Etalon Group - Strong 2Q21 Operating Results, 2021 Sales Guidance Reiterated

Etalon Group published a strong set of 2Q21 operating results yesterday. It also reiterated its 2021 sales guidance.> Robust 2Q21 operating results. New contract sales grew 29% y-o-y in volume and 15% in ruble terms in 2Q21. The R24.9 bln sold was the highest quarterly result on record. The number of new contracts rose 47% y-o-y to 2,297, while the average selling price per m2 grew 67% y-o-y and 24% Q-o-Q to R203.9k, which owed mainly to an improved product mix, but also to the general rise in housing prices.> Moscow driving strong sales growth. In April, the company launched sales at a new stage of Nagatino i-Land and its flagship project ZIL-Yug, which had a starting selling price of around R300k/m2. This contributed to a 70% y-o-y increase in sales in volume terms and a 221% increase in ruble terms in Moscow. Meanwhile, sales in St Petersburg declined 11% in volume terms and only increased 11% in rubles due to the company's limited offering there.> Lower debt load. Cash collections increased by 64% y-o-y and 27% Q-o-Q to R22.9 bln in 2Q21. Along with the proceeds from the recent SPO (around $150 mln), this brought Etalon Group's corporate debt down to R0.7 bln at the end of June 2021 from R19.6 bln at the beginning of 2021. As a result, the ratio of net corporate debt to pre-PPA EBITDA fell to almost zero from 1.2 as of end-2020. In addition to that, the average borrowing cost fell from 8.3% to 6.7% over 1H21, though the company highlighted that borrowing costs are likely to be higher going forward due to key rate hikes. > Management reiterates 2021 guidance. During a conference call following the publication of the results, the management reiterated its 2021 sales guidance at 538k m2 in volume terms (in line with 2020) and R88 bln in ruble terms (up 10% y-o-y). The company only reached 41% and 47% of these targets in 1H21, but it expects the second half of the year to be stronger, as usual. Etalon does not anticipate a material negative impact on volumes from the recent moderate cutbacks to the state's mortgage subsidy program, as these reductions will affect mainly the mass-market segment, while the company focuses on the comfort and business segments. > Company expects housing price growth to be close to or slightly above inflation. The management expects housing prices in the primary market to grow at a rate close to or slightly above inflation. The company's budget planning is based on this assumption. Etalon has not been seeing any pressure on prices following the cuts to the government's mortgage subsidy program. > Etalon's project acquisition pipeline over 2021-24 is 3.8 mln m2. Of that, 1.13 mln m2 is planned for 2021. The 2021 figure includes ten projects in Moscow and St Petersburg: one 0.1k m2 project in St Petersburg that Etalon has already acquired, three projects totaling 0.28k m2 that are in an advanced stage of negotiations and six projects totaling 0.76k m2 that are in an earlier stage. Investments in acquisitions to be made in 2021 are estimated at up to R30 bln, and they will be financed with the proceeds from the SPO, installment payments and project financing. > Our view. Etalon's 2Q21 operating results showed material improvement after the weak performance in 1Q21, when new sales were down by 22% y-o-y in volume terms and 10% in ruble terms due to the lack of housing available for sale. The launch of sales at ZIL-Yug (46% of the company's unsold NSA at end-2020) seems to have stemmed the decline, at least for the next 12 months or so. The 2Q21 sales numbers indicate that people like the project, which is in the business-class segment and hence less affected by mortgage subsidies than mass-market projects. In our view, in the longer run the company' sales dynamics will depend largely on whether it is able to meet its objectives for replenishing its project portfolio and for new launches. Overall, we treat the published results as strong and reiterate our BUY rating on the stock.