Pulse Building Lease With Seine-Saint-Denis Will Boost Portfolio Strength

Key Takeaways

• Improved rental growth expected from the lease agreement and focus on prime locations may enhance revenue stability.
  
• Strategic asset disposals and strong liquidity position could optimize the portfolio and support future earnings.
  
• Lack of new commercial contracts and tenant departures are impacting revenue growth and posing refinancing challenges amid economic uncertainty.

Catalysts

A full-service real estate company with expertise in both commercial property investment (portfolio worth €6.8bn on a full consolidation basis as of 12/31/2023) and property development (2023 economic revenue of €1.3bn) that operates throughout France.

• Icade has signed a significant lease with the Seine-Saint-Denis Departmental Council for the entire Pulse building, which is expected to positively impact future rental income and occupancy rates as the lease starts in late 2025, potentially improving revenue.
  
• The Property Development Division showed a strong increase in residential orders by 16% in volume and 22% in value, driven by an uptick in both individual and bulk orders, which might enhance future revenue and earnings.
  
• Icade maintains a strong liquidity position with €2.3 billion and additional credit facilities secured in attractive conditions, which ensures financial stability and could support strategic growth initiatives, thus potentially improving net margins through reduced financing costs.
  
• Strategic focus on prime locations for light industrial assets is expected to crystallize positive rental growth despite macroeconomic challenges, which should enhance rent levels and support future revenue stability.
  
• The disposal of nonstrategic and mature assets is anticipated to optimize the portfolio and improve overall efficiency, potentially impacting net margins and earnings positively as less profitable units are phased out.

Icade Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Icade's revenue will grow by 10.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from -19.5% today to 20.0% in 3 years time.
• Analysts expect earnings to reach €377.9 million (and earnings per share of €5.47) by about April 2028, up from €-275.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €421.7 million in earnings, and the most bearish expecting €336 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 6.8x on those 2028 earnings, up from -5.8x today. This future PE is lower than the current PE for the GB REITs industry at 13.4x.
• 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 10.32%, as per the Simply Wall St company report.

Icade Future Earnings Per Share Growth

Risks

• The slowdown in the Commercial Property Development segment, particularly due to completion of major projects and lack of new commercial contracts, has led to a decrease in revenue, which could impact future earnings.
  
• The financial occupancy rate for Icade's well-positioned assets has declined, and tenant departures in 2024 continue to affect rental income, suggesting potential impacts on revenue stability and net margins.
  
• Economic revenue from Property Development fell by 2.2%, driven by the absence of significant new commercial contracts and an expected slowdown in the commercial segment, impacting overall revenue growth.
  
• Future refinancing challenges are indicated by the volatility in credit markets affecting financing costs, with projected costs of funding between 4.5% and 5%, which could squeeze net margins.
  
• Uncertain political and tax environments in France, coupled with global macroeconomic factors, add risk to business growth and potential profitability in both property investment and development sectors.

Valuation

• The analysts have a consensus price target of €25.333 for Icade 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 €40.0, and the most bearish reporting a price target of just €19.6.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €1.9 billion, earnings will come to €377.9 million, and it would be trading on a PE ratio of 6.8x, assuming you use a discount rate of 10.3%.
  
• Given the current share price of €20.94, the analyst price target of €25.33 is 17.3% 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.