WOOD Flash – Echo Investment: 1Q21 – leverage lower, but still high; resi at full throttle, more disposals ahead?

Trading on a par with book, Echo remains cheaper than the other leading Polish developers, Atal and Dom Development (trading at around 2x and 3x P/BV, on the 2021E consensus estimates, respectively). We believe the market remains cautious about the relatively high leverage (41% net debt to assets, even following the sale of the Villa Offices in the Brewery complex) and the exposure to the commercial real estate segment – the majority of Echo’s earnings in recent years have been generated by revaluation gains, most of which still need to be locked in via disposals. While the acquisition of the controlling stake in Archicom means another cash outflow, the structuring of the deal backloads part of the consideration. Importantly, the deal should further boost Echo’s already growing presence on the residential market. Together with Archicom, Echo targets to sell 3.2k apartments this year. The apartment prices are growing, as the supply is not keeping up with the demand, and management sees evidence of margin expansion ahead. We believe it is crucial that Echo delivers on the disposals of the five office buildings it is trying to sell currently, to push down its net debt to assets to c.30%. If it delivers on the exit and locks in the revaluation gains, we believe the combination of lower leverage, the growing share of residential for sale, and the continued expansion of the extremely promising Resi4Rent business could warrant a multiples rerating.