Financial Expenses And Vacancies Will Challenge Profitability In 2025

Key Takeaways

• Rental growth and tenant retention face challenges from lower inflation and higher vacancy rates, risking revenue stagnation and income pressure.
  
• Increased financial expenses and capital outlay for asset development could strain margins and long-term earnings, despite short-term dividend gains.
  
• Strong letting markets, strategic asset management, and disciplined cost control bolster PSP Swiss Property's stable revenue and shareholder value, minimizing financial risk.

Catalysts

Owns and manages real estate properties in Switzerland.

• The expected like-for-like rental growth rate is anticipated to drop significantly to 1.5% in '25 due to a substantial decrease in inflation rates to 0.7% in Switzerland, indicating potential stagnation in revenue growth.
  
• Financial expenses are projected to increase, contributing approximately CHF 35-36 million in '25, which may pressure net margins and profitability as these costs impact overall earnings.
  
• There is a projected increase in vacancy rates to 3.5% for 2025, suggesting possible challenges in tenant retention and space utilization that could negatively affect rental income and net operating income.
  
• The development and potential rezoning of assets like Wallisellen into mixed residential areas could lead to increased capital expenditure with uncertain returns, potentially impacting long-term earnings if demand does not meet expectations.
  
• The proposed dividend increase, while providing immediate shareholder returns, reflects an allocation of cash that might otherwise be used for reinvestment, potentially constraining future growth initiatives and earnings reinvestment opportunities.

PSP Swiss Property Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PSP Swiss Property's revenue will grow by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 105.0% today to 84.1% in 3 years time.
• Analysts expect earnings to reach CHF 310.2 million (and earnings per share of CHF 6.37) by about March 2028, down from CHF 374.9 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting CHF398.9 million in earnings, and the most bearish expecting CHF256.5 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 24.1x on those 2028 earnings, up from 16.2x today. This future PE is greater than the current PE for the GB Real Estate industry at 17.3x.
• 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 6.9%, as per the Simply Wall St company report.

PSP Swiss Property Future Earnings Per Share Growth

Risks

• The strong letting market in central business districts (CBD) of Zurich and Geneva, along with increased market rents, implies a stable revenue environment for PSP Swiss Property, potentially mitigating risks of declining earnings.
  
• The company's disciplined cost management, as evidenced by an EBITDA margin of 85%, suggests potential stability in net margins, offsetting risks related to financial expenses.
  
• PSP Swiss Property's ability to sell non-core assets at a 14% premium and achieve valuation gains, notably CHF 171 million from its investment portfolio, underscores a capacity to bolster earnings through strategic asset management.
  
• The company's diversified and stable lender portfolio coupled with low loan-to-value ratio of 34.1% supports a robust capital structure, minimizing risks associated with increased financial costs and maintaining profit margins.
  
• Regular, incremental dividend increases indicate sustained shareholder value creation and potential confidence in future earnings, countering the belief of declining share prices.

Valuation

• The analysts have a consensus price target of CHF135.8 for PSP Swiss Property based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF155.0, and the most bearish reporting a price target of just CHF125.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CHF369.0 million, earnings will come to CHF310.2 million, and it would be trading on a PE ratio of 24.1x, assuming you use a discount rate of 6.9%.
• Given the current share price of CHF132.1, the analyst price target of CHF135.8 is 2.7% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.