WOOD Flash – Echo Investment: 2Q21 – mixed bag, with a number of one-offs linked to Archicom deal

Echo’s 2Q21 results are marked by a number of one-offs. Chiefly, these are linked to the accounting treatment of the acquisition of Archicom. Treating the acquisition as a “business combination”, Echo has revalued Archicom’s assets at market levels. This means that Archicom’s apartments, being delivered currently, are generating little to no margin in Echo’s P&L, as they are, essentially, carried at fair value already, instead at cost, as is normally the case. Echo also booked a PLN 40m revaluation loss on its commercial assets during the quarter, offsetting the gains booked in 1Q21. This was driven by the strengthening of the PLN vs. the EUR during 2Q21, and is likely to reverse again in 3Q21E, given that the PLN weakened again over the summer. There was also a gain on the bargain purchases recorded in 2Q, linked to the Archicom deal. Encouragingly, Echo is expecting to hand over around 2k apartments in 2H21E alone. This would put the total handovers in FY21E at around 2.5-3.0k, nearly double the levels reached in 2019 and 2020. This underlines the core of our thesis: the improving earnings quality. Revaluations – historically, a major component of earnings – are likely to account for only a small part of the earnings going forward, while the majority of the income will be generated by apartment sales. We also note that management has suggested that the construction of Towarowa 22 could kick off next year – we believe this could be an important sentiment driver.