Upcoming Polish Housing Projects Will Face Profitability Challenges Amid High Interest Rates

Key Takeaways

• Strategic land acquisitions support long-term growth and ensure future development potential despite current market challenges.
  
• Expected gross margin improvement signals stronger profitability amid a comprehensive project pipeline and anticipated favorable market conditions.
  
• Economic uncertainties, high interest rates, and reliance on affluent buyers challenge Atal's revenue growth and profitability.

Catalysts

Engages in the development and sale of residential buildings in Poland.

• Atal has 42 projects in progress and plans to implement 41 more, aiming to deliver over 11,700 flats, which can boost future revenues significantly as these projects reach completion and sales.
  
• Despite a current challenging market, the company has increased its inventory by commencing construction on numerous projects, indicating potential growth in revenues as these projects are completed and sold in the coming years.
  
• The company's gross margin on sales is forecasted to increase from 25% in Q4 2024 to 27-28% in Q1 2025, suggesting improved profitability and earnings potential despite a currently squeezed market.
  
• Atal has been strategic in land acquisition, spending PLN 324 million on new land in 2024, ensuring a substantial land bank for future developments, which underpins long-term revenue and growth potential.
  
• The company envisions better financial results in 2026 due to its ongoing and future projects, alongside improved market conditions such as lower interest rates, which could enhance its net margins and profitability.
  

Atal Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Atal's revenue will decrease by 0.5% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 21.6% today to 18.2% in 3 years time.
• Analysts expect earnings to reach PLN 332.4 million (and earnings per share of PLN 7.96) by about February 2028, down from PLN 400.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting PLN376.7 million in earnings, and the most bearish expecting PLN279 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.6x on those 2028 earnings, up from 5.6x today. This future PE is greater than the current PE for the GB Consumer Durables industry at 8.1x.
• 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 11.94%, as per the Simply Wall St company report.

Atal Future Earnings Per Share Growth

Risks

• There is a noticeable drop in sales, with a 14% decrease compared to the previous year, caused by factors like high interest rates, which could impact Atal’s future revenues and net margins.
  
• Although there is an increase in the number of handed over flats, the average gross margin on sales has dropped by 3.6 percentage points compared to the previous period, indicating pressure on profitability.
  
• High interest rates in Poland remain persistent, making home buying challenging for many potential customers, potentially affecting Atal's revenue and earnings.
  
• The management is relying on future economic improvement and potential interest rate decreases without having significant control over these macroeconomic factors, adding uncertainty to future revenue and profit projections.
  
• A significant portion of properties is targeted towards wealthier customers due to affordability issues, which may limit market reach and diversification, affecting future sales volume and revenue stability.

Valuation

• The analysts have a consensus price target of PLN64.038 for Atal 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 PLN73.59, and the most bearish reporting a price target of just PLN56.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be PLN1.8 billion, earnings will come to PLN332.4 million, and it would be trading on a PE ratio of 11.6x, assuming you use a discount rate of 11.9%.
  
• Given the current share price of PLN51.6, the analyst price target of PLN64.04 is 19.4% 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.