S Immo: Capital rotation to exploit yield spread (upgraded to BUY)

Following the withdrawal of Immofinanz’s bid, we expect S Immo to move on with its strategy of reinvesting the capital tied up in the CA Immo and Immofinanz stakes into directly-held real estate. There are execution risks, as modern, quality assets at reasonable prices are not easy to find, and deploying EUR 1bn over a fairly short period means that S Immo could be buying in bulk at the top of the market. That said, we see the decision to redeploy the funds directly into property as a reasonable step, to exploit the spread between the dividend yields on Immofinanz and CA Immo (c.3%) and the yields on the standing assets (c.5-7% in CEE). We believe it would be too optimistic to assume that the company should trade on a par with NAV, which we expect to exceed EUR 26/share this year, given that the pressure on office rents is likely to continue in the near term across CEE, and we cannot rule out further restrictions and lockdowns, potentially weighing on valuations, That said, we see the current c.25% discount to NAV as too wide, given the positive rent dynamics in Germany, the eventual rebound in the hotel result, as well as the boost for earnings that may be generated by acquisitions. Thus, we have upgraded our S Immo rating to BUY (from Hold), setting our 12M price target (PT) at EUR 23.9/share.