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CAPITAL PARK - Narrowing the discount to NAV - IPOPEMA

Narrowing the discount to NAV
We initiate coverage of Capital Park with a BUY recommendation and a FV of PLN 8.50 per share, which implies 56% upside. The company manages and develops commercial properties in Poland, with major focus on Warsaw office market. As of end-1Q19 CPG owned commercial properties valued at nearly PLN 2.2bn, that generated funds from operations (FFO) of PLN 45m in 2018. Aside from cash-generating assets, Capital Park is also developing the ArtN project, which encompasses 40k sqm of office space and 27k sqm of retail area, to be completed in 1Q21. CPG also owns plot of land allocated for construction of the Eurocentrum Hotel & Residence project. We expect the completion of the ArtN building to allow CPG to recognize PLN 115m revaluation in 2019-21E. Also, we believe CPG may potentially dispose of its projects, which could result in significant cash inflow and dividend payments. However we do not include this in our forecasts due to low visibility. Our estimates suggest a rise in NAV from PLN 975m at end-2018 to PLN 1,096m at end-2021, implying a 2018-21E CAGR of nearly 4%. The firm trades at a discount of more than 40% to its NAV, but we expect the gap to narrow given the development pipeline and potential project disposal.
Stable FFO from cash-generating assets
As of end-1Q19, Capital Park’s portfolio consisted of eight projects with a total GLA of 147k sqm and a BV of PLN 1,548m, with outstanding debt of PLN 895m. The firm reported NOI of PLN 85m ex. deconsolidated funds and FFO of PLN 45m in 2018. Given the occupancy rate of completed projects at 91% and WAULT at 4.8 years, we expect the properties to deliver stable results in the years ahead.
NAV growth via development of the ArtN project
Capital Park started the construction of the ArtN project at end-2017, while the completion is scheduled in 1Q21. The property will offer 67k sqm of mixed-use space. We expect the development of the project (total capex of around PLN 1bn) to allow CPG to recognize a revaluation of around PLN 115m in 2019-21, while post-completion it should generate an annual NOI of around PLN 62m (vs. PLN85m reported by CPG in FY18). CPG also owns a plot of land for the construction of the Eurocentrum Hotel & Residence (BV of PLN 51m at end-4Q18), although we do not include this in our forecasts, as the company has yet to start development.
Valuation with over 40% discount to company’s BV
The current valuation implies around 40% discount to BV and NAV, which we see as unjustified. We highlight that two completed projects (Eurocentrum Complex and Royal Wilanów) represent a NAV of around PLN 5.4/share (close to CPG’s share price). We also expect NAV to rise almost 12% by end-2021 due to the development of ArtN. Finally, we highlight the potential cash inflow resulting from project disposals.