Acquisition Of Entra Shares Will Strengthen Presence In Oslo's Prime Locations

Key Takeaways

• Expansion into projects like Infinity and acquiring Entra shares aims to enhance Castellum's market position and long-term revenue growth.
  
• Credit ratings facilitate better financing, enabling investment in high-quality developments and strategic property reinvestments for increased rental income.
  
• Increased operational risk and economic challenges could negatively impact Castellum's rental income, financial stability, and revenue growth amid property devaluations and market competition.

Catalysts

Castellum is one of the largest listed property companies in the Nordic region that develops flexible workplaces and smart logistics solutions.

• Castellum's expansion into new projects like Infinity in Stockholm's vibrant area of Hagastaden aims to capitalize on strong office demand, expected to drive future revenue growth as these strategically located and high-quality developments attract tenants.
  
• The acquisition of additional shares in Entra, resulting in a mandatory offer for remaining shares, is a strategic move intended to strengthen Castellum’s market positioning and earnings by integrating high-quality assets in central Oslo and leveraging long leases.
  
• The recent S&P credit rating of BBB, coupled with the existing Moody's rating, positions Castellum to secure better financing opportunities, reducing overall interest expenses and enhancing net margins.
  
• Castellum plans to reinvest proceeds from divested non-strategic properties into refurbishment, tenant improvements, and new project developments, anticipated to enhance property values and rental income over time.
  
• With planned investments outpacing those from the previous year and focus on markets expected to experience economic recovery, Castellum foresees significant growth in income from property management and a positive shift in net leasing, boosting overall earnings.

Castellum Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Castellum's revenue will grow by 2.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 24.6% today to 42.9% in 3 years time.
• Analysts expect earnings to reach SEK 4.4 billion (and earnings per share of SEK 8.64) by about March 2028, up from SEK 2.4 billion 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 17.5x on those 2028 earnings, down from 23.1x today. This future PE is lower than the current PE for the GB Real Estate industry at 20.5x.
• 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 9.23%, as per the Simply Wall St company report.

Castellum Future Earnings Per Share Growth

Risks

• The announcement of new projects like the Infinity development in Stockholm may increase operational risk due to the lack of pre-signed leases. This could affect rental income and net margins if the expected demand does not materialize.
  
• The company has experienced a decrease in property values, writing down SEK 1.6 billion, impacting overall earnings and financial positioning.
  
• There is an increase in vacancy and discount rates, with higher vacancies affecting revenue by SEK 122 million due to the economic slowdown and resulting negative re-leasing spreads, which could suppress income growth.
  
• The acquisition of additional shares in Entra leading to a mandatory offer could affect liquidity and leverage, potentially challenging the maintenance of a 40% loan-to-value ratio target if the shareholding increases further.
  
• Economic challenges in major cities like Stockholm, Helsinki, and Copenhagen, as well as competition in key submarkets, could continue to affect renegotiation outcomes negatively, impacting revenue stability.

Valuation

• The analysts have a consensus price target of SEK121.6 for Castellum 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 SEK150.0, and the most bearish reporting a price target of just SEK101.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be SEK10.4 billion, earnings will come to SEK4.4 billion, and it would be trading on a PE ratio of 17.5x, assuming you use a discount rate of 9.2%.
• Given the current share price of SEK110.5, the analyst price target of SEK121.6 is 9.1% 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.