Dom Development: slower sales and lower margins (downgraded to HOLD)

In this report, we have downgraded Dom Development to HOLD (from Buy), reducing our 12M price target (PT) to PLN 100 (from PLN 121).The effect of the steep increase in rates in Poland has been exacerbated by the tightening of the lending criteria in the spring. Together, these two factors have triggered a collapse in the number of new apartment sales in Poland. The number of new mortgage applications was down by around 70% yoy in both July and August, and it seems that the mass market segment has been hit the hardest. While this is an extremely challenging environment for any developer, we believe that Dom’s upmarket offer should continue to fare better than the market average. In our view, the small and medium-sized developers are likely to find it difficult to launch new projects, due to the low volume of pre-sales, the limited availability of bank financing, and customers’ preference for larger, established players. Thus, we expect the market to consolidate, with the larger, well-capitalised players, able to continue to supply apartments, benefiting. With 7k apartments under construction, 18k in the pipeline, a robust net cash balance sheet, a long track record and experienced management, Dom is well-positioned to navigate the challenging environment, in our view. That said, with expensive mortgages weighing on affordability and sales, we see limited triggers for a re-rating in the near term, especially considering that the slower sales dynamics are likely to translate into lower deferred income, making the business more capital intensive.