WOOD Flash – Echo Investment: 3Q21 – beat on top line and revaluation gain, Moje Miejsce I sold 25% above cost

Echo has reported strong 3Q21 results, and – unless we are surprised by a sudden strengthening of the PLN, which could drive a revaluation loss in 4Q21 – we believe it is on track to reach our full-year net profit forecast of PLN 170-180m. Management said that growth in the prices of apartments continues to outpace the growth in costs. This should be supportive for margins, and is in line with the feedback we are getting from Dom Development. The PLN 0.2/share advance dividend, to be paid at the end of December, should add near-term support for the stock and, if Echo is successful with further office disposals, we believe we may see an additional payout next year. The net debt to assets has declined to sub-40%, and disposals could push it lower still. We maintain our positive view on the stock. The growing share of resi improves the quality of its earnings. Prior to the pandemic, the revaluation result was the key driver of Echo’s earnings, accounting for over two-thirds of its income in 2018 and 2019. Going forward, we expect this share to reverse, with revaluations accounting for only around 20% in both 2022E and 2023E, with the majority of earnings generated by apartment sales. We estimate that the results from the residential business should push the earnings back to c.PLN 300m annually from next year onwards, which could lead to a dividend of around PLN 0.5/share again. If margins exceed our expectations, the earnings could exceed this level. We see Echo trading at around 6x P/E and a dividend yield of a touch above 10% on our 2022E. We believe the better earnings quality could drive a multiples re-rating.