Abacus Group: Fair Value Estimate Reduced 8%; Securities Still Screen As Undervalued

We reduce our fair value estimate for no-moat Abacus Group ABG by 8% to AUD 1.75. We’ve taken a fresh look, with the separation of its storage assets and operating platform into a separate entity, Abacus Storage King. Abacus Group retains a 20% stake in the storage entity and is remunerated as its manager, but the former’s primary interest is now commercial property. Two thirds of the commercial portfolio are from 15 offices, the other third is retail and other properties.

The retail portfolio is trading well, but the office portfolio faces new supply and tepid demand from hybrid working. Three fourths of the office portfolio is A-grade, mostly in inner city locations in Sydney, Melbourne, or Brisbane, with a skew to central business district, or CBD, fringe locations, older buildings, and buildings with heritage elements. Abacus’ relatively short average lease length of 3.7 years implies higher-than-average leasing risk.

Even so, Abacus Group securities still screen as significantly undervalued, trading at a 33% discount to our valuation and a 45% discount to pro forma AUD 2.11 net tangible assets per security at June 30. Guidance includes a fiscal 2024 distribution of 8.5 cents per share, which puts the REIT on a forward yield of 7.2%. That’s not bad, considering our outlook. We expect rising interest costs to roughly offset revenue growth for the next three years, leading to approximately flat funds from operations and distributions with moderate near-term downside risk, with decent mid-single-digit percentage growth thereafter.

A pending exit from the S&P/ASX 200 index on Sept. 18 may be weighing on the security price as index funds and benchmark-hugging fund managers exit. And while Abacus looks cheap, some better-positioned office heavyweights are too. It will likely take time for the market to warm to Abacus’ new structure.