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.
Earnings and revaluation trend above sector – Updated 19 July
Underlying earnings in Q2 were up 6% y/y, 25% below our estimates based on non-recurring financing costs. Asset revaluation was solid, up 1.8% q/q versus the sector average of around 1% so far in the reporting season. We argue that SBB will continue posting strong revaluations as SBB’s improving portfolio fundamentals will gradually be more visible in its valuation. SBB’s financial costs are decreasing due to the improved credit rating, as reflected in SBB’s higher earnings capacity. Our estimates continue moving up, reflecting support from transactions and lower financial costs.
Marketing material commissioned by Samhällsbyggnadsbolaget i Norden.
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.
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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
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25 May 2018, 08:38 CET