New Hotel And Office Conversions Will Drive Future Resilience

Key Takeaways

• Strategic actions have strengthened financial position, reducing future costs and enhancing liquidity, which could improve net margins.
  
• Diversified asset focus on residential and hotel portfolios supports demand, boosting revenue growth and potentially improving net income.
  
• Aroundtown faces revenue and margin challenges from macro uncertainties, rising finance expenses, and credit rating pressure, with potential impacts from asset sales.

Catalysts

Operates as a real estate company in Germany, the Netherlands, the United Kingdom, Belgium, and internationally.

• Aroundtown's strategic actions, such as perpetual note exchanges and tender offers, have significantly strengthened its financial position, reducing future coupon payments and strengthening liquidity, which could lead to improved net margins.
  
• The company's proactive operational strategy, including the reopening and upgrading of hotel properties and converting office spaces into service apartments, is expected to contribute to robust operational growth and increased revenue.
  
• The diversification of Aroundtown’s asset base, especially focusing on residential and hotel portfolios, positions it well for continued strong demand, thereby supporting revenue growth and potentially improving net income.
  
• Aroundtown's green initiatives and ESG progress could enhance asset value and attract more environmentally-conscious investors, potentially boosting net asset value and market perception over the long term.
  
• The implementation of ATworld and ATechX initiatives is designed to create new revenue streams and improve operational efficiencies, which may positively impact earnings in the coming years.

Aroundtown Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Aroundtown's revenue will grow by 4.6% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 42.7% today to 30.3% in 3 years time.
• Analysts expect earnings to reach €540.8 million (and earnings per share of €0.63) by about March 2029, down from €665.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €620.2 million in earnings, and the most bearish expecting €438.6 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 9.1x on those 2029 earnings, up from 3.7x today. This future PE is lower than the current PE for the DE Real Estate industry at 10.7x.
• 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 10.19%, as per the Simply Wall St company report.

Risks

• The real estate industry faced significant macro uncertainties, elevated inflation levels, and peak interest rates in 2024, which may continue to impact revenue and net margins if such challenges persist.
  
• Aroundtown's net rental income decreased by 1% in 2024, despite disposals and like-for-like rental growth, which could constrain future revenue growth.
  
• The company's finance expenses increased due to new debt raised above the current average cost of debt and expiry of certain hedging instruments, negatively affecting net margins.
  
• While Aroundtown achieved only a slight like-for-like value decline in its portfolio, continued interest rate and macroeconomic volatility may negatively impact future valuations and reduce net earnings.
  
• S&P's negative outlook on Aroundtown's BBB+ rating necessitates continued leverage reduction, potentially limiting cash flow flexibility and affecting earnings if asset sales do not proceed as planned.

Valuation

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

• The analysts have a consensus price target of €3.37 for Aroundtown 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 €4.5, and the most bearish reporting a price target of just €2.3.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be €1.8 billion, earnings will come to €540.8 million, and it would be trading on a PE ratio of 9.1x, assuming you use a discount rate of 10.2%.
• Given the current share price of €2.3, the analyst price target of €3.37 is 31.9% 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.