Focusing On High-Demand Locations Will Sustain Strong Occupancy Rates Ahead

Key Takeaways

• Focus on high-demand locations with declining supply is expected to sustain occupancy, boosting future revenue growth.
  
• Strategic acquisitions and dynamic pricing are poised to enhance net margins and drive rental growth.
  
• Rising costs and equity dilution could impede NAV growth and shareholder returns, while reliance on market conditions poses risks to future revenue growth.

Catalysts

Empiric Student Property plc is a leading provider and operator of modern, predominantly direct-let, premium student accommodation serving key UK universities.

• Empiric's focus on locations with growing long-term demand and declining supply is expected to maintain strong occupancy rates, driving future revenue growth.
  
• The implementation of a dynamic pricing capability has led to record rental growth, which is poised to positively impact revenue in future academic years.
  
• The strategic acquisitions in Manchester and other areas leverage clustering benefits, potentially enhancing net margins through operational efficiencies.
  
• The refurbishment and post-graduate conversion programs are anticipated to deliver attractive returns, boosting earnings and potentially increasing net asset value.
  
• The continuous improvement in customer satisfaction metrics suggests potential for increased rebooking rates, supporting sustained revenue growth and stable margins.

Empiric Student Property Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Empiric Student Property's revenue will grow by 6.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 40.9% today to 74.8% in 3 years time.
• Analysts expect earnings to reach £75.6 million (and earnings per share of £0.1) by about April 2028, up from £34.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting £85.8 million in earnings, and the most bearish expecting £64.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.7x on those 2028 earnings, down from 17.3x today. This future PE is greater than the current PE for the GB Residential REITs industry at 9.7x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.35%, as per the Simply Wall St company report.

Empiric Student Property Future Earnings Per Share Growth

Risks

• Increased administrative and finance costs, including inflation-driven expenses and nonrecurring charges, could impact net margins and overall earnings.
  
• The dilutive impact of recent equity placements and potential further equity raises might limit net asset value (NAV) growth and affect shareholder returns.
  
• Interest rate environment may deter the tap of new debt, possibly constraining financing options for acquisitions or expansions, affecting future revenue growth.
  
• With a relatively high EPRA cost ratio, achieving significant cost reductions via small-scale acquisitions might be challenging, thereby impacting net margins.
  
• Heavy reliance on market conditions for revenue growth (such as occupancy and rental growth) could present a risk if there are changes in student demand or geopolitical issues, potentially impacting future revenues.

Valuation

• The analysts have a consensus price target of £1.027 for Empiric Student Property based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be £101.0 million, earnings will come to £75.6 million, and it would be trading on a PE ratio of 13.7x, assuming you use a discount rate of 7.3%.
• Given the current share price of £0.89, the analyst price target of £1.03 is 13.0% 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.