Samhällsbyggnadsbolaget i Norden (SBB) has commissioned Nordea Markets to produce a research report with the aim of providing investors with quality research on the company.
Stronger, Bigger, Better – Updated 25 May 2018
Stronger financial performance and bottom line expansion
SBB has historically traded at a significant EPRA NAV discount to peers of ~10%. We argue that one contributing factor is the high cost of debt, which makes up more than half of expenses. Following the recent BB rating from S&P, we estimate that spreads will come down by slightly more than 100 bp, creating leeway for strong cash earnings adjusted EPS growth ahead, fuelling a higher interest coverage ratio and a slowly shrinking LTV. Both factors contribute, we argue, to a high probability of a future Investment Grade rating (S&P already judges SBB’s assets to be Investment Grade).
Bigger – building an empire across the Nordics
With its ambition to become the largest holder of community service real estate in the Nordics, SBB has seen tremendous growth through acquisitions, rental growth and a reverse takeover. The property portfolio of SEK 23.8bn as of Q1 2018 has grown from virtually nothing two years ago. As unadjusted LTV is 2 pp above the company’s target, it looks as though there is no room for growth. However, the company is steadily expanding into Finland and we see potential in the building rights portfolio, which is set to add some SEK 250-400m annually to earnings, and so we anticipate further NAV growth.
Better – refurbishments to add to the ~12% NAV growth target
During our property tour with SBB, we visited several of its properties. One thing that stood out is SBB’s ability to refurbish, extend and innovate in order to increase the utility for both tenants and society as a whole. We see similar strategies with peers Victoria Park and D. Carnegie, although SBB’s is on a broader scale, as it involves community service properties. This increases rental income and revaluation potential. SBB aims to refurbish 600 apartments annually from H2 2018, which we believe could add as much as 3 pp to return on NAV over the next three years.
We base our valuation on the P/NNNAV peer multiple range for Hemfosa and Klövern. We adjust the NAV for joint venture potential and quantify a ~12% return on NAV three years ahead, which creates value above the cost of capital. We argue for a fair value range of SEK 9.7-11.9 per share.
Disclaimer and legal disclosures
Origin of the report
This report originates from: Nordea Bank AB (publ), including its branches Nordea Danmark, filial af Nordea Bank AB (publ), Sverige, Nordea Bank AB (publ), filial i Finland and Nordea Bank AB (publ), filial i Norge (together “Nordea”) acting through their unit Nordea Markets.
Nordea Bank AB (publ) is supervised by the Swedish Financial Supervisory Authority and the branches are supervised by the Swedish Financial Supervisory Authority and the Financial Supervisory Authorities in their respective countries.
Content of report
This report has been prepared solely by Nordea Markets.
Opinions or suggestions from Nordea Markets credit and equity research may deviate from one another or from opinions presented by other departments in Nordea. This may typically be the result of differing time horizons, methodologies, contexts or other factors.
The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision
Opinions or ratings are based on one or more methods of valuation, for instance cash flow analysis, use of multiples, behavioural technical analyses of underlying market movements in combination with considerations of the market situation and the time horizon. Key assumptions of forecasts or ratings in research cited or reproduced appear in the research material from the named sources. The date of publication appears from the research material cited or reproduced. Opinions and estimates may be updated in subsequent versions of the report, provided that the relevant company/issuer is treated anew in such later versions of the report.
Validity of the report
All opinions and estimates in this report are, regardless of source, given in good faith, and may only be valid as of the stated date of this report and are subject to change without notice.
No individual investment or tax advice
The report is intended only to provide general and preliminary information to investors and shall not be construed as the basis for any investment decision. This report has been prepared by Nordea Markets as general information for private use of investors to whom the report has been distributed, but it is not intended as a personal recommendation of particular financial instruments or strategies and thus it does not provide individually tailored investment advice, and does not take into account the individual investor’s particular financial situation, existing holdings or liabilities, investment knowledge and experience, investment objective and horizon or risk profile and preferences. The investor must particularly ensure the suitability of an investment as regards his/her financial and fiscal situation and investment objectives. The investor bears the risk of losses in connection with an investment.
Before acting on any information in this report, it is recommendable to consult (without being limited to) one’s financial, legal, tax, accounting, or regulatory advisor in any relevant jurisdiction.
The information contained in this report does not constitute advice on the tax consequences of making any particular investment decision. Each investor shall make his/her own appraisal of the tax and other financial merits of his/her investment.
This report may be based on or contain information, such as opinions, estimates and valuations which emanate from: Nordea Markets’ analysts or representatives, publicly available information, information from other units of Nordea, or other named sources.
To the extent this publication or report is based on or contain information emanating from other sources (“Other Sources”) than Nordea Markets (“External Information”), Nordea Markets has deemed the Other Sources to be reliable but neither Nordea, others associated or affiliated with Nordea nor any other person, do guarantee the accuracy, adequacy or completeness of the External Information.
Limitation of liability
Nordea or other associated and affiliated companies assume no liability as regards to any investment, divestment or retention decision taken by the investor on the basis of this report. In no event will Nordea or other associated and affiliated companies be liable for direct, indirect or incidental, special or consequential damages (regardless of whether being considered as foreseeable or not) resulting from the information in this report.
The risk of investing in certain financial instruments, including those mentioned in this report , is generally high, as their market value is exposed to a lot of different factors such as the operational and financial conditions of the relevant company, growth prospects, change in interest rates, the economic and political environment, foreign exchange rates, shifts in market sentiments etc. Where an investment or security is denominated in a different currency to the investor’s currency of reference, changes in rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. Past performance is not a guide to future performance. Estimates of future performance are based on assumptions that may not be realized. When investing in individual shares, the investor may lose all or part of the investments.
Conflicts of interest
Readers of this document should note that Nordea Markets has received remuneration from the company mentioned in this document for the production of the report. The remuneration is not dependent on the content of the report.
Nordea, affiliates or staff in Nordea, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives) of any company mentioned in the report.
To limit possible conflicts of interest and counter the abuse of inside knowledge, the analysts of Nordea Markets are subject to internal rules on sound ethical conduct, the management of inside information, handling of unpublished research material, contact with other units of Nordea and personal account dealing. The internal rules have been prepared in accordance with applicable legislation and relevant industry standards. The object of the internal rules is for example to ensure that no analyst will abuse or cause others to abuse confidential information. It is the policy of Nordea Markets that no link exists between revenues from capital markets activities and individual analyst remuneration. Nordea and the branches are members of national stockbrokers’ associations in each of the countries in which Nordea has head offices. Internal rules have been developed in accordance with recommendations issued by the stockbrokers associations. This material has been prepared following the Nordea Conflict of Interest Policy, which may be viewed at www.nordea.com/mifid.
The securities referred to in this report may not be eligible for sale in some jurisdictions. This report is not intended for, and must not be distributed to private customers in the UK or the US. This research report is intended only for, and may be distributed only to, accredited investors, expert investors or institutional investors in Singapore who may contact Nordea Bank, Singapore Branch of 3 Anson Road, #22-01, Springleaf Tower, Singapore 079909.
This report may be distributed by Nordea Bank Luxembourg S.A., 562 rue de Neudorf, L-2015 Luxembourg which is subject to the supervision of the Commission de Surveillance du Secteur Financier.
This report may be distributed by Nordea Bank, Singapore Branch, which is subject to the supervision of the Monetary Authority of Singapore.
This report may be distributed in the UK to institutional investors by Nordea Bank AB, London Branch of 6th Floor, 5 Aldermanbury Square, London, EC2V 7AZ, which is authorised by Finansinspektionen (Financial Supervisory Authority) in Sweden and subject to limited regulation by the Financial Conduct Authority and Prudential Regulation Authority in the United Kingdom. Details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request
This report may not be mechanically duplicated, photocopied or otherwise reproduced, in full or in part, under applicable copyright laws.
Nordea Markets equity and credit analysts do not hold shares in the companies that they cover. No holdings or other affiliations by analysts or associates.
Fair value and sensitivity
We calculate our fair values by weighting DCF, DDM, SOTP, asset-based and other standard valuation methods. Our fair values are sensitive to changes in valuation assumptions, of which growth, margins, tax rates, working capital ratios, investment-to-sales ratios and cost of capital are typically the most sensitive. It should be noted that our fair values would change by a disproportionate factor if changes are made to any or all valuation assumptions, owing to the non-linear nature of the standard valuation models applied (mentioned above). As a consequence of the standard valuation models we apply, changes of 1-2 percentage points in any single valuation assumption can change the derived fair value by as much as 30% or more. All research is produced on an ad hoc basis and will be updated when the circumstances require it
This research report should be considered marketing material, as it has been commissioned and paid for by the subject company, and has not been prepared in accordance with the regulations designed to promote the independence of investment research and it is not subject to any legal prohibition on dealing ahead of the dissemination of the report. However, Nordea Markets analysts are according to internal policies not allowed to hold shares in the companies/sectors that they cover.
Market-making obligations in shares or derivatives and
other significant financial interest
Nordea Markets has no market-making obligations in Samhällsbyggnadsbolaget i Norden
Investment banking transactions
Nordea Markets has been lead or co-lead manager in a public disclosed offer of financial instruments issued by Samhällsbyggnadsbolaget i Norden over the previous 12 months.
This report has been reviewed by the issuer prior to publication.
25 May 2018, 08:38 CET