Rising Dutch Taxes And Higher Interest Expenses Will Weaken Future Profits

Key Takeaways

• Upcoming tax changes, asset disposals, and interest expenses are expected to negatively affect earnings, margins, and profitability.
  
• ESG investments and joint ventures present risks and could pressure net margins without immediate returns.
  
• Wereldhave's asset revaluation and transformation strategy support financial stability, while disposing non-core assets and refinancing enhance net margins and tenant retention.

Catalysts

Wereldhave N.V. (“the Company”) is an investment company that invests in real estate (shopping centers and offices).

• The expected taxation in the Netherlands in 2025 of about €4 million to €5 million per annum will put pressure on net income, potentially impacting earnings and margins negatively.
  
• The dilutive impact of the Winkelhof disposal is anticipated, as the guidance for 2025 earnings per share (EPS) includes a decline, signaling an expected reduction in future earnings capacity.
  
• Increased focus on ESG-related capital expenditures may require substantial investment, which could pressure profitability if these investments do not yield commensurate returns in the near term, impacting net margins.
  
• The company's plans to explore joint ventures to take equity out of the Dutch market might introduce risks related to operational control and financial outcomes, possibly affecting future revenue streams and profitability.
  
• Higher interest expenses are anticipated to continue impacting net profitability adversely, as exemplified by the 2024 results, where higher interest expenses offset part of the positive direct result.

Wereldhave Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Wereldhave's revenue will decrease by 1.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 60.3% today to 48.7% in 3 years time.
• Analysts expect earnings to reach €90.6 million (and earnings per share of €1.92) by about March 2028, down from €115.8 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 9.9x on those 2028 earnings, up from 5.9x 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 8.43%, as per the Simply Wall St company report.

Wereldhave Future Earnings Per Share Growth

Risks

• Wereldhave's net profit in 2024 was the highest since 2007, driven by direct cash flows and a significant revaluation of properties, indicating a strong financial position, which could support stable earnings.
  
• Despite facing several bankruptcies in its portfolio, Wereldhave maintained an occupancy rate of 97.3% in 2024, reflecting the company's ability to attract and retain tenants, positively impacting revenues.
  
• Wereldhave is actively disposing of non-core assets, aiming to improve its capital allocation and potentially reduce tax expenses, which could enhance net margins and financial health.
  
• The company's strategy of transforming traditional shopping centers into full-service centers has resulted in strong leasing demand and rental growth, which could support revenue and net income growth.
  
• Wereldhave's refinancing activities and a stable credit rating have reduced interest expenses, which can positively affect net margins and overall financial stability.

Valuation

• The analysts have a consensus price target of €16.333 for Wereldhave 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 €185.9 million, earnings will come to €90.6 million, and it would be trading on a PE ratio of 9.9x, assuming you use a discount rate of 8.4%.
• Given the current share price of €15.66, the analyst price target of €16.33 is 4.1% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• 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.