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


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


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.


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