Renovation rules now a reality

The Energy Performance of Buildings Directive (EPBD) was approved on 12 April, requiring the modernisation of existing real estate in the EU, and will soon enter the Official Journal of the EU. Member states will have two years to incorporate the provisions into their national legislation. While Q1 is Nordic construction’s low season due to winter effects, we see some downside risk to Q1e consensus and longer-term to 2024–2026e EBIT on lower development gains. We recommend a stock-picking approa...

Aros Bostad (Hold, TP: SEK28.00) - Solid end to 2023

We find the Q4 results solid, with a strong POC-based EBIT margin of 11%, and EPS adj. in line with our forecast, but an IFRS-based EPS beat at SEK0.7 (we forecast SEK-0.1) due to a timing effect (more Q4 unit completions than we expected). We reiterate our HOLD but cut our target price to SEK28 (30), awaiting more clarity on the potential merger with Besqab as well as signs of an improved end-market.

Renovation regulation approaching

The ‘trilogue’ process regarding the Energy Performance of Buildings Directive (EPBD) that aims to double renovation rates of commercial and residential properties has been concluded, and the new legislative text is due to be published in spring 2024. Also, the recent pivot in market interest rates has improved the sector outlook, but with long profit lead times. Names with high short interest (JM and SBO) have rallied the recently, but we believe the current valuation underestimates the profit ...

Political agreement for EPBD

Yesterday evening saw a political agreement and the conclusion of the final trilogue meeting on EPBD revisions. There are some revisions to earlier drafts, but EU member states will now prepare requirements for lower energy building stocks. We believe that once in place this regulation should be a positive for construction companies, but CAPEX for real estate companies.

Aros Bostad (Hold, TP: SEK30.00) - Project starts guidance slightly re...

We find the Q3 results solid, with POC-based adj. EPS of SEK0.3 (we forecast SEK0.1) and IFRS-based EPS of SEK0.8 (SEK0.3), with the outperformance due to more completions than we expected. Business remains strong, in our view, with solid margins. However, given the more muted project ramp-up guidance, we have reduced our project start forecasts. We have lowered our NAV-based target price to SEK30 (38) and reiterate our HOLD, awaiting signs of an improved end-market.

Bright spots few and far between

With only three BUYs, we consider bright spots in the sector – just as residential newbuild and commercial development sales in today’s market – few and far between. New housing sales and commercial property markets have been hit by rising interest rates, and the EU’s Energy Performance of Buildings Directive (EPBD) – which holds potential upside – has been delayed. We still prefer stocks with no (or limited) pure residential exposure; our top picks in construction are Skanska and NCC, but, desp...

Aros Bostad (Hold, TP: SEK38.00) - Positioned to await a better market

Q2 results were neutral with POC-based adj. EPS of SEK0.3, above our SEK0.1 estimate. The ramp-up of projects on its own book has yet to materialise and depends on market factors, while its tilt towards small-sized projects and a solid balance sheet makes us optimistic about it being ready once the end-market turns. We have reduced our 2023–2025e EPS due to a cut to near-term project starts, while we reiterate our NAV-based SEK38 target price and our HOLD, awaiting an improved end-market.

Building trouble in the private sector

The building outlook remains grim, with very weak new private housing sales and a tough commercial property market. However, the overall picture is eased slightly by support from the public sector and civil engineering, and a likely renovation wave from the Energy Performance of Buildings Directive (EPBD). However, we still prefer stocks with no (or limited) pure residential exposure, and retain our neutral sector stance. Veidekke and Skanska are our preferred picks in construction, but we expec...

Aros Bostad (Hold, TP: SEK38.00) - Making the best of a tough market

The Q1 results were solid, including POC-based adj. EPS of SEK0.5, above our SEK0.4 estimate. In line with its plans, the company started 213 pre-sold units in Q1. Moreover, with 10 units sold in Q1, pre-sales of ongoing projects increased to 91%, reducing the risk, in our view. We have made minor estimate changes, and reiterate our HOLD and SEK38 target price, based on our NAV adj. after a c40–50% haircut to the reported net overvalue of its land bank.

Northern Lights

Aros Bostad Minor model adjustments

We have made no estimate changes ahead of the Q1 results due at 07.00 CET on 12 May. We do not consider these changes to be material, and we have not changed our HOLD recommendation. However, we have lowered our target price from SEK40 to SEK38 after tweaking our haircut on the reported net overvalue in its land bank, which has lowered our NAV adj.

Residential markets still weak, but renovation wave approaching

With still extremely weak new housing sales, we prefer stocks with no (or limited) residential exposure. We fear residential developers might have to downsize if markets do not recover quickly. The EU parliament has passed the EPBD revisions and the bill is now in a trialogue process – in our view this is a major potential catalyst for a wave of renovation. We retain our neutral sector stance, seeing upside potential in construction and downside potential in residential development. Our top sect...

EU say it is time to renovate

The EU Parliament’s position on the Energy Performance of Buildings Directive (EPBD) — which aims to decarbonise the EU’s building stock by 2050 — passed with 343 votes in favour, 216 in opposition and 78 abstentions. The EU aims to standardise (for the first time) energy classifications in Europe and also to introduce modernisation requirements for existing buildings. The aim is to double renovation rates of existing residential and non-residential buildings, starting with the 15% with the lowe...

Aros Bostad (Hold, TP: SEK40.00) - Strong profitability in ongoing pro...

POC-based adj. EPS grew strongly to SEK1.2 in Q4 and was SEK2.0 in 2022. We have cut our 2024–2025e EPS by 14–31% as we have lowered our selling price assumptions to 15% below its average selling price in ongoing projects. We have also increased our share count estimates for 2024e, while we have raised our 2024–2025 project starts forecasts somewhat to 720 (650) net units following its ALM acquisition. We reiterate our HOLD but have cut our target price to SEK40.

Housing risk, renovation bright spot

Preliminary data indicates weak Nordic newbuild sales, with falling property prices in the wake of rising interest rates and spiralling inflation. As a result, we see downside risk to consensus for all the residential-exposed names – although, resulting in weak EPS24e first in some names. The upcoming EU parliament vote should increase focus on renovation. Following the sell-off, valuations are below historical averages, but given the residential risk, we have changed our sector view from Overwe...

Northern Lights

Aros Bostad (Hold, TP: SEK43.00) - Tough market

Q3 saw POC-based EPS of SEK0.4 (versus our SEK0.8), while there were no project starts in the quarter. Despite a tough market, we keep our 2023e annual net unit starts at 650, with c70% pre-sold as rental residential. We have cut our 2023–2024e EPS by 7% (on lowered project margins and raised administration costs given higher headcount), and our target price to SEK43 (51), but reiterate our HOLD.

Aros Bostad - Favourable position in the upcoming year

Limited estimate revisions for 2023e-2024e Project starts picking up in Q4’22-Q1’23 ALM projects will contribute – still not in estimates

Aros Bostad - GP-margin below expectations

Lumpy - Sales of SEK 361m (ABGSCe 253m).. .. while Q3 GP-margin was 13.4% (ABGSCe at 26.7%) Share booked/sold at 88% (91% in Q2’22)

One step closer to more renovation

After the ‘energy performance in buildings’ act was agreed by the EU Council on Tuesday (containing stricter rules for energy performance in buildings), we believe the regulations for existing assets aimed to double renovation of buildings (as highlighted in previous sector notes) are one step closer to being tightened, which should be bullish for construction companies. Renovation work tends to be low-risk at high margins (normally cost + margin orders, as construction companies do not normally...