New Projects In Stockholm And Sickla Will Build Resilient Portfolio

Key Takeaways

• Strategic metro-linked locations and diversified tenants mitigate risk, stabilize income, and boost occupancy rates, enhancing potential revenue and margins.
  
• Significant project completions and future developments in high-demand areas drive rental income growth and elevate property valuations.
  
• Rising interest rates, property sales, and increased vacancies and costs threaten Atrium Ljungberg's profitability and revenue growth across sectors.

Catalysts

Owns, develops, and manages real estate properties in Sweden.

• The completion and leasing of significant projects, such as the deal with Stockholm University of the Arts and the creation of a new block with a rentable area of 27,000 square meters, are expected to drive future rental income growth. This is due to securing long-term leases that provide stable cash flows and contribute to increased earnings.
  
• Ongoing projects and planned developments in high-demand areas like Sickla, the Meatpacking District, Hagastaden, and Slussen represent substantial future investments worth SEK 40 billion. These projects are likely to enhance the attractiveness and value of the company’s property portfolio, potentially leading to higher revenues and increased property valuations.
  
• The diversification of the tenant base, with a well-distributed contract portfolio where the top 10 customers account for only 21% of contract value, mitigates risk and stabilizes rental income. This diversification supports steady revenue streams and protects net margins.
  
• Atrium Ljungberg’s strategic focus on locations connected by existing or upcoming metro stations maximizes foot traffic and accessibility, which is expected to enhance the desirability and occupancy rates of their properties. This should result in increased rental income and improved net margins as occupancy rises.
  
• The company's strong financial management, indicated by a stable financing situation and undrawn credit facilities exceeding near-term maturities, ensures that Atrium Ljungberg can pursue growth without excessive financial strain. This solid financial base supports sustained investment in growth projects, potentially boosting future earnings.

Atrium Ljungberg Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Atrium Ljungberg's revenue will decrease by 6.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from 22.6% today to 49.2% in 3 years time.
• Analysts expect earnings to reach SEK 1.6 billion (and earnings per share of SEK 2.35) by about April 2028, up from SEK 897.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting SEK2.0 billion in earnings, and the most bearish expecting SEK1.1 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 15.3x on those 2028 earnings, down from 23.2x today. This future PE is lower than the current PE for the GB Real Estate industry at 21.3x.
• 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 6.76%, as per the Simply Wall St company report.

Atrium Ljungberg Future Earnings Per Share Growth

Risks

• The company's profit from property management decreased by 12% due to property sales to strengthen the balance sheet and rising interest rates, potentially affecting future earnings and net margins.
  
• There is market uncertainty, which has led to difficulties in planning and making investment decisions, reducing consumption and potentially impacting revenue from the residential and retail sectors.
  
• The increase in office vacancies due to the loss of 44,000 office jobs in Stockholm since 2022, along with significant tenants like Convendum and H&M leaving, could lead to reduced rental income and pressure on revenue growth.
  
• Interest expenses have risen by 15% due to maturing fixed-rate loans and expiring interest rate swaps, impacting net margins and possibly reducing profitability.
  
• The ongoing increase in property taxes, which outpace associated income adjustments, could lead to higher costs and reduced operating surplus margins, impacting earnings stability.

Valuation

• The analysts have a consensus price target of SEK32.0 for Atrium Ljungberg 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 SEK3.3 billion, earnings will come to SEK1.6 billion, and it would be trading on a PE ratio of 15.3x, assuming you use a discount rate of 6.8%.
• Given the current share price of SEK32.98, the analyst price target of SEK32.0 is 3.1% lower. 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.