Affordable Housing And Green Ventures Will Drive Future Value

Key Takeaways

• LEG Immobilien plans to boost revenue through affordable housing rental growth and optimize margins via asset renovations and refinancing strategies.
  
• Green ventures and integration initiatives, like BCP, aim to enhance earnings long-term, despite a neutral short-term AFFO impact.
  
• Increased rent control and high leverage create financial risks, with limited rent growth and uncertainty affecting earnings and stability.

Catalysts

Operates as an integrated property company in Germany.

• LEG Immobilien aims to grow its revenue by leveraging the strong market dynamics in the affordable housing segment, expecting a rental growth of 3.4% to 3.6% for 2025. This is driven by a shortage of new building permissions that keeps supply tight, potentially boosting rental revenue.
  
• The company plans to optimize net margins through increased investment in asset renovation and improvements, with spending rising to over €35 per square metre. This is expected to enhance property value and rental income, positively impacting earnings.
  
• Expected cost improvements in the financing structure are a key catalyst. LEG Immobilien's refinancing activities, including issuing low coupon bonds and paying down more expensive debt, have the potential to lower average debt costs, thereby improving net earnings.
  
• The integration of BCP is expected to provide operational synergies and scale benefits, although its contribution to AFFO will be neutral in 2025. However, further down the line, this integration could contribute positively to earnings as capex requirements stabilize.
  
• The growth of LEG's green ventures, including Renowate, dekarbo, and Termios, is anticipated to add an earnings contribution of €20 million by 2028. This diversification into energy-efficient technologies and services could enhance revenues and, in turn, earnings.

LEG Immobilien Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming LEG Immobilien's revenue will decrease by 15.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.2% today to 78.7% in 3 years time.
• Analysts expect earnings to reach €759.3 million (and earnings per share of €10.08) by about April 2028, up from €66.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €908.1 million in earnings, and the most bearish expecting €609.7 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, down from 80.9x today. This future PE is lower than the current PE for the GB Real Estate industry at 15.8x.
• Analysts expect the number of shares outstanding to grow by 0.49% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.69%, as per the Simply Wall St company report.

LEG Immobilien Future Earnings Per Share Growth

Risks

• The company faces increased restrictions in rent control regulations in certain regions, which could limit rent growth and impact future revenue streams.
  
• The high leverage with an LTV above target creates financial risk, especially if interest rates remain elevated or increase further, potentially affecting net earnings via higher interest expenses.
  
• The market volatility and uncertainty around refinancing in 2025 pose risks that could impact the company’s financial stability and earnings.
  
• The non-core asset disposal program, while beneficial for deleveraging, may take several years at the current pace, potentially slowing financial improvements and affecting net margins.
  
• The integration of recently acquired BCP assets is not expected to contribute to AFFO in 2025 due to high capex requirements, which could weigh on overall earnings and financial performance.

Valuation

• The analysts have a consensus price target of €88.876 for LEG Immobilien 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 €135.3, and the most bearish reporting a price target of just €65.4.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €964.3 million, earnings will come to €759.3 million, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 9.7%.
• Given the current share price of €71.7, the analyst price target of €88.88 is 19.3% higher.
• 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.