Investments In Berlin Residential And Southern Europe Hotels May Boost Future Prospects

Key Takeaways

• Strategic portfolio transformation focusing on higher-yield segments like hotels and offices could enhance revenue growth and improve net margins.
  
• Asset swaps, focusing on German residential and Southern European hotel markets, are projected to drive EBITDA and earnings growth.
  
• Declining values in the German office market and increased hotel investments could hinder Covivio's revenue stability, net earnings, and financial predictability.

Catalysts

Thanks to its partnering history, its real estate expertise and its European culture, Covivio is inventing today’s user experience and designing tomorrow’s city.

• Covivio is streamlining and transforming its portfolio, focusing more on higher-yielding segments like hotels and city center offices, which could enhance revenue growth as these areas are anticipated to perform well. This rebalancing can drive revenue growth and improve net margins as the portfolio shifts toward higher-yielding investments.
  
• The asset swap with AccorInvest to merge hotel operations is expected to yield significant long-term benefits, including higher EBITDA yield from CapEx investments, enhancing future earnings potential.
  
• Covivio's focused strategy on the German residential market, particularly in Berlin, is projected to yield strong rental growth due to significant reversionary potential, positively impacting revenue and net earnings.
  
• The company is leveraging its investments in Southern Europe's hotel market, an area poised for growth, to increase revenue streams through high-yield, mixed fixed and variable lease agreements, further contributing to earnings enhancement.
  
• Operational enhancements through increased occupancy rates across office portfolios, driven by strategic lettings and asset management improvements, should bolster like-for-like rental growth, supporting overall revenue and potentially improving net margins.

Covivio Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Covivio's revenue will grow by 7.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.6% today to 53.7% in 3 years time.
• Analysts expect earnings to reach €689.0 million (and earnings per share of €6.21) by about February 2028, up from €68.1 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.0x on those 2028 earnings, down from 83.7x today. This future PE is lower than the current PE for the GB REITs industry at 19.6x.
• 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 9.51%, as per the Simply Wall St company report.

Covivio Future Earnings Per Share Growth

Risks

• The decline in values within the German office segment could negatively impact Covivio's revenues and net asset value, especially given the continued economic and political uncertainty in the region.
  
• Challenges in the German office market, including prolonged low occupancy rates and decreased letting activity, could constrain operating income and hinder net earnings growth.
  
• The company's planned increase in hotel investments, driven by asset swap and variable revenue models, while offering growth potential, also introduces greater exposure to market volatility, which could affect net margins.
  
• The shift towards more variable leases in the hotel segment may elevate financial risk, impacting revenue stability and earnings predictability during economic downturns.
  
• The strategic disposal program and asset rotation initiatives may not realize anticipated valuations or desired liquidity outcomes, potentially affecting cash flow and financial results.

Valuation

• The analysts have a consensus price target of €62.055 for Covivio 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 €66.0, and the most bearish reporting a price target of just €55.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.3 billion, earnings will come to €689.0 million, and it would be trading on a PE ratio of 13.0x, assuming you use a discount rate of 9.5%.
  
• Given the current share price of €51.45, the analyst price target of €62.05 is 17.1% 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.