The Grounds Real Estate Development AG
04.12.2017 - Equity Research Report (english) // buy
Initial Coverage - The Grounds Real Estate Development AG - english
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ISIN: DE000A2GSVV5
Branche: Immobilien
Rating: buy
Kurs bei Erstellung in €: 2,90
Kursziel in €: 5,40
Mögl. Interessenskonflikt gem. §34b Abs.1 WpHG und FinAnv: 4;5a;6a;11
„An attractive real estate proprietor is being developed”
High return potentials and stable cash flows with real estate development and inventory management; extensive project pipeline available; price target well above the price of the current capital increase
Following the integration of its operating subsidiary The Grounds Real Estate AG, The Grounds Group intends to cover the real estate value chain as widely as possible. The Group is planning the development of residential and commercial real estate within the context of project development. This includes the purchase of undeveloped land and land with planning permission, in addition to the acquisition of existing real estate with subsequent renovation or conversion. The project development will be operated primarily for the development of the company’s own inventory. However, properties that do not meet the long-term investment criteria of the company may be sold at short notice.
With this integrated business model, The Grounds Group is in an outstanding position within the German listed real estate companies. In our opinion, the combination of earnings potential in the development segment with the sustainability of the real estate portfolio is very attractive. In the medium term, the Group plans to significantly expand its real estate portfolio to a maximum of €500 million in order to gain a comprehensive basis for stable income and will implement a continuous dividend strategy. At the same time, the company is able to participate in the very attractive market environment. Low interest rates, rising populations in the areas addressed by the company and the favourable development of construction costs for project developers are the main drivers behind the expected growth in dynamic demand for residential real estate.
The Grounds Group currently has five contractually secured development projects and a further eight projects that are currently in an advanced phase of negotiation. The main focus of the regional projects is on the fast-growing metropolitan regions of Frankfurt am Main and Berlin. With a projected average equity ratio of 25% at the project company level, The Grounds Group is able to handle large investment volumes. In addition to typical bank loan financing, the groundwork for the real estate portfolio also includes capital increases through contribution in kind, capital increases through cash contributions and mezzanine financing.
During the course of the expected progressive realisation of the project pipeline, we expect a significant increase in revenues in the coming financial year, with a generally high level of profitability. Both the increase in rental income anticipated by us and the realisable project margins should, in combination, enable an EBIT margin of significantly higher than 20.0%. For 2020, our last concrete year of estimation, we still conservatively estimate an EBIT margin of 20.1% based on total output, with total output amounting to €132.56 million. In the medium term even higher profit margins are possible, which we have taken into account in our DCF valuation model.
Within the scope of the DCF valuation model, we calculated a fair value (post money) of €5.40 per share. This is well above the current placement price of the current capital increase of €2.20 and we have therefore awarded the rating BUY.
Wichtiger Hinweis:
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