Ord Minnett’s European research counterparts have resumed coverage of Unibail-Rodamco following its takeover of Westfield Corporation, and we have incorporated their forecasts for the company’s newly listed Australian chess depositary interests in what is now known as Unibail-Rodamco-Westfield. We initiate coverage with a Buy recommendation and a $19.00 target price.
Unibail is trading on a CY18E P/E multiple of 14.3x and a 6.3% dividend yield, with a forecast three-year EPS compound annual growth rate (CAGR) of 8.0%. It is also trading on an implied capitalisation rate of 4.8%, versus book of 4.4%, which is too high for a portfolio of this quality, in our view.
We believe Unibail has the highest-quality retail portfolio globally and therefore warrants the firmest implied capitalisation rate. It has outlined a €13bn development pipeline with target yields on cost of 7%-plus, which should create material value as it is built out over the next seven or eight years. We factor €6.3bn in development capital expenditure (Unibail’s share) over CY18–21 into our estimates. URW has good earnings growth prospects given its large and potentially highly accretive development pipeline. We forecast EPS of €1.00 and DPS of €0.66 for CY18, increasing to EPS of €1.35 and DPS of €0.63 for CY19.
Unibail’s gearing is 41%, just above its historical range of 30–40%, and it has higher leverage than many of its peers. The company has a large development pipeline to fund, which will require some work. It has outlined €3bn of planned asset sales, including a recently announced agreement to sell the Capital 8 office building in Paris for €789m. Our European counterparts estimate that excluding sales, the three-year EPS CAGR is 8.0%, while assuming €6.5bn in sales on a 6.4% yield – 6% for Europe and 7% for the US – dilutes the CAGR to a still-solid 4.7%.