After a strong share price performance we downgrade Immofinanz to “hold” on the back of insufficient upside to our target price of EUR 3.40 per share (cut by 3% compared to previous target price on administrative and rental income adjustments) on the basis of our DCF (FFO) model. We remain positive on the company’s investment case overall but lack fundamental arguments to increase our estimates that would warrant a “buy” call in the short-term.
Widening guidance gap: Immofinanz has issued a profit warning stating that “the forecasted result of operations of EUR 600 mn will not be reached”. The company should be able to avoid a substantial miss only in case it manages to deliver major asset sales in the remaining months of the financial year. While the asset management result should continue to show an upward trend - further strengthening the recurring earnings profile-, the trading income component (EUR 60 mn targeted), volatile in its nature, should turn out to be challenging to reach. Major reason for the miss will be a lower development profit (also guided at EUR 60 mn) due to a delay of the GoodZone shopping mall completion (planned before Christmas) with a missing support of the rental income and development profit line. What comes also into play is a negative trend on the cost side – Immofinanz does not show any progress regarding the EUR 100 mn admin cost target.
Growth versus optimisation: A miss of the EUR 600 mn target is negative but not the major issue in our view (especially as non-cash revaluation effects of property developments are factored in, which rather blur the value of the figure as a metric of operational improvement). We perceive declining dynamics in the optimisation and streamlining of the property portfolio and corporate structure which is reflected in continuously high administrative costs and subdued proceeds from the sale of non-core assets. We would expect the company to reach the targeted operational level on a sustainable basis – which is the second component of the guidance – in one year from now at the earliest. Immofinanz pursues a growth strategy and shapes up its development activities, however, the operating platform still offers significant optimisation potential which has not been fully exploited to date.
Driving theme BUWOG: We keep our positive view on a fundamental portfolio restructuring, i.e. a split of commercial and residential assets which might become the dominant Immofinanz story in 2013 as it should increase transparency and efficiency. The split would lead to a sharper profile and investment case which should tap additional funds from investors’ and help reduce the structural discount to the group’s intrinsic value. That notwithstanding, management’s strategic rationale which calls for a major investment in the hyped German residential asset class also comes with risks and plays on the assumption of an ongoing boom in the German residential market.