IGD’s stock impacted by the cooling sentiment for the retail real estate segment
While the overall mood of the equity markets remains positive, thanks to abundant liquidity, M&A and the expansive economic policies adopted in response to the pandemic, beginning early June there has been a correction in the retail real estate segment. The sentiment of brokers and investors, first fueled by the prospects of reopening and uptick in long delayed consumption, has cooled. Concerns about inflation have cast doubts on the ability of retailers to return to pre-pandemic sales levels in a context of rising prices and, consequently, on the ability of real estate companies to maintain sustainable growth in rents and effectively relet the vacancies created when the anti-Covid restrictions were in place.
IGD was affected by this generally negative perception of the segment in which it operates, even though the company’s shopping center format was not penalized as much as the large malls without a food anchor. The evidence provided by IGD’s operating indicators, which showed net recovery in the last few months, will provide the investors with the elements needed to reconsider the stock’s valuation.
Source: Italian Stock Exchange and EPRA data compiled by IGD
Since 6 August 2021, date of the last edition of News&Views, through today the price of IGD’s stock has traded in a range of between the period high of €4.25, recorded after publication of the half-year results, and the period low of €3.60, hit on 16 September.
At the end of October the price of IGD’s stock was roughly10% higher than at the beginning of the year: in line with the most comparable sector index, EPRA NAREIT Developed Europe Retail. Even though the index outperformed the European real estate segment, particularly between March and June – when the rapid vaccine rollouts made it seem that the restrictions might be over and that a sustained economic recovery might gain momentum – as of the latter part of June more than half of this rebound has been retraced.
The more recent months have been dominated by inflationary fears, with the brokers and investors paying renewed attention to the ability of companies in Continental Europe to implement sustainable increases in rents, which could be subject to pressure in the long-term as consumer prices rise and demand wanes. While the attention of the stock market shifted from cyclical issues, tied to the process of reopening, to more structural ones, the focus in the retail real estate segment was once again on the threat of eCommerce and the skepticism that many brokers have about the ability of retailers to return to pre-pandemic sales. Skepticism which was, moreover, confirmed by the disappointing operating indicators published recently by a few important European segment players with regard, above all, to retailers’ sales and reletting rates.
The dynamics of the sales recorded by the retailers in IGD’s shopping centers suggest that the medium size of the portfolio assets allows for more agility when adapting to shoppers’ changing needs. The publication of the most recent performances, along with the results for the first nine months of 2021, could, therefore, shed light on the advantages of this specific positioning and allow investors to reconsider IGD’s stock valuation.
The sentiment of the stock markets remains positive, however, despite uncertainties on several fronts: the solidity of the growth in China and the stability of its real estate sector, the difficulty in interpreting the price spikes of the commodities, in addition to the different visions as to the direction interest rates might take. Even though the cyclical stocks stopped outperforming toward the end of summer in the face of uncertainty as to the scope and length of the economy’s next expansive cycle, stock prices continue to be driven upward by the system’s abundant liquidity and M&A deals, while corporate earnings continue to reap the benefits of economies exiting the crisis caused by Covid-19. The period from September through mid-October was characterized by sector rotation out of tech stocks and into the banking sector which clearly had a positive impact on the Italian stock market given the significant weight that financial stocks have in terms of capitalization. The tech stocks then rebounded, driven also by the convincing quarterly results that were published in the meantime.
As for IGD, at the price recorded on 29 October of €3.79, the stock is trading at a strong discount not only to its NAV/NRV at 30 June 2021 of €10.56, but also with respect to the average target price of the brokers covering the stock of €4.63 (before the publication of the third quarter results).
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