Vastned Retail NV. (ENXTAM:VASTN) has been on my radar for a while, and I’ve been consistently disappointed in its investment thesis. My concerns are mainly around the sustainability of its future growth, the opportunity cost of investing in the stock accounting for the returns I could have gotten in other peers, and its cash-to-debt management. Whether a company has a good future, in terms of its business operation and financial health, is an important question to address.
First, a short introduction to the company is in order. Vastned is a listed European retail property company focusing on venues for premium shopping. Since starting in 1986 in Netherlands, the company has now grown to a market cap of €699.28M.
The first thing that struck me about VASTN is its declining top-line growth of -4.70% over the past year. A consensus of 4 NL equity real estate investment trusts (reits) analysts covering the stock illustrates the trend may continue into the foreseeable future. According to their forecast, VASTN’s revenue level is expected to reduce by -0.26% in the next financial year. This is expected to effect the bottom line, with earnings expected to fall by -13.56% year-on-year, on average. With top line and bottom line expected to decline going forward, risk exists around the sustainability of its current operations.
Limiting your downside risk is an important part of investing, and financial health is a key determinant on whether VASTN is a risky investment or not. Alarm bells rang in my head when I saw VASTN’s high level of debt at 0.66x equity, and its low level of cash generated from its core operating activities, covering a mere 7.23% of debt. Although EBIT is able to amply cover interest payment, there’s still a lot of room for improvement on the cash management side. Or the very least, reduce debt to a more prudent level if cash generated from operating activities is insufficient to cushion for potential future headwinds. The current state of VASTN’s financial health lowers my conviction around the sustainability of the business going forward. VASTN has poor liquidity management. Firstly, its cash and other liquid assets are not sufficient to meet its upcoming liabilities within the year, let alone its longer term liabilities. Secondly, more than a fifth of its total assets are physical and illiquid, such as inventory. Keeping in mind the downside risk, if we think about the worst case scenario, such as a downturn or bankruptcy, a non-trivial portion of its assets will be hard to liquidate and redistribute back to investors.
VASTN currently trades at €38.45 per share. At 18.19 million shares, that’s a €699.28M market cap – which is expensive for a company that has a 5-year cumulative average growth rate (CAGR) of -8.78% (source: analyst consensus). With an upcoming 2018 free cash flow figure of €39.40M, the target price for VASTN is €21.25 is below than the current share price. Therefore, the stock is trading at a premium. However, comparing VASTN’s current share price to its peers based on its industry and earnings level, it’s trading at a fair value, with a PE ratio of 7.65x vs. the industry average of 7.65x.
A good company is reflected in its financials, and for VASTN, the financials don’t look good. This is a fast-fail analysis, which means I won’t be spending too much time on the company, given that there is a universe of better investments to further research. For all the charts illustrating this analysis, take a look at the Simply Wall St platform, which is where I’ve taken my data from.