from external content providers.

If you rely on a Report, you do so at your own risk. Past performance is not an indication of future performance. Any projections are estimates only and may not be realised in the future. Except to the extent that liability under any law cannot be excluded, Market Matters disclaims liability for all loss or damage arising as a result of any opinion, advice, recommendation, representation or information expressly or impliedly published in or in relation to this report notwithstanding any error or omission including negligence.