S Immo: Immediate threat removed, operations sound (upgraded to HOLD)

We have upgraded our S Immo recommendation to HOLD, setting our new 12M price target (PT) at EUR 21.3/share, offering 4% upside. The proposals for the changes of the articles of association, the key risk we highlighted in our recent sector report, in which we downgraded S Immo to a SELL, has not materialised, as the shareholders present at the AGM rejected the proposals, by a narrow margin. As the case remains on track operationally, we do not identify any stock-specific triggers presently that would be likely to depress the share price in the near term. The result from the hotel operations seems to be heading for another record-breaking year, while the continued yield compression and rental growth are driving the property values higher. That said, the rent caps being introduced currently in Berlin could weigh negatively on the rental growth potential in S Immo's Berlin residential portfolio. Furthermore, the uncertainty related to the merger with Immofinanz has not disappeared. While we believe the company should continue to enjoy the supportive macro backdrop – solid GDP growth in CEE, underpinned by low rates across the Eurozone – it is already trading at a 10% premium to book value and a sub-5% FFO yield, so the room for further share price gains may be limited in the near term, in our view.