Speculative Swedish Logistics Oversupply Will Undermine Future Yields

Key Takeaways

• Oversupply in Sweden's logistics market and soft tenant demand threaten Catena's occupancy, rental growth, and revenue stability.
  
• Rising leverage, tenant concentration risk, and heightened compliance costs are likely to compress margins and future earnings.
  
• Strong acquisition strategy, sustainable asset portfolio, and prudent capital management position Catena for long-term growth, stable earnings, and enhanced appeal to ESG-conscious tenants.

Catalysts

Owns, develops, manages, and sells logistics properties in Sweden and Denmark.

• The supply of new logistics assets in Sweden has sharply increased, much of it built on a speculative basis rather than driven by clear demand, contributing to a national vacancy rate that has risen to 9 percent-with the trend still upward. This growing oversupply directly threatens future occupancy rates and rental income, weakening revenue and potentially compressing net operating income margins.
  
• Tenant demand for logistics space is fragile and softening, as evidenced by weak market absorption and a cautious outlook from both Catena and the broader market for at least the next 6 to 12 months. As a result, the company's ability to drive like-for-like rental growth is languishing at only about 2 percent, mostly via CPI indexation, and there are limited prospects for significant rent reversions in the near term, pointing to stagnating revenue growth.
  
• The rapid expansion of Catena's portfolio through recent large acquisitions and developments, especially in the face of rising interest rates and higher debt costs, exposes the company to rising leverage and interest expenses, which will erode net margins and depress future earnings.
  
• A notable concentration of risk is developing in Catena's tenant roster, as large recent transactions with tenants like Elgiganten and Boozt lead to higher exposure to single counterparties. Should any of these key tenants default or relocate, there is heightened risk of sharply increased vacancies and reduced rental income, with a material negative impact on cash flow and earnings predictability.
  
• Regulatory changes and more stringent sustainability requirements may necessitate significantly higher capital expenditures to keep existing properties compliant, at a time when returns from new developments are being pressured by oversupply. This combination could force down return on assets and increase both annual capex and operating costs, further reducing the company's long-run profit margins.

Catena Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on Catena compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming Catena's revenue will grow by 9.2% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 57.1% today to 29.2% in 3 years time.
• The bearish analysts expect earnings to reach SEK 923.2 million (and earnings per share of SEK 23.75) by about August 2028, down from SEK 1.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 33.1x on those 2028 earnings, up from 19.7x today. This future PE is greater than the current PE for the SE Real Estate industry at 18.1x.
• 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 7.96%, as per the Simply Wall St company report.

Catena Future Earnings Per Share Growth

Risks

• Despite near-term caution in the market, Catena's strong track record of accretive acquisitions and value-adding development-already delivering a 26% year-on-year increase in rental income and expanding its portfolio with large, high-yield projects-could sustain revenue and asset value growth in the long term.
  
• Ongoing digitalization and rapid e-commerce expansion in the Nordic region, evidenced by a 9% e-commerce growth in Q1 and new long-term leases with leading retailers, may boost occupancy and demand for logistics assets, supporting rent levels and stabilizing earnings.
  
• Catena's high-quality, well-located and increasingly sustainable assets-supported by 57% environmentally certified area and a growing installed solar capacity-could help attract ESG-focused tenants, resulting in premium rental yields, reduced operating costs and stronger net margins over time.
  
• Prudent capital management, demonstrated by a solid balance sheet with a loan-to-value of 38.6%, an equity ratio of 52% and substantial liquidity, gives Catena flexibility to weather short-term headwinds while continuing to invest for future growth, thereby supporting long-term earnings per share and book value.
  
• Increasingly long and stable lease agreements with major tenants (such as the recent 10-year PostNord lease and the expansion/extension with Boozt until 2037) reduce tenant turnover risk, supporting steady rental income and predictable cash flow growth.

Valuation

• The assumed bearish price target for Catena is SEK405.0, which represents the lowest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Catena's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of SEK600.0, and the most bearish reporting a price target of just SEK405.0.
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be SEK3.2 billion, earnings will come to SEK923.2 million, and it would be trading on a PE ratio of 33.1x, assuming you use a discount rate of 8.0%.
• Given the current share price of SEK452.6, the bearish analyst price target of SEK405.0 is 11.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
• 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.