Dom Development: Riding the peak (HOLD - initiation of coverage)

Dom Development is the leading housing developer in Poland. Having built almost 30k units since its inception in 1995-96, the company boasts an impressive track record. Historically, Dom has focused exclusively on Warsaw. Its recent expansion into other markets (Wroclaw and Tricity) increases its earnings capacity, and reduces its reliance on a single market. With almost no debt and an experienced management team, who navigated the company successfully throughout 2008-09, we believe that Dom may fare better than its peers during potential downturns, using the opportunity to consolidate its position on the market and acquire attractive land plots. Last but not least, the ongoing strong macro backdrop and steady demand for housing in Poland should remain supportive for unit sales and pricing in the near term. We expect Dom to generate around PLN 220m in earnings this year (16% up yoy) and c.PLN 210m in 2019E (translating into DPS of PLN 8.9 and PLN 8.4, respectively). If our forecasts prove correct, we believe that the generous dividends could temporarily push the share price to above our price target. However, after the stellar 2017 results, the shares are trading close to their highest level in the past decade, having outperformed the WIG Index by 24% and 145% over the past 1Y and 5Y, respectively. While the Polish National Bank could start raising rates later than we expected originally, we believe it may signal the start of the end of the cycle for Dom once it does. Besides the dividends, we see limited upside from the current levels, at this stage of the business cycle. As such, we initiate our coverage with a HOLD rating and a 12M price target (PT) of PLN 88/share.