CA Immo: Time to take a breather (downgraded to HOLD)

CA Immo (CAI) had a successful year in 2017. The sale of Tower 185 in Frankfurt, in which CAI held a 33% stake, for EUR 775m (at a c.3.75% yield) unlocked funds that are to be accretively reinvested in developments. The sale also provided yet further evidence of CAI’s conservative valuation approach: at the end of 2016, the company was booking the building at a 5.2% yield. Importantly, CAI’s refinancing steps, the acquisition of the Frontex office in Warsaw and leasing activity in Germany more than make up for the FFO lost by the sale. We have adjusted our forecasts following the strong 9M17 performance, increasing our 2017-19E FFO by c.4-6%. Going forward, we expect the own-development pipeline to be the key factor setting CA Immo apart from its peers, driving organic growth in recurring earnings, while also boosting the trading result. We forecast a c.7% FFO I CAGR from 2017-22E. That said, given the completion schedule, we expect the FFO dynamics to slow to c.6% in 2018E, from c.15% yoy growth in 2017E. We increase our price target (PT) to EUR 29.0/share, on the back of our forecast updates. Following the recent strong performance (up 43% since the start of 2017), our PT now offers 14% upside. As such, we downgrade CAI to HOLD from Buy. While we believe the investment story remains sound, and that FFO growth should accelerate during 2019-21E, due to planned completions, we expect the pace of the share price appreciation to slow in the coming months, at least until there is more clarity on the merger.
Merger timeline to be decided in 1Q18E. Following Immofinanz’s disposal of its Russian portfolio, we expect the merger process to resume in the coming weeks. It remains to be seen whether it will be possible to hold the merger EGM this year. While there are still many moving parts, as things stand now, we would pencil in the merger ratio at around 11-13x.
Change of CEO. In December, CAI’s CEO Frank Nickel (58) announced that he had decided to leave the company for health reasons. The CEO role is being filled currently by Andreas Quint (57), who previously held management positions at JLL, E&Y and BNP Paribas Real Estate.
CA Immo is trading at 4.6% and 88% on our 2018E FFO I yield and P/NAV, respectively. Assuming a 10% tax rate on recurring earnings, the post-tax 2018E FFO I yield stands at 4.1%, on our estimates. The results are boosted further by sales, driven by the development projects designated for disposal. On our numbers, we see CAI trading at a 5.4% 2018E (post-tax) FFO II yield.
Well-priced acquisitions, like-for-like rental growth and further yield compression in CEE could trigger additional upside. The key risks include cost overruns and delays at any of the projects CAI is developing currently, or planning to develop. We also advise investors to follow the progress of the merger talks closely.
We set our PT by using a combination of a DCF and a relative valuation. We then increase our PT by EUR 0.9/share, reflecting the value we assign to the development pipeline, which we value separately and risk by 50%.