EPP’s turnaround gains traction
The rand hedge property stock still appears to offer value despite a 45% share-price rebound
Polish retail property company EPP (formerly Echo Polska Properties) got off to a rocky start when it made its debut on the JSE two years ago. In the first six months the stock slumped 25% from its listing price.
Back then, SA investors were clearly not yet buying into the Polish growth story.
But there appears to have been a marked turnaround in investor sentiment since early this year. Though the counter is still trading slightly below its listing price of R23.50, it has notched up share-price growth of a hefty 45% from February 5, when it hit a two-year low of R14.40.
That places EPP as the JSE’s top-performing property stock year to date. In addition, it now counts among the sector’s top 10 largest companies, with a market cap of close to R18bn.
Last week, management under CEO Hadley Dean posted an equally impressive set of results, with dividend growth up 12% in euro for the six months to the end of June — against the average 4%-6% dividend growth (in rands) that investors now have to be satisfied with from SA-focused property stocks.
Speaking at the results presentation, Dean said EPP has — over the past six months — cemented its position as one of Poland’s largest shopping-centre owners, following the transfer of the first tranche of the M1 portfolio, a €692m deal announced in December last year.
The M1 portfolio is made up of 12 retail properties that will be transferred to EPP in three tranches. The deal will effectively double EPP’s retail footprint to close to a million square metres of gross lettable area by 2020. In May EPP also bought the 45,353m² King Cross Marcelin Shopping Centre in Poznan for €91.1m, marking its entry into Poland’s third most populous area (after Warsaw and Krakow).
"By 2020, EPP will own 28 shopping centres across 20 cities spanning more than 1m m², all within a 30-minute drive of 40% of Poland’s wealthiest regions," Dean said.
EPP has a strategic partnership with Echo Investment, Poland’s largest developer, from which it has acquired most of its properties.
Referring to the ongoing strength of consumer spending in Poland, Dean said despite the government’s recent ban on Sunday trading, the retail sector continues to be fuelled by Poland’s growing middle class, low unemployment and GDP growth well above the EU average.
Keillen Ndlovu, head of listed property funds at Stanlib, rates EPP as one of its top three stock picks.
"Over the past two years, we have become familiar with Poland as an investment destination. And there’s no denying that the country currently offers better property fundamentals than SA. Unlike the case in SA, Polish mall owners are still experiencing strong tenant demand as well as robust like-for-like net operating income and sales growth."
Ndlovu says SA investors may initially have been wary of EPP, given limited knowledge of Poland as a real-estate investment destination. In addition, EPP’s listing two years ago coincided with a new-listings fatigue that may have set in among fund managers due to the sheer number of new JSE real-estate counters vying for investors’ capital at the time.
There was also concern about the company’s rather complicated structure, given its historic relationship with Redefine Properties.
Though the latter still owns a 39% stake in EPP, Ndlovu notes that the company structure is now much more streamlined.
"The only remaining concern is EPP’s relatively high loan-to-value of 51% but management is addressing the issue," he says.
Metope Investment Managers also counts EPP as one of its top three property stock picks. Metope investment analyst Kelly Ward says Poland is on a significant growth trajectory — its GDP was up 4.6% last year, its strongest growth in six years.
Ward says EPP is a play on the strength of the Polish consumer market.
"Average salary growth of 20% was recorded in Poland over the 2012-2017 period, against 11% in Germany over the same time."
She says EPP will add weight to its growing stature as one of Poland’s top retail landlords with the opening next year of Galeria Mlociny, an 82,000m² shopping centre now under construction in Poland’s capital, Warsaw. Close to 90% of the mall has already been pre-let.
Despite the recent run in EPP’s share price, Ward says the stock still offers SA investors an attractive yield of around 9.5%, with dividend growth of 6%-8% (in euro) forecast for the full year ending December.