Value-unlocking metamorphosis
- CERT has clear divestment and redevelopment strategies in place to unlock deep value; its redevelopments could lift FY35F NAV by c.21%, in our view.
- Post-rebalancing, CERT’s 60%/40% industrial/Grade A office portfolio is poised to capture nearshoring/e-commerce and ESG-compliant demand.
- Initiate coverage with an Add and TP of €2.15. Potential re-rating catalysts include successful execution of its redevelopment and reconstitution strategy.
Value-unlocking potential underappreciated – 21% upside to NAVPS
Despite trading at a 37% discount to NAV, Cromwell European REIT’s (CERT) recent
divestments averaged 13.7%/21.4% above the latest valuations/purchase price, realising
€40.3m in capital gains and reaffirming its portfolio quality. Management’s €250m mid-term
redevelopment plan, c.80% of which has been announced, comprises five redevelopments.
We estimate that these could deliver c.€60m-70m upside to NAV, translating into 11-12
€cents, or a 4.7-5.5% uplift in NAV/share. Within its long-term redevelopment pipeline, the
redevelopment of Parc des Docks could lift NAV by up to €200m, or €0.36 per share,
translating into c.16% NAVPS upside. The mid- and long-term redevelopments could lift
NAVPS by 21%, which we think has been overlooked by the market.
Metamorphosis into a more defensible, future-ready portfolio
We believe CERT’s divestment and redevelopment strategies will shift its portfolio towards
a more defensible composition of 60%/40% industrial/Grade A office assets (from
46%/25%/19% industrial/Grade A offices/Grade B and C offices currently). CERT’s light
industrial/logistics assets are benefitting from secular trends, such as higher near-shoring
and growth of e-commerce penetration in Europe, which EuroCommerce expects to
increase from 10-25% of total retail sales to c.30% by 2030 as the market matures.
Meanwhile, the flight to quality and corporate commitments to net zero emissions has
resulted in Grade A/A green offices accounting for c.60-80% of office take-up. Hence, we
believe that earnings will be supported by CERT’s portfolio recalibration, which will result
in a future-ready portfolio with lower vacancy and devaluation risks.
Buying into Europe’s nascent recovery near the bottom of the cycle
We believe the EU market is at an inflection point. The improving macroeconomic outlook
saw headline inflation in the EU hitting a two-year low of 2.4% in Oct 2023, which could
accelerate policy rate cuts, mitigating interest rate and valuation risks for CERT. All 72
economists polled during Reuter’s Nov 2023 survey agreed that there would be no more
rate hikes in the current cycle; 45% of the surveyed economists predicted that there would
be a rate cut before the ECB meeting in Jul 2024 (vs. 42% from the prior month’s survey).
Initiate coverage with an Add rating
We initiate coverage on CERT with an Add and TP of €2.15, based on a blended valuation
(DDM and RNAV), which we believe better accounts for both CERT’s high dividend payout
ratio and asset redevelopment. Its valuation is undemanding, in our view, at FY24F DPU
yield of 11.0% and a 49% discount to RNAV. Re-rating catalysts: stronger-than-forecasted
rental growth and successful execution of its redevelopment and reconstitution strategy.
Downside risks: higher-than-projected redevelopment costs eroding NAV upside, and a
slowdown in consumer demand, impacting the take-up of industrial/logistics space.
