Echo Investment: good projects, challenging backdrop (downgraded to HOLD)

We have downgraded Echo Investment (Echo) to HOLD, setting our 12M price target (PT) at PLN 3.1/share. We see a wide range of outcomes for Echo Investment. On the positive side, there is potentially significant value in Resi4Rent. Successful office disposals could bring the net debt to assets down from the current c.30% to sub-20%, strengthening the balance sheet ahead of new project launches and increasing the dividend capacity. The launch of Towarowa 22 could be positive for sentiment, following the success of the landmark Warsaw Brewery. Alongside improved affordability and higher transaction activity in Resi4Sale, these are some of the factors behind a bull case on the name. That said, it is also easy to chart the bear case. It is far from clear whether Echo will be able to exit the office projects it is currently negotiating to sell, and we do not pencil any disposals into our base case until late-2024E. In the absence of exits, Echo’s plans to continue launching new office developments risks pushing the net debt to assets up to around 50%. At the same time, the slowdown in residential sales means the Resi4Sale business could also become more capital intensive. In the absence of disposals, we believe it may be prudent to discontinue the dividend temporarily, considering the significant bond maturities in 2024E. A pause in the dividend could trigger another move downwards, however. We expect that the next three-to-six months could bring datapoints that could illuminate the likely path ahead.