WOOD Flash – NEPI Rockcastle: 1H21 earnings miss our estimate slightly, but tenants' sales recovery encouraging

NEPI Rockcastle’s (NRP) 1H21 recurring earnings came in slightly below our expectations, with the numbers still affected heavily by the restrictions on trading in place during the first part of the year. Importantly, however, its tenants’ turnovers have, since re-opening, nearly matched the pre COVID-19 levels, exceeding our expectations significantly. This implies that it should be possible to maintain the former rent levels, once the discounts granted to tenants have been rolled back gradually. NRP booked a small positive revaluation result, citing stable yields and improvements in the NOI, and suggested that this could mark the start of a longer-term trend. In contrast, we had been expecting to see further revaluation losses this year. While we need to review down our earnings estimates for the current financial year, we see the encouraging data on turnovers as the more important fundamental driver for the stock. If there are no further lockdowns, we believe the FFO could reach EUR 0.45-0.50/share next year, some 15% below the 2019 level. This would imply an FFO yield of c.8.4% at the current share price. NRP continues to generate a better ROE than its major peers. With low leverage (a LTV of 32%), a quality portfolio and hands-on management, we believe the company remains an attractive play on the CEE consumer. That said, at 0.87x P/NAV, the stock is valued accordingly. We see c.EUR 200m of room for acquisitions – if deployed, this could boost the FFO by around EUR 10-15m. That said, the visibility on shopping centre values is limited, due to limited transaction evidence, and we cannot rule out further revaluation losses. The fiscal consolidation in Romania (which accounts for 40% of NRP’s rental income) could translate into lower wage growth. This could mean slower rental growth than in the past, especially against the backdrop of rising e-commerce. In the near term, an increase in the number of COVID-19 cases in the coming autumn and winter could necessitate further restrictions on non-essential shops, which could have an adverse impact on earnings both this and next year, with the prospective impact exacerbated by the recent legal changes enacted in Poland. We maintain our HOLD rating on the stock.