VGP Upgrade to Buy, Saving up the Land Bank for better times
We upgrade our rating from Accumulate to Buy, but reduce our Target from EUR 255 to 215 after our model update. We believe VGP share price has been volatile as it suffers from its complex accounting policies on up-front profit recognition and Joint-Venture structure. This makes it notoriously difficult to separate recurrent profits from exceptional gains like yield compression. In this flash note we detail our assumptions for the 2 main components : the sustainable development gains from its pipeline and the recurrent income from the JV. Last Friday, VGP announced a significant slow-down in developments starts in its 1H22 report. A post-COVID e-commerce normalisation was mentioned as an explanation. We believe that also the strong increase in construction costs as well as an overhang from speculative investments by other companies are to blame. We believe that VGP currently opts not to pre-let certain projects if they can't obtain their internal margin expectations. In our new model, we assume an 18 month digestion period before the development starts recover by 2H24. However at a pace that is 45% below the 2H21 blow-out period. Our DCF indicates a value of EUR 215 per share. A severe recession that sinks demand for a longer period of 3-5 years is the biggest investment risk to our scenario.VGP NV is a Belgium-based real estate development company that constructs and develops industrial real estate and ancillary offices, which are rented out to clients on long term lease contracts. The Company operates in three business segments: the Development activities segment is focused on the identification and acquisition of the land and development of the infrastructure, the design of buildings, the coordination of architectural and engineering aspects, the administration to obtain the necessary permits, the tendering and coordination of the construction works, including site management, and the facility management of the real estate portfolio; the Property Management and Leasing services segment is responsible for managing the operation of the buildings, and the Facilities Management services segment is responsible for managing the operation of the buildings and performs all actions, such as maintenance services, waste management services and maintenance greenery, among others.
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