Onshoring And Aggressive Development Will Pressure Occupancy And Margins Over The Coming Years

Catalysts

About VGP

VGP develops, owns and operates logistics and industrial parks with integrated renewable energy solutions across Europe.

What are the underlying business or industry changes driving this perspective?

• Intensifying onshoring and manufacturing reshoring to Europe risks overshooting current demand. This could leave VGP with structurally lower occupancy and pressure on rental growth, weighing on revenue and earnings quality over time.
• A rapid build-out of large brownfield redevelopments and iconic land plots across many countries may stretch execution capacity. This increases cost overruns and delay risk that erode targeted 30% development margins and depress net margins.
• Heavy reliance on long-duration build-to-suit leases with highly customized facilities makes the portfolio less adaptable if tenant needs shift. This raises future reletting capex and downtime and undermines medium-term earnings resilience.
• Accelerating investments in photovoltaic and battery energy storage assets expose VGP to regulatory changes and power price normalization. This could cap renewable income growth and reduce the contribution of high-margin energy revenues to overall EBITDA.
• Ambitious growth in land bank and development pipeline ahead of potential cooling in logistics and e-commerce leasing could result in slower lease-up, lower like-for-like rental uplifts and weaker valuation gains. This may constrain net asset value growth and future EPRA earnings.

Assumptions

This narrative explores a more pessimistic perspective on VGP compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming VGP's revenue will grow by 28.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 198.1% today to 68.6% in 3 years time.
• The bearish analysts expect earnings to reach €241.9 million (and earnings per share of €11.75) by about December 2028, down from €326.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €622.6 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 10.8x on those 2028 earnings, up from 8.1x today. This future PE is lower than the current PE for the BE Real Estate industry at 12.7x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.47%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Leasing momentum could remain structurally strong, supported by resilient European logistics demand, returning e commerce tenants and onshoring manufacturing. This would sustain high occupancy, rental growth and recurring revenue rather than drive the expected decline in revenue and earnings.
• Disciplined development with around three quarters of the pipeline pre let and strict internal KPIs on pre letting could limit vacancy and speculative risk. This would allow VGP to keep realizing development margins near its 30% target and protect net margins over the long term.
• Ongoing expansion of the land bank at attractive entry prices in strategic brownfield and infill locations across multiple countries could secure long duration growth optionality. This would support continued net asset value compounding and long term earnings rather than a structural slowdown.
• Scaling of the renewable energy and battery storage business, with rising capacity, high margins and growing on site consumption, could become a meaningful, resilient income stream that diversifies cash flows and lifts EBITDA margins. This could offset any cyclical softness in traditional logistics demand.
• Robust balance sheet metrics, ample liquidity close to EUR 1 billion and investment grade ratings from multiple agencies could underpin continued development and joint venture recycling at attractive terms. This would support earnings stability and limit downside risk to net profit in weaker macro conditions.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for VGP is €73.0, which represents up to two standard deviations below the consensus price target of €104.5. This valuation is based on what can be assumed as the expectations of VGP's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €125.0, and the most bearish reporting a price target of just €73.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €352.3 million, earnings will come to €241.9 million, and it would be trading on a PE ratio of 10.8x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of €97.3, the analyst price target of €73.0 is 33.3% lower.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.