Nordic Grocery-Anchored Portfolio Expansion Will Drive Long-Term Earnings Quality

Catalysts

About Prisma Properties

Prisma Properties is a Nordic real estate company focused on modern, long lease grocery, discount retail and QSR properties across Sweden, Finland and Denmark.

What are the underlying business or industry changes driving this perspective?

• The planned doubling of the property portfolio from SEK 8 billion to SEK 16 billion by 2028, mainly through high yielding development projects and disciplined acquisitions, is expected to materially lift rental income and earnings capacity as new assets are added at attractive yields.
• Rapid expansion in grocery anchored and daily goods oriented assets, including recent ICA Maxi and K Citymarket acquisitions and developments, positions Prisma to benefit from resilient consumer demand in essential retail, supporting stable revenue and more defensive net operating income through cycles.
• The build out of a diversified Nordic footprint, with higher yielding growth in Finland and development led growth in Denmark and Sweden, reduces concentration risk and is intended to enhance portfolio quality and valuation multiples, which over time can support faster net asset value per share growth.
• A growing pipeline of projects with an expected average yield on cost of around 7.7 percent, combined with an improving investment market sentiment for Prisma’s segment, creates upside potential from development profits and future revaluations, supporting both profit from property management and bottom line earnings.
• The strategic move from a build up phase to a more capital optimized growth phase, including a higher net LTV target of 55 percent and rising interest coverage, increases investment capacity at a time of attractive deal flow, which can accelerate rental income growth and improve operating leverage in net margins.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Prisma Properties's revenue will grow by 16.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 62.4% today to 74.3% in 3 years time.
• Analysts expect earnings to reach SEK 594.0 million (and earnings per share of SEK 4.17) by about December 2028, up from SEK 313.0 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as SEK477.2 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 11.1x on those 2028 earnings, down from 13.7x today. This future PE is lower than the current PE for the SE Real Estate industry at 14.8x.
• 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 9.02%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Rising competition and yield compression in Nordic grocery anchored and discount retail properties, especially in Sweden where management highlights high competition, could force Prisma Properties to accept lower acquisition and development yields over time, reducing rental income growth and compressing net margins.
• The strategic shift toward a higher net loan to value target of 55 percent and continued balance sheet expansion leaves the company more exposed to sustained high funding costs or a reversal in interest rate trends, which would pressure earnings from property management and slow growth in net profit.
• As the portfolio doubles in size and more leases begin to expire, evidenced by the recent decline in WAULT from 8.3 years to 7.8 years, Prisma may struggle to consistently renew on equally favorable terms or fully re let space, which would weaken occupancy and weigh on rental income and earnings capacity.
• The increasingly development heavy growth strategy, with an expanding pipeline targeting a 1 billion SEK annual run rate, exposes Prisma to construction cost inflation, project delays and potential tenant demand shifts, any of which could erode the anticipated 7.7 percent yield on cost and lower future net operating income and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of SEK31.0 for Prisma Properties based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be SEK799.0 million, earnings will come to SEK594.0 million, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 9.0%.
  
• Given the current share price of SEK26.0, the analyst price target of SEK31.0 is 16.1% 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.