MoneyTalks: Morningstar says buy Abacus Property despite headwinds, accumulate Credit Corp
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The research company says Abacus’ portfolio has historically been split roughly between storage, which is experiencing strong tailwinds, and office, which has headwinds.
Over the past five years, Abacus has undertaken major storage acquisitions and developments, with more expected in the future.
Earlier projects performed well and are benefitting from strong conditions, but it remains to be seen whether these conditions will remain strong enough for the current crop of projects to benefit, says the note from Morningstar – adding that it typically takes several years to construct and lease a new storage facility.
Abacus has retained a 20% stake in the spun-off group Abacus Storage King (ASX:ASK), which owns and manages a $3 billion self-storage portfolio across 131 assets providing 588,379 sqm of self storage space.
But Abacus’ primary interest is now in commercial property, where two thirds of its commercial portfolio are from 15 offices, and the other third from retail.
According to Morningstar, the retail portfolio is trading well, but the office portfolio faces new supply and tepid demand from hybrid working.
As a result, the research firm has downgraded Abacus’ fair value by 8% to $1.75.
“Three fourths of Abacus’ office portfolio is A-grade, mostly in inner city locations in Sydney, Melbourne or Brisbane, with a skew to CBD, fringe locations, older building and buildings with heritage elements,” says Morningstar.
“Abacus’ relatively short average lease of 3.7 years implies higher than average leasing risk.”
Even so, Abacus’ shares are still undervalued, says Morningstar.
The company’s FY24 guidance includes a dividend distribution of 8.5c per share, which puts the REIT on forward yield of 7.2%.
“That’s not bad, considering our outlook,” says Morningstar.
“While Abacus’ older buildings aren’t well positioned for the new hybrid working paradigm, we think rental downside is limited.
“Market rents have risen have risen from pandemic lows, and Abacus’ rents are below the market average.
“We assume no rent growth on new leases signed in FY24, and moderate 3% growth thereafter.
“We think that’s achievable given the low starting point for rents in Abacus’ buildings, population growth, and moderate rebound in office utilisation,” concludes Morningstar.
Meanwhile, Morningstar has a ACCUMULATE recommendation on Credit Corp Group (ASX:CCP), with a fair value cut to $15 from $22.50 (vs current share price $11.87) due to unprecedented rate hikes since listing.
Credit Corp is a major purchased debt ledger, or PDL, acquirer in Australia, which is essentially a debt buyer and collector.
Its market share of PDL in the country is around 35%, while in the US, it is the fourth largest PDL player.
PDLs are mainly acquired from banks and financial institutions, and are mostly secured credit card debt that are at least six months in arrears and already been through a collection process.
According to Morningstar, CCP has a track record in buying PDLs at sensible prices, recovering greater amounts than its initial overlay.
“Still, it is a business that requires financial leverage to drive higher economic profits, bringing the threat of value destruction from a severe credit or overpayment for PDLs,” says Morningstar’s notes.
“Additionally, we now think Credit Corp’s lesser experience in the US could likely lead to overpayment for debt ledgers.”
However, Morningstar forecasts incremental share gains in the US to about 12% of the market by FY28, versus around 11% in FY23.
In Australia, in addition to its 35% market share of the PDL business, Credit Corp has added four new lending/leasing businesses in late 2021, which provides revenue mix to its consumer facing flagship product, Wallet Wizard.
Morningstar believes these consumer facing businesses – which include consumer loans, auto lending, BNPL and appliance leasing – should continue grow given that the banks don’t service those segments.
As such, Morningstar forecasts the Australia/NZ gross lending book to around $435m by FY28, up from $358m in FY23.
However, the note also added that competition for PDLs in Australia will likely heat up as pandemic period stimuli fade off, increasing PDL supply.
“A combination of lower barriers to entry and greater operation efficiency among peers will likely encourage more aggressive price bidding for PDLs,” says Morningstar.