Wilson Asset Management weekly: Positive sentiment returns | Spotlight on Aveo Group

After what many would describe as a ‘bloodbath’ in the market, positive sentiment returned this week, with the S&P/ASX All Ordinaries Accumulation Index closing up 1.4%. The US Dow Jones Industrial Average recovered almost all of its losses from last week, leading the charge in global markets. We believe there are still significant liquidity risks from passive money held in exchange traded funds (ETFs), which now represent more than $5 trillion of assets, and we have seen the recent volatility impacting certain ETF products.

We are now halfway through reporting season. A key theme to date is that market expectations have been too high and companies with high expectations that have reported ‘in-line’ results have suffered share price falls. We have also seen many companies join the ‘second half club’, with company earnings needing a lift later in the year to meet guidance. With our high cash holdings we have the ability to capitalise on opportunities discovered during this current results season and we expect this will continue over the coming weeks.

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Spotlight on Aveo Group

Retirement living and aged-care business Aveo Group (ASX: AOG) announced its half-year results on Tuesday, reporting underlying profit after tax of $36.3 million for the six months to 31 December 2017.

Eight months ago, Aveo’s share price was trading close to its net tangible asset (NTA) value, however a challenging start to FY18 following negative media coverage saw the share price fall almost 30%. Following the share price fall we saw value in Aveo and invested in the company through WAM Capital, WAM Leaders, WAM Active and Century Australia.

Aveo’s result was in line with market expectations and was buoyed by a positive outlook statement which highlighted that sales volumes had recovered significantly since November and had returned to normalised levels prior to the negative media coverage. Aveo is becoming one of the major players in the Australian retirement sector and is in the process of divesting its non-core assets, which we believe will be a catalyst for the share price to rebound. Shares in Aveo closed up 3.5% for the week.