New Zealand Professional Investment Services Firm

Forsyth Barr

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Asset Plus</h2>
1H20 — Basic Arithmetic
Asset Plus Limited (APL) delivered a 1H20 result evident of a company still in the transitory phases of executing on its long term strategy. Underlying profit of NZ$2.8m was broadly in line with our forecasts and flat on the prior year, with the dilutionary effect of asset sales offset by the acquisition of 35 Graham Street. APL’s portfolio metrics remain steady, and its relatively defensive lease expiry profile provides complementary upside. APL declared a 2Q20 dividend of 0.90cps, in line with forecasts and the prior year. No changes to our forecasts have been made. NEUTRAL.
35 Graham Street remains the Crown Jewel
APL highlighted the increased attention shown toward its recently acquired 35 Graham Street property which presents an attractive redevelopment opportunity. At acquisition price, the property possesses an initial yield of 6.85% with 100% occupancy for the next 1.75 years, providing flexibility in the design process whilst underpinning cashflows and APL’s dividend. Development feasibility work suggests that the redevelopment could create ~20,000 sqm of Net Lettable Area. We estimate an annual net rental contribution of NZ$10.3–10.6m p.a. on completion (depending on construction duration). This represents an estimated yield on construction cost (guided as NZ$90–100m) of ~11%. Initial works are anticipated to begin by FY22.
Portfolio performance improving holistically
1H20 portfolio occupancy and WALT are 98% and 4.2 years respectively. Although Eastgate (Christchurch), continues to be characterized as the “problem child” of the portfolio, in light of further work undertaken to develop a new masterplan for the centre alongside securing a significant lease renewal with key tenant, Countdown, we believe there is a strong probability the property will be able to reverse the drag on earnings it has historically created.
APL’s 1H20 dividend of 1.8cps was in line with forecasts and guidance, whilst no FY20 guidance was provided, in line with its policy to review the dividend on a quarterly basis. The 2Q20 dividend of 0.9cps has a record date of 11 December 2019 and payment date of 18 December 2019.
Focus on building out the portfolio through strategic M&amp;A
APL noted its continuous motivation to identify fairly priced, value add acquisition opportunities. In kind, NZ$0.8m was spent on due diligence costs related to two substantial investment opportunities which did not eventuate. Although the quantum of such due diligence costs are not expected to be mirrored in future periods, management signalled that these expenditures will likely become a recurring feature of its financial results. Gearing is relatively full at ~26% on an adjusted basis, even when taking into account APL’s recent divestment of its Heinz Watties distribution centre. Consequently, we expect any further acquisitions would likely be accompanied by a capital raising.
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Investment View
APL has announced its first major acquisition and value add opportunity to follow its management externalisation. There is upside for APL over the medium-term if it can execute on its ‘value-add’ strategy, which AUG has done successfully on other funds. While APL trades at a discount to peers, this is justified in our view. Our rating is NEUTRAL.&nbsp;&nbsp;
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Jeremy Simpson, CFA jeremy.simpson@forsythbarr.co.nz +64 9 368 0022

Asset Plus
1H20 — Basic Arithmetic
Asset Plus Limited (APL) delivered a 1H20 result evident of a company still in the transitory phases of executing on its long term strategy. Underlying profit of NZ$2.8m was broadly in line with our forecasts and flat on the prior year, with the dilutionary effect of asset sales offset by the acquisition of 35 Graham Street. APL’s portfolio metrics remain steady, and its relatively defensive lease expiry profile provides complementary upside. APL declared a 2Q20 dividend of 0.90cps, in line with forecasts and the prior year. No changes to our forecasts have been made. NEUTRAL.
35 Graham Street remains the Crown Jewel
APL highlighted the increased attention shown toward its recently acquired 35 Graham Street property which presents an attractive redevelopment opportunity. At acquisition price, the property possesses an initial yield of 6.85% with 100% occupancy for the next 1.75 years, providing flexibility in the design process whilst underpinning cashflows and APL’s dividend. Development feasibility work suggests that the redevelopment could create ~20,000 sqm of Net Lettable Area. We estimate an annual net rental contribution of NZ$10.3–10.6m p.a. on completion (depending on construction duration). This represents an estimated yield on construction cost (guided as NZ$90–100m) of ~11%. Initial works are anticipated to begin by FY22.
Portfolio performance improving holistically
1H20 portfolio occupancy and WALT are 98% and 4.2 years respectively. Although Eastgate (Christchurch), continues to be characterized as the “problem child” of the portfolio, in light of further work undertaken to develop a new masterplan for the centre alongside securing a significant lease renewal with key tenant, Countdown, we believe there is a strong probability the property will be able to reverse the drag on earnings it has historically created.
APL’s 1H20 dividend of 1.8cps was in line with forecasts and guidance, whilst no FY20 guidance was provided, in line with its policy to review the dividend on a quarterly basis. The 2Q20 dividend of 0.9cps has a record date of 11 December 2019 and payment date of 18 December 2019.
Focus on building out the portfolio through strategic M&amp;A
APL noted its continuous motivation to identify fairly priced, value add acquisition opportunities. In kind, NZ$0.8m was spent on due diligence costs related to two substantial investment opportunities which did not eventuate. Although the quantum of such due diligence costs are not expected to be mirrored in future periods, management signalled that these expenditures will likely become a recurring feature of its financial results. Gearing is relatively full at ~26% on an adjusted basis, even when taking into account APL’s recent divestment of its Heinz Watties distribution centre. Consequently, we expect any further acquisitions would likely be accompanied by a capital raising.

Investment View
APL has announced its first major acquisition and value add opportunity to follow its management externalisation. There is upside for APL over the medium-term if it can execute on its ‘value-add’ strategy, which AUG has done successfully on other funds. While APL trades at a discount to peers, this is justified in our view. Our rating is NEUTRAL.&nbsp;&nbsp;

Jeremy Simpson, CFA jeremy.simpson@forsythbarr.co.nz +64 9 368 0022

Asset Plus

Asset Plus: 1H20 — Basic Arithmetic