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ECHO INVESTMENT - Upside lies in mix of projects - IPOPEMA

Upside lies in mix of projects
We re-initiate coverage of Echo Investment with a BUY recommendation and FV at PLN 5.32 per share. The company operates in Poland’s commercial and residential segments, with the book value of Echo’s projects of PLN 3.6bn as of end-2Q19. The company stands out from its peers due to its business diversification (retail, office, and residential projects both for sale and for rent) and strategy of quick disposal of commercial projects. Given the development pipeline, we expect the company’s NAV to increase by 11% y/y in 2019 (assuming the already announced DPS of PLN 0.50) and remain flat y/y in 2020 (assuming a pay-out of DPS PLN 0.52). On our estimates, the company trades at a 2019 P/BV of 1.23x with a 29% premium to its peers, which we find justified as 26% of its assets are related to residential projects (a median P/BV of 1.4x), while the commercial segment (53% of assets, peer median of 0.9x P/BV) stands out with its quick cash generation due to disposals.
Solid development pipeline of commercial projects…
Based on the development schedule, we assume that the company will deliver 56k sqm of commercial area in 2019 and 104k sqm in 2020E. We assume that the company will dispose its projects ca. one year after completion. As a result, we do not expect those projects to significantly impact gross profit, however we expect the company to report revaluation gains of PLN 363m and PLN 327m in 2019-20, respectively.
…and increasing scale of operations in the residential segment…
At the same time, we expect Echo Investment to benefit from strong demand in the residential market. The company reported pre-sales of 986 dwellings in 2018, while in 9M19 this increased by 30% y/y to 936 units. Given a dwellings offer of 1,094 units and land bank of ca. 5,350 units, we expect pre-sales to increase by 27% y/y in 2019 and 12% y/y in 2020, and deliveries to increase to over 1,400 units in 2021.
…should allow for sound dividend payments in the years ahead
In our forecasts, we assume Echo Investment pays out ca. 70% of net profit as dividend and reinvests the remaining 30%. We note that the company has already decided to pay out PLN 0.50 per share as dividend from the EPP shares disposal proceeds. We expect a dividend of PLN 206m to be paid out in 2019 and PLN 216m in 2020. Given the above, we expect the NAV to increase by 11% y/y to PLN 1,921m in 2019 and remain flat y/y at PLN 1,943m in 2020.
Valuation with justified premium to peers
Echo Investment currently trades at a P/BV of 1.23x in 2019E and 1.22x in 2020E, with a 29% and 31% premium to its peers, respectively, which we find justified given the company’s business diversification and quick disposals within the commercial segment. We forecast an FCF of PLN 65m and PLN 1,124m in 2020-21 (FCF yield at 3% and 57% respectively).