Future Remerchandising At Woluwe And Carosello Will Improve Tenant Demand, But Reliance On Italy Could Pose Risks

Key Takeaways

• Tenant demand growth from remerchandising projects boosts potential for rental income increases and enhances revenue growth.
  
• Strong operational performance and low occupancy cost ratios indicate continued earnings growth and stable net margins.
  
• Heavy reliance on Italy, coupled with uncertain economic trends, poses risks to revenue stability and financial margins if rental growth projections do not materialize.

Catalysts

A Euronext-quoted property investment company and one of Europe’s shopping centre specialists.

• The remerchandising of flagship shopping centers like Woluwe Shopping in Belgium and Carosello in Italy has significantly boosted footfall and tenant demand, demonstrating potential for increased rental income and enhancing revenue growth.
  
• Strong leasing activities, particularly in Italy, with rental uplifts well above 20% in some cases, suggest continued favorable conditions for rent increases and potential improvements in net margins.
  
• Ongoing internal growth strategies through further remerchandising projects in Italian and Swedish shopping centers indicate future revenue expansion and asset valuation enhancements.
  
• The robust operational performance in 2024, driven by like-for-like rental growth and a notable net property income uplift of 5.9%, points to continued earnings growth momentum into 2025.
  
• Maintaining one of the lowest occupancy cost ratios in the industry at 9.8%, alongside successful tenant rotations and introductions of new concepts, ensures sustainable rent levels that contribute to stable and potentially increasing net margins.

Eurocommercial Properties Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Eurocommercial Properties's revenue will decrease by 4.7% annually over the next 3 years.
• Analysts assume that profit margins will increase from 64.5% today to 66.6% in 3 years time.
• Analysts expect earnings to reach €158.2 million (and earnings per share of €2.88) by about March 2028, down from €176.8 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €139.9 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.7x on those 2028 earnings, up from 7.5x today. This future PE is greater than the current PE for the GB Retail REITs industry at 6.7x.
• 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 7.94%, as per the Simply Wall St company report.

Eurocommercial Properties Future Earnings Per Share Growth

Risks

• Despite positive geographic diversification, a significant reliance on Italy's market could expose Eurocommercial Properties to country-specific economic downturns, potentially affecting revenue stability.
  
• The increase in rental growth and property income is partly driven by remerchandising projects, which are capital-intensive. Future projects may not yield similar returns, posing a risk to net margins and earnings if expected rental uplifts do not materialize.
  
• Rising interest rates and economic uncertainty present a risk to Eurocommercial's financial stability and refinancing costs, impacting net income and margins due to the potential increase in interest expenses.
  
• Current tenant administration cases and potential bankruptcies could hurt rental income, as retail markets remain volatile with winners and losers, thus affecting overall revenue.
  
• Although positive trends are noted in Belgium due to remerchandising, any misalignments in tenant mix or ineffective execution in future projects may lead to missed revenue opportunities and affect asset valuations.

Valuation

• The analysts have a consensus price target of €27.822 for Eurocommercial Properties 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 €30.0, and the most bearish reporting a price target of just €25.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be €237.4 million, earnings will come to €158.2 million, and it would be trading on a PE ratio of 11.7x, assuming you use a discount rate of 7.9%.
• Given the current share price of €24.9, the analyst price target of €27.82 is 10.5% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
• 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.