Long Term Public Sector Leases And Nordic Platform Will Support Earnings Stability

Catalysts

About PPI Public Property Invest

PPI Public Property Invest owns and manages a Nordic portfolio of social infrastructure properties, primarily leased to public sector tenants on long contracts.

What are the underlying business or industry changes driving this perspective?

• Higher public sector demand for long term social infrastructure such as elderly care, supported living and public administration properties, supported by new leases with municipalities and government agencies, can support rental income and help sustain net operating income margins.
• Ongoing development projects in Finland and other Nordic markets that are fully aligned with public tenant demand, and are expected to add NOK 111 million in net operating income upon completion, can lift EBITDA and earnings capacity as these assets move from construction to income producing status.
• The move to a primary listing on NASDAQ Stockholm, together with a secondary listing on Oslo Børs, widens access to Nordic real estate and social infrastructure investors, which can support equity and debt funding options and reduce future financing costs, feeding into net income from property management.
• A larger pan Nordic platform of 850 properties with 84% of rental income from government backed tenants and a WAULT of around 7 years including projects can support more stable long term cash flows and improve visibility on revenue and earnings.
• Access to social infrastructure deal flow during a period where some owners face loan maturities and equity pressure, combined with a BBB+ rating and 73% of debt at fixed rates, can allow disciplined acquisitions that may add to rental income and potentially support net margins if purchased at attractive yields.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming PPI Public Property Invest's revenue will grow by 34.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 35.9% today to 46.9% in 3 years time.
• Analysts expect earnings to reach NOK 2.1 billion (and earnings per share of NOK 1.79) by about July 2029, up from NOK 647.0 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NOK2.3 billion in earnings, and the most bearish expecting NOK1.4 billion.
• 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 19.4x on those 2029 earnings, down from 28.1x today. This future PE is greater than the current PE for the SE Real Estate industry at 10.9x.
• 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 10.34%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• PPI carries relatively high financial leverage, with net debt to run rate EBITDA of 9.9x and loan to value of 48.5%. Any sustained pressure on asset values, refinancing terms or rental levels could limit financial flexibility and weigh on net income from property management and earnings.
• The portfolio and earnings are materially exposed to foreign currencies, with around 70% of property values and income in SEK, Danish kroner and euro. Ongoing currency swings similar to the recent appreciation of the Norwegian kroner that reduced reported asset values and EPRA NRV per share could continue to drag on reported equity, revenue and earnings in the reporting currency.
• The integration of the large SocialCo acquisition and the build out of a pan Nordic platform have pushed administration expenses higher and required one off costs. If expected synergies or cost efficiencies do not materialize, overhead could remain elevated and compress net operating income margins and net income from property management.
• Although 84% of rental income comes from government backed tenants and WAULT is 7.1 years including projects, vacancy has already moved from 5% to 6%. Any long term change in public sector space needs or budget priorities could gradually affect occupancy, lease terms and rental income growth, which would flow through to NOI and EBITDA.
• The growth plan relies on development projects and further acquisitions funded by equity and debt markets. If access to capital weakens or sector wide stress among Nordic real estate companies intensifies, the company may have to slow its investment pipeline or sell assets, which could limit revenue growth and pressure earnings and margins.

Valuation

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

• The analysts have a consensus price target of SEK25.3 for PPI Public Property Invest based on their expectations of its future earnings growth, profit margins and other risk factors.
• In order for you to agree with the analysts, you'd need to believe that by 2029, revenues will be NOK4.4 billion, earnings will come to NOK2.1 billion, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 10.3%.
• Given the current share price of SEK18.84, the analyst price target of SEK25.3 is 25.5% 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.