WOOD Flash – Echo Investment: 1Q18 – underlying trends remain supportive, BUY reiterated

We maintain our positive view on Echo. Its 1Q18 earnings (reported yesterday, 29 May) suggest that the underlying trends remain supportive, even though the rising construction costs could force the company to target selling fewer residential units in the initial stages of construction. The gross margin on residential units delivered in 1Q18 stood at 28%, compared with our estimate of 25% and the 24% reached in FY17. The company also exceeded our expected revaluation result slightly, booking a PLN 99m revaluation gain (which accounts for c.30% of our total expected revaluation gain for 2018E). Management has revised down its total sales target for the year, from 1,500 to 1,300-1,400 residential units, citing an increased focus on margins (if the project is pre-sold too quickly and construction costs rise, Echo would not be able to pass the costs onto its customers). The target for 1,000 hand-overs remains intact. Considering the continued strong investment demand for commercial real estate across the region, we believe the company could close the sale of the Libero shopping centre in Katowice and the Browary Warszawskie J in Warsaw by the year-end. We view the progress on the disposals of these two assets, as well as the sale of the 7% stake Echo holds in Echo Polska Properties (and the subsequent special dividend that management stated it intends to pay from the proceeds), as the key near-term drivers for the stock. Trading at 1.1x P/BV, 6.0x P/E and a 12% dividend yield on our 2018E estimates, we view the stock as attractively valued and we reiterate our BUY rating on Echo’s shares.