CGS-CIMB Research analysts have initiated coverage on Cromwell European REIT (CEREIT) with an “add” call and target price of EUR2.15 ($3.13), citing the successful execution of its redevelopment and reconstitution strategy as key factors.
Despite trading at a 37% discount to net asset value (NAV), analysts Natalie Ong and Lock Mun Yee note that the REIT’s recent divestments averaged 13.7%/21.4% above the latest valuations/purchase price, realising EUR40.3 million in capital gains and reaffirming its portfolio quality.
The analysts say that CEREIT has a clear divestment and redevelopment strategies in place to unlock deep value — it consists of a EUR250 million mid-term redevelopment plan, of which about 80% has been announced, comprising five redevelopments.
“We estimate that these could deliver about EUR60 million - EUR70 million upside to NAV, translating into 11-12 EUR cents, or a 4.7% - 5.5% uplift in NAV/share (NAVPS). Within its long-term redevelopment pipeline, the redevelopment of Parc des Docks could lift NAV by up to EUR200 million, or 36 EUR cents per share, translating into about 16% NAVPS upside,” they say.
Ong and Lock believe that the mid- and long-term redevelopments could lift NAVPS by 21%, which they think has been overlooked by the market.
In addition, the analysts say that CEREIT’s portfolio will shift towards a more defensible composition of 60%/40% industrial/Grade A office assets, away from 46%/25%/19% industrial/Grade A offices/Grade B and C offices currently.
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“CEREIT's light industrial/logistics assets are benefitting from secular trends, such as higher near-shoring and growth of e-commerce penetration in Europe, which EuroCommerce expects to increase from 10% - 25% of total retail sales to about 30% by 2030 as the market matures,” they add.
As the flight to quality and corporate commitments to net zero emissions has resulted in Grade A/A green offices accounting for about 60% - 80% of office take-up, the analysts believe that earnings will be supported by CEREIT’s portfolio recalibration, which will result in a future-ready portfolio with lower vacancy and devaluation risks.
Finally, Ong and Lock note that the EU market is at an inflection point, and are therefore keen on buying into Europe’s nascent recovery near the bottom of the cycle.
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Citing headline inflation in the EU hitting a two-year low of 2.4% in October 2023 as a key indicator that the macroeconomic outlook is improving, Ong and Lock say that this could mitigate interest rate and valuation risks for CEREIT.
They note that 72 economists polled during Reuter's November 2023 survey agreed that there would be no more rate hikes in the current cycle, and 45% of the surveyed economists predicted that there would be a rate cut before the European Central Bank meeting in July 2024.
The analysts’ target price is based on a blended valuation of both the dividend discount model (DDM) and RNAV, which they say better accounts for both CEREIT’s high dividend payout ratio and asset redevelopment.
“Its valuation is undemanding, in our view, at FY2024 distribution per unit yield of 11.0% and a 49% discount to restated NAV,” they say.
As at 10.19am, units in Cromwell European REIT are trading 1 cent EUR lower, or 0.71% down at EUR1.39.
