Prestige Estates - Plotting a careful trajectory - Karvy

Following a catastrophic summer of negative sectoral news flows, slowing markets, unaffordability, within the realty sector, the share price of Prestige Estates (PEPL) has largely been insulated, outperforming Sensex by 29% on 12M relative basis. Going into FY14, we expect sharp re-rating owing to (i) Robust new launch plans of 14mn sqft; (ii) annuity portfolio nearing maturity by FY15-16E (iii) likely balance sheet deleveraging and (iv) stated dividend policy announcement. We initiate coverage with BUY stance and 28% upside.

Robust residential business and maturing annuity asset base

PEPL operationally has a balanced mix of residential & commercial projects contributing 48% and 52% to our NAV estimates respectively. Moreover annuity business is likely to mature and stabilize by FY15-16E and in an event of slowing residential segment sale the cash flows from commercial projects lend visibility to earnings and dividends payout. PEPL has been able to deliver industry ahead residential sales and has 14mn sqft of new launches planned in FY14E.

Healthy balance sheet; dividend policy key re-rating trigger

PEPL has a relatively healthy balance sheet with FY13 net D/E 0.7x and which is the level we expect the debt to stabilize. PEPL is evaluating a stated dividend policy which once approved by Board would yield 5% on current price (5x jump) and would largely be paid from annuity business cashflows.

High rank on competitive positioning matrix

PEPL ranks high in our competitive business mapping of the Southern developers. Ability to acquire high quality lands, superior brand recall and relatively healthy access to finance are the key contributing factors.

Initiate coverage with BUY: Target price Rs207/share

We initiate on the company with a BUY stance and a SOTP-based target price of Rs207/share. We value the residential real estate at Rs122/share, commercial annuity assets at Rs132/share and net debt at (Rs47/share). We believe that the near-term catalysts are: (i) success of new launch; (ii) new dividend policy & (iii) annuity business ramp up.

Key risks

(i) Unaffordability may lead to a 8-10% real estate price correction; (ii) increase in D/E remains key de-rating trigger.

Source : Equity Bulls

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