Helsinki, Tampere And Turku Rental Markets Will Unlock Lasting Value

Key Takeaways

• Tight rental supply and urbanization trends should enhance market positioning, driving sustained revenue growth and supporting long-term pricing strength.
  
• Digitalization, efficiency initiatives, and disciplined capital allocation are set to boost tenant retention, margins, and shareholder value.
  
• Persistent oversupply, local market risks, rising costs, high leverage, and limited new investments threaten Kojamo's profitability, growth prospects, and financial stability.

Catalysts

Operates as a private housing investment company in Finland.

• The persistent low level of new housing starts-currently less than 20,000 per year compared to estimated demand of 35,000-combined with sustained population growth in Finland's largest cities (driven by both domestic and immigration trends), is expected to keep rental supply tight relative to demand, which should enhance Kojamo's long-term pricing power and support revenue and earnings growth.
  
• The continuing trend of urban migration and concentration of Kojamo's portfolio (87% in Helsinki, Tampere, and Turku) positions the company to benefit from structural shifts toward rental living in growing city centers, supporting higher occupancy rates and recurring revenues over time.
  
• Investments in digitalization and improvements in customer experience (reflected in record-high Net Promoter Scores and reduced tenant churn) are expected to translate into better tenant retention, opportunities for rent premiums, and gradually improving net margins.
  
• Ongoing energy efficiency and modernization initiatives (with increased capex on modernization and progress toward carbon neutrality) are likely to yield lower property maintenance costs and attract ESG-conscious tenants and investors, supporting NOI and enhancing the company's market valuation in the long-term.
  
• Share buybacks funded by recent asset disposals and strengthened balance sheet are expected to provide additional support to per-share earnings metrics, while disciplined capital allocation reduces financial risk and positions Kojamo for value creation as macro conditions normalize.

Kojamo Oyj Future Earnings and Revenue Growth

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Lumo Kodit Oyj's revenue will grow by 6.6% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.9% today to 48.4% in 3 years time.
• Analysts expect earnings to reach €264.4 million (and earnings per share of €0.7) by about June 2029, up from €13.2 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €153.3 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 16.8x on those 2029 earnings, down from 142.8x today. This future PE is greater than the current PE for the FI Real Estate industry at 15.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 11.48%, as per the Simply Wall St company report.

Risks

• Persistent oversupply and muted rent levels, especially in the capital region, have forced Kojamo to use rent-free campaigns and lower rents on new tenants; if this oversupply continues or urban demand stagnates, it will constrain revenue growth and put ongoing pressure on net margins.
  
• High geographic concentration-87% of portfolio value in Helsinki, Tampere, and Turku-exposes Kojamo to local economic downturns or population shifts, which could lead to earnings volatility and risk to asset values.
  
• Rising maintenance, repair, and modernization expenses (expected to increase due to both inflation and ESG requirements) could outpace the company's ability to raise rents, threatening margins and lowering net operating income over time.
  
• Kojamo's elevated financial leverage, increased financial costs, and reliance on asset disposals to fund debt reduction and share buybacks expose it to risks from higher interest rates or tightening credit, which could compress earnings and strain future refinancing.
  
• The company's limited new investments, heavy pause on development, and focus on disposals rather than growth indicate difficulty capitalizing on future urbanization or population growth, which may limit long-term revenue expansion and value creation.

Valuation

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

• The analysts have a consensus price target of €9.89 for Lumo Kodit Oyj 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 €12.0, and the most bearish reporting a price target of just €8.5.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be €546.5 million, earnings will come to €264.4 million, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 11.5%.
• Given the current share price of €7.12, the analyst price target of €9.89 is 28.0% 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.