Etalon Group - 2021 Sales Guidance Reiterated, Land Bank Development in Focus

Etalon Group posted its 3Q21 operating results and held a conference call yesterday. Although the results were weak, the company reiterated its sales guidance in monetary terms thanks to its still solid prices and still robust performance in 9m21. With the latest project acquisitions in Omsk and Novosibirsk and the upcoming additions to the project portfolio in St Petersburg and Moscow, the company seems to have resolved its issue of having a limited land bank. > Etalon's new contract sales dropped 36% y-o-y and 21% Q-o-Q to 96k m2 in 3Q21, its lowest third quarter sales in the last five years. In monetary terms, the decline was 23% y-o-y and 26% Q-o-Q. Number of new contracts decreased 31% y-o-y and 19% Q-o-Q. The declines in sales were driven by a more challenging sector backdrop as well as high bases from 3Q20 and 2Q21. > In 9m21, sales grew 11% y-o-y to R59.5 bln, which is 68% of Etalon's full-year guidance. Given that the fourth quarter is usually the strongest quarter of the year, the company reiterated its 2021 sales guidance of R88 bln (+10%), which we had initially felt was conservative and reflected the risks of a slowdown in sales. The company noted that it might miss its sales guidance in m2 terms (538k m2, flat y-o-y), though it stressed that the monetary target is more important. > Etalon's average selling price dropped 6% Q-o-Q to R191k/m2 in 3Q21, though this was driven by a higher share of parking slots in the quarter. Meanwhile, the average apartment selling price increased 4% Q-o-Q to R245k/m2, with Moscow and St Petersburg prices up 8% and 10%. The company noted that the Q-o-Q price increases were only partially driven by the project mix, as it raised its prices on a like-for-like basis following its price-over-volumes strategy. > Etalon also disclosed the size of its project in Omsk, which it announced in August without providing specific details. According to the company, the total NSA of the project will be 1.4 mln m2, with 95% of that going to Etalon and 5% to the government of Omsk. The company will launch construction and sales before the year-end, and it plans to wrap up construction in 2030. The management estimates the project's gross margin at above 30% (Etalon's overall pre-PPA margin was 38% in 1H21). > With the three new projects in St Petersburg (+240k m2 of NSA) Etalon acquired in 3Q21 and the new project in Novosibirsk Region it announced last Friday (+280k m2), Etalon has added in 1.85 mln m2 to its project portfolio YTD. Taking the 2021 sales plan into account, Etalon's land bank should grow to at least 4.14 mln m2 (+46% y-o-y), or from 5.3 to 7.7 times its annual sales. It has also become more geographically diverse, with around 40% now outside of Moscow and St Petersburg (Etalon's long-term target is 50%). > During the conference call, the company highlighted that it is at an advanced stage in negotiations over another 800k m2 of land in Moscow and Saint Petersburg, which would bring its land bank to nearly 5 mln m2, and this figure does not even include the company's potential acquisition of the Electrozavod land plot (+0.8-1.0 mln m2 of NSA) and its plans to expand into another three regions (though these plans are not likely to materialize until 2022). All in all, we see the YTD additions to the portfolio as crucially important developments, as they have resolved the company's issue of having a limited land bank and they create a base for sales growth in 2022 and 2023. > On our estimates, the additions should also create a base for dividends that could exceed R12 per GDR starting with the 2022 results (based on a payout ratio of 55%, the middle of the 40-70% range in the dividend policy), which was guaranteed by the company's recently cancelled dividend policy after Etalon has decided to switch to distributing dividends based on a percentage of net income and pay just R9.4 per share for 2020 (a decision the market took rather negatively). We expect the dividends for 2021 to be flat at the 2020 level of R9.4 per GDR (for an 8.3% dividend yield) and forecast a 2022 dividend of R12.2 per GDR (a 10.8% yield), which would give Etalon the highest dividend yield in the sector. > We have fine-tuned our model for the company following the 3Q21 trading update and 1H21 IFRS results, and given the latest development in the project portfolio. We reiterate our ruble target price of R179 per GDR for the locally listed GDRs based on a mix of target EV/EBITDA, P/NAV and P/E multiples (the five-year average levels), while we upgrade our target price for the London-listed GDRs to $2.48 per GDR from $2.45 per GDR due to our stronger ruble exchange rate assumption (USD/RUB 70 at end-2021 versus 73 previously). > The stock is trading at a 1.8 2021E EV/EBITDA and 0.23 P/NAV, at respective 55% and 34% discounts to its five-year historical average levels, and at a 5.6 P/E, which is about in line with the historical average level). We reiterate our BUY rating on the stock due to the attractive valuation.