Concentrated City Center Retail Exposure Will Limit Returns And Increase Long-Term Risk

Catalysts

About Hammerson

Hammerson is a listed owner, developer and manager of large scale city center retail and mixed use destinations across the U.K., France and Ireland.

What are the underlying business or industry changes driving this perspective?

• Concentration of retail spend into a small number of dominant city center destinations risks overexposure to a narrow set of locations. As a result, any reversal in retailer footprint strategies or local economic weakness could pressure rental growth and portfolio values, ultimately weighing on revenue and earnings.
• Intensifying flight to quality by retailers may cap upside if top tier destinations already command peak rents. This may limit further rent reversion and compress net margins as Hammerson absorbs more capital expenditure to maintain its assets at the standard occupiers increasingly demand.
• Reliance on repositioning and densification projects, such as mixed use schemes and residential over car parks, could be undermined by planning delays, construction cost inflation and softer demand for new space. This may slow expected growth in net rental income and delay earnings accretion from the development pipeline.
• High yield acquisitions and redevelopment led growth are expanding the balance sheet at a point when funding costs and refinancing risk may increase. Consequently, any narrowing of the yield spread or tightening of credit conditions could erode returns and pressure both earnings and net tangible assets per share.
• Heavy investment in analytics, platform scalability and asset upgrades assumes sustained occupier demand and strong unified commerce models. However, if physical store rationalisation resumes or online channels regain share, occupancy and footfall could stagnate, restraining like for like rental growth and compressing long term earnings and dividend capacity.

Assumptions

This narrative explores a more pessimistic perspective on Hammerson compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Hammerson's revenue will grow by 5.6% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 24.4% today to 59.7% in 3 years time.
• The bearish analysts expect earnings to reach £166.9 million (and earnings per share of £0.31) by about December 2028, up from £58.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as £253.5 million.
• 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 8.9x on those 2028 earnings, down from 28.1x today. This future PE is lower than the current PE for the GB Retail REITs industry at 15.8x.
• The bearish analysts expect the number of shares outstanding to decline by 0.71% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.38%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The structural trend of retailers concentrating spend in a small number of dominant city center destinations strongly favors Hammerson's uniquely positioned, top 1% assets. This could sustain or accelerate like for like gross rental income growth and push revenue and earnings higher over the long term.
• Consistently strong operating metrics such as rising footfall, increasing sales densities and occupancy at 95%, with leasing deals materially ahead of previous passing rents and ERV, suggest durable pricing power that may support expanding net rental income and net margins rather than a deterioration.
• Disciplined capital allocation into high yielding acquisitions like WestQuay, Brent Cross, and Bullring and Grand Central at yields around 7.7% to 8.5%, combined with value creating repositionings delivering double digit returns, indicates that incremental investment could be earnings accretive and lift long run earnings and dividends.
• The scalable, data driven platform and early investment into AI analytics may unlock further operating leverage as assets under management grow. This means that fixed costs are spread over a larger income base and improving platform efficiency could enhance net margins and free cash flow.
• A strong balance sheet with investment grade credit metrics, significant liquidity and diversified capital recycling options including monetization of strategic land and asset rotation reduces financial stress risk and may support sustained dividend growth, net tangible asset resilience and long term earnings growth.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Hammerson is £2.45, which represents up to two standard deviations below the consensus price target of £3.27. This valuation is based on what can be assumed as the expectations of Hammerson'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 £4.05, and the most bearish reporting a price target of just £2.45.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be £279.5 million, earnings will come to £166.9 million, and it would be trading on a PE ratio of 8.9x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of £3.07, the analyst price target of £2.45 is 25.5% lower. Despite analysts expecting the underlying business 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.