Key message: NEPI Rockcastle displayed a sharp recovery in 1H FY22 and the upward revision to earnings guidance is encouraging. Weakened by a challenging macro picture, we think the current share price materially undervalues the portfolio and its prospects on a medium-term view.  

  • 1H FY22 results were excellent: DEPS was EUR23.8c (+29.4% y/y) and the interim dividend is expected to be EUR23.8c per share, based on a 100% payout (1H FY21: EUR17.6c). Growth was driven by a recovery in the core portfolio to normalised operations for virtually all the interim reporting period. Consequently, COVID-related rental relief for tenants fell to insignificant levels and is expected to have a minimal impact on the portfolio for the foreseeable future. Although footfall is slower to recover, the portfolio is trading ahead of the pre-COVID (FY19) level based on tenant turnover (+8% ahead), and trading density growth is strong due to increased average basket sizes (+27%). The development pipeline is gaining momentum with c. EUR160mn to be spent over FY22; Promenada Bucharest (58 400sqm) and Promenada Craiova (63 700sqm) are the most significant projects under construction. The balance sheet is in very good shape after notable unsecured Eurobond issuances over FY21/22 that extended average debt maturity to 4.7 years at a 2.4% cost of debt (100% hedged) and LTV of 31.3%.
  • Update to earnings forecasts: we revise our FY22E DEPS forecast to EUR45.9c (+33.5% y/y), in line with management’s updated guidance for +33% growth. For FY23E we forecast DEPS of EUR49.1c (+6.9% y/y). We maintain a 100% payout ratio throughout the forecast period to FY26E as we see no solvency or liquidity concerns over this horizon that could curtail full payout; cash on hand was EUR450mn at 1H FY22.
  • Our revised target price is ZAR100.47, which implies a one-year forecast total shareholder return (TSR) of +27.5% (9.9% dividend yield and +17.6% capital return). As one of our preferred holdings in the listed property sector, we think the forward income yield (9.9%) and 29% discount to forward NAV offers an attractive entry point and wide margin of safety at the current price. It retains a NEUTRAL rating on relative valuation, but in our view it is underpriced.
  • Key catalysts and factors to watch: impact of Ukraine conflict on CEE region economy; growth in irrecoverable property operating costs and tax expense; progress on inorganic (development and acquisition) pipeline; resolution of arbitration in Poland.

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