Helsinki Oversupply And Rising Costs Will Hurt Property Value

Key Takeaways

• Geographic concentration and demographic shifts increase vulnerability to local market risks, potentially depressing occupancy rates and rental income.
  
• Rising costs, regulatory demands, and higher interest expenses threaten profitability, limit investment capacity, and pressure margins over the long term.
  
• Urbanization and portfolio concentration in key cities, along with digital innovation and proactive financial management, underpin Kojamo's strong position for rental growth and investor appeal.

Catalysts

Operates as a private housing investment company in Finland.

• Demand for Kojamo's rental apartments is at risk of softening over the long term due to signs that urban population growth is increasingly dependent on immigration rather than organic demographic expansion, raising the risk that urban resident numbers could plateau or decline in Finland's largest cities. This could lead to persistent pressure on occupancy rates and pose a structural drag on rental income.
  
• The company's heavy geographic concentration in the Helsinki metropolitan area leaves it especially vulnerable to local oversupply, shifting population trends, and demographic risks, putting both asset values and rental revenue at the mercy of adverse local market dynamics.
  
• Persistent cost inflation, especially in construction and maintenance, is set to continue squeezing margins as Kojamo may struggle to fully pass rising costs onto tenants in an environment of muted rental growth and highly regulated rent increases, resulting in potential margin compression and reduced earnings.
  
• The long-term trend of rising interest rates increases Kojamo's future debt servicing costs, as the company relies heavily on leverage to fund property acquisitions and modernization, putting sustained pressure on net income and limiting free cash flow available for dividends and reinvestment.
  
• Stricter EU environmental and energy-efficiency regulations will necessitate significant capital expenditures for retrofitting Kojamo's aging building stock, further eroding return on invested capital and creating the risk that net margins and earnings per share could stagnate or fall over time.

Kojamo Oyj Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Kojamo Oyj compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Kojamo Oyj's revenue will decrease by 0.3% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 11.8% today to 34.1% in 3 years time.
• The bearish analysts expect earnings to reach €157.2 million (and earnings per share of €0.63) by about September 2028, up from €53.8 million today. The analysts are largely in agreement about this estimate.
• 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 15.1x on those 2028 earnings, down from 50.2x today. This future PE is lower than the current PE for the FI Real Estate industry at 30.5x.
• 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 11.03%, as per the Simply Wall St company report.

Kojamo Oyj Future Earnings Per Share Growth

Risks

• Urbanization and population growth in major Finnish cities continue to drive sustained demand for rental housing, supporting healthy occupancy rates and underpinning Kojamo Oyj's long-term revenue growth potential.
  
• The persistent trend towards urban living, smaller household sizes, and immigration to growth centers like Helsinki, Tampere, and Turku benefits Kojamo's highly concentrated portfolio in these areas, helping to stabilize or increase occupancy and average rents.
  
• Industry momentum following Kojamo's recent large-scale asset transactions has attracted renewed international investor interest in Finnish residential real estate, which acts as a supportive factor for property valuations and market liquidity, ultimately strengthening Kojamo's asset base and equity value.
  
• Ongoing investments in digitalization, enhanced customer experience, and service innovation-evidenced by Kojamo's record-high Net Promoter Score-allow the company to command premium rents and reduce tenant churn, potentially improving rental income and net margins over time.
  
• Solid balance sheet management, demonstrated by proactive refinancing at favorable rates and large-scale deleveraging via disposals, positions Kojamo Oyj to pursue value-accretive growth or resume dividend payments, supporting shareholder returns and earnings per share.

Valuation

• The assumed bearish price target for Kojamo Oyj is €7.07, which represents two standard deviations below the consensus price target of €10.99. This valuation is based on what can be assumed as the expectations of Kojamo Oyj'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 €12.5, and the most bearish reporting a price target of just €6.9.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be €461.4 million, earnings will come to €157.2 million, and it would be trading on a PE ratio of 15.1x, assuming you use a discount rate of 11.0%.
  
• Given the current share price of €10.95, the bearish analyst price target of €7.07 is 54.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• 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.