Baltic Real Estate as an Opportunity
Pro Kapital Grupp AS (PKG; ISIN EE3100006040, Open Market, 17E GF) is a developer of large-scale retail and residential real estate in the Baltic countries of Estonia, Latvia and Lithuania. The group can look back on a long-term track record in planning, building and selling large real estate projects in different asset classes and enjoys an extensive network among the Baltics with dedicated local management teams. As the company´s performance is dependent on the completion and sale of development projects, sales and earnings figures as well as cash flows are inherently volatile.
Despite the high interest expenses, PKG´s financial structure indicates no excessive indebtedness. As at the end of Q2 2018, all liabilities in the amount of €88.6 mln were collateralized with properties and pledged shares in the amount of €181 mln (loan-to-value (LTV) ~ 49%). This in turn has two important implications: Firstly, PKG´s current debt level is far away from its debt capacity enabling the company to raise more funds to realize further development projects. Secondly, as the risks for banks providing PKG with loans are quite low (LTV below 50%), terms for additional secured bank loans should still be favorable.
In the first half of 2018, PKG significantly improved net income from a loss of €2.6 mln in H1/2017 to a profit of €2.8 mln due to a notable rise in revenues from sale of real estate (+258%). Accordingly, gross profit was at €5.0 mln, +185% higher compared to previous period. Based on information available in PKG´s financial statements we anticipate continuing completion activity of residential development projects leading to a significant expansion of revenues from sale of real estate in the coming years.
Currently PKG´s largest single-project is the T1 shopping and entertainment center in Tallinn with a total investment value of €78.1 mln. Up to now construction of T1 increased PKG´s debt burden considerably. In November 2018 T1 started operations and should significantly contribute to top and bottom line. Furthermore, PKG´s risk-return profile is expected to improve as risky revenues related to development projects are complemented by stable and recurring revenue streams from T1 letting activity. This should not only yield steady operating profits in the coming years but also enable the company to pay a dividend on a regular basis.
Our fundamental DCF analysis returns a fair value of €1.97 per share. In light of the current share price we rate the stock as “Buy”.
Pro Kapital Grupp AS is an Estonian-based holding company active in the real estate sector. The Company is engaged in buying and selling as well as renting, operating and management of own and leased real estate. The Pro Kapital Grupp AS focuses on commercial and residential real estate development in Estonia, Latvia and Lithuania. It offers office spaces and apartments in Tallinn, Estonia, apartments in Riga, Latvia, and apartments in Vilnius, Lithuania. As of December 31, 2011, the Company operated five direct subsidiaries as well as a number of indirect subsidiaries and affiliated companies.
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