Ample room for further upside

Between 8 November, when the last newsletter was published, and the market close on 24 February 2017 IGD’s stock price recovered 7.6%, despite the negative impact of Italy’s perceived country risk. IGD’s stock is trading at a substantial discount with respect to its P/NNNAV 2016 (44%), while the consensus target price is 33% higher than the current price. The space for potential upside is even more apparent in light of the significant results posted for 2016.

Source: Italian Stock Exchange and EPRA data compiled by IGD

Between 8 November 2016, when IGD’s results for the first nine months of 2016 were published, and today, 24 February 2017, the stock price has risen 7.6% from €0.682 to €0.734. In the last three and a half months the price of IGD’s shares has been extremely volatile hitting a period low on 21 November 2016 of €0.618 and a period high of €0.759 on 5 January, a gap of 22.8%.

Despite the Company’s solid fundamentals, which were confirmed by the results posted at 30 September 2016, the performance of IGD’s stock was impacted, on the one hand, by increased aversion to Italy’s country risk and, on the other hand, by negative perceptions which impacted the stock valuations of the entire real estate sector.

With regard to the situation in Italy, while the concerns about a phase of political instability following the negative outcome of the constitutional referendum voted on 4 December were overcome thanks to the quick formation of a new government, international institutional investors continue to be concerned about the ability of Italy to implement the reforms called for by the EU in an environment of what continues to be very fragile growth. The increase in the perceived country risk is expressed quite eloquently in the spread between BTPs and Bunds which recently returned to a level of around 200 basis points. With more than 90% of its assets in Italy and a free float held primarily by foreign investors, the performance of IGD’s stock was, in part, impacted by this skepticism.

As for the sector, IGD was impacted by the generally unfavorable view of European real estate equities. European bond yields began to increase beginning in September 2016 as expectations for “reflation” – namely economic recovery accompanied by inflation – gradually took hold which triggered sector rotation in equity portfolios. Consequently, asset managers purchased cyclical stocks and sold defensive ones like utilities, telecoms and real estate. In reality property companies have a natural shield against the risk of inflation, namely the indexed leases. Furthermore, the probability that higher interest rates will result immediately in higher financial costs is limited thanks to the gradual extension of the average debt maturities carried out by real estate companies at a time when the cost of debt was extremely low. At the beginning of the year all the sector stocks, notwithstanding these considerations, were subject to sell-offs. Similarly, in the last few months IGD’s stock was also subject to a sell-off attributable to portfolio rotation which does not take into account the company’s solid fundamentals.

The publication of the results for the last quarter of 2016 will make it possible, on the one hand, to understand to what extent the cyclical stocks are able to translate the new “reflation” environment into tangible progress in the income statement , and, on the other hand, will provide new elements for linking the performance of real estate stocks to single fundamentals, including in light of the significant re-rating that the sector underwent, on average, in terms of P/NAV.

Currently, based on the price at the close on 24 February 2017 of €0.734, IGD’s stock is trading at a discount of 44% with respect to the EPRA NNNAV recorded at year-end 2016 of €1.29.

The consensus target price of the analysts covering IGD is currently around €0.98 which translates into a potential upside of more than 33% against the current price.

Proposed dividend (FY 2016): 0.045 euro per share

Going ex-div	22 May 2017
Record date	23 May 2017
Payable as from	24 May 2017

 

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