Logistics And Convenience Retail Demand Will Drive Long Term Outperformance

Catalysts

About LondonMetric Property

LondonMetric Property is a UK real estate investment trust focused on logistics, convenience-led retail and experiential assets aligned to evolving consumer behaviour.

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

• Ongoing shift toward faster, more reliable delivery is increasing retailer demand for modern logistics space, supporting rental uplifts, higher like for like rental income and stronger top line growth.
• Consumer preference for quick, local grocery and essentials shopping is reinforcing the value of convenience retail assets, underpinning occupancy, rental pricing power and resilient net rental income.
• Growing consumer spend on experiences such as budget hotels and leisure is boosting demand for the company’s experiential assets, which should support sustained rental growth and uplift earnings over time.
• Increased scale and a sector leading cost ratio are enabling further economies of scale and cheaper unsecured and bond financing, which should enhance net margins and cash flow available for dividends.
• Active portfolio recycling from non core assets into higher conviction sectors is expected to improve asset quality and average lease terms, supporting higher returns on capital and long term earnings growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming LondonMetric Property's revenue will grow by 6.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 72.7% today to 91.7% in 3 years time.
• Analysts expect earnings to reach £471.8 million (and earnings per share of £0.19) by about December 2028, up from £314.4 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as £598.3 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 18.4x on those 2028 earnings, up from 13.6x today. This future PE is greater than the current PE for the GB Industrial REITs industry at 13.6x.
• 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 10.43%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Persistent higher-for-longer interest rates and volatile swap and gilt yields could keep liquidity weak for larger real estate transactions, compress valuation multiples and reduce gains on disposals, weighing on earnings growth and potentially pressuring net asset values and share price performance, which would ultimately impact overall earnings.
• A cyclical downturn in consumer spending or a structural shift away from discretionary experiences could undermine demand for budget hotels and leisure assets, limiting rent uplifts, increasing vacancy risk and slowing growth in net rental income and earnings.
• If retailer profitability comes under pressure from cost inflation or weaker sales, demand for new logistics and convenience retail space could soften, reducing the company’s ability to repeat recent double digit rent uplifts and thereby moderating revenue growth and net margins.
• The strategy of continuous portfolio trimming and recycling into favoured sectors relies on healthy transaction markets, so any prolonged downturn in UK commercial property or reduced buyer appetite for smaller assets could force sales at lower prices or delay reinvestment, constraining returns on capital and earnings momentum.
• Rapid balance sheet expansion from GBP 3.2 billion to GBP 7.4 billion in two years increases exposure to execution missteps in acquired portfolios and to any deterioration in debt markets, so if refinancing costs rise or new bond and private placement funding becomes less attractive, interest expenses could climb and erode net margins and earnings.

Valuation

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

• The analysts have a consensus price target of £2.26 for LondonMetric Property 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 £2.69, and the most bearish reporting a price target of just £2.0.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be £514.7 million, earnings will come to £471.8 million, and it would be trading on a PE ratio of 18.4x, assuming you use a discount rate of 10.4%.
  
• Given the current share price of £1.83, the analyst price target of £2.26 is 18.9% 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.