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Fourlis | On the REIT path

In our new note on Fourlis we consider the potential value that may be crystallised from Fourlis’s REIC structure. We argue that the value creation will stem mostly from the re-rating of the rental income within the REIC and suggest that key for the value creation will be the multiple attached to the operating business (OpCo), which will naturally have lower margins due to the rentals paid to the REIC. Our analysis suggests that a combination of 10% discount to NAV for the REIC and a 6.5x adj. EV/EBITDAR for the OpCo – which we consider to be realistic – yields a fair price near €6.4 for the group, pointing to significant upside vs. the current price. This is in sync with our DCF-derived PT based on the existing structure. We note though that this is just an illustrative analysis, as the final structure is likely to be different as the REIC gets scaled-up via the injection of more assets prior to its listing.

From an operational perspective, we believe there are reasons to be cheerful in 2019 as cyclical momentum accelerates. Our estimates factor in c5.6% group revenue growth in 2019e leading to double-digit EBITDA growth yoy. Although we acknowledge there is short-term downside risk, we note that Fourlis’s 2019e EBITDA will still be >10% below the level we consider mid-cycle, leaving room for better earnings momentum in 2020-21e.

We have also supplemented our analysis of Fourlis’s fundamentals with an evaluation of the group’s compliance with some key corporate governance best-practices (e.g. board independence, system of internal controls). Overall, relative to the rest of our G.RE.CO. universe, Fourlis seems to be one of the leaders in terms of compliance with the examined corporate governance performance indicators, while also screening well within our entire coverage universe.