Prestige Estates Projects Ltd - All eyes on annuity assets - ICICI Securities

Prestige Estates Projects (PEPL) has informed that it has signed a non-binding Letter of Intent (LoI) with the Blackstone Group for the sale of PEPL's direct and indirect interest in its office, retail, hotel properties and property/facilities management businesses. The consummation of any transaction between the parties will be subject to completion of due diligence, finalisation of the transaction structure and receipt of approvals. We currently value PEPL's share in these businesses at an EV of Rs142bn. PEPL may divest either full or partial stake in all or select assets and may look to reduce its debt in the annuity business completely or look for a REIT listing in case of a partial stake sale. As the final deal contours are subject to the transaction going through, we retain our DCF based target price of Rs291/share and downgrade our Rating to ADD from BUY.

- What's on the table? As of June 2020, PEPL had a gross exit annuity income stream of Rs13.8bn of which Rs9.3bn was from offices and Rs4.5bn from malls. Of this, PEPL share of annuity income stood at Rs10.5bn of which Rs7.1bn was from offices and Rs3.4bn from malls. Apart from this, there was an additional Rs10.7bn of gross annuity income (Rs8.0bn from offices and Rs2.7bn from malls) estimated from under construction assets of 9msf (Rs23bn of capital WIP), of which PEPL's estimated share was Rs6.4bn. Apart from annuity assets, PEPL also had 1,262 operational hotel keys and 1,229 under construction keys (including Delhi Aerocity 50:50 JV with DB Realty). PEPL also has a Property Management business which undertakes facility management for its residential/annuity properties with an annual revenue of Rs5.6bn.

- We value PEPL's share in annuity and hotel/FM business at an EV of Rs142bn: We expect PEPL to incur 50% rental losses from malls in FY21E while office rentals are expected to remain resilient with incremental leasing activity to see marginal pickup in H2FY21 and regain momentum in FY22E. Overall, we expect PEPL share of rental NOI to grow to Rs11.6bn in FY23E vs. Rs9.2bn in FY20. PEPL has consolidated net debt of Rs84bn as of June 2020 of which 53% is in the form of lease rental discounting (LRD) loans and 17% are receivables discounting loans. We currently value PEPL's annuity business at an EV of Rs127bn (Rs88bn for offices and Rs39bn for malls), hotels at Rs8.0bn and facilities management business at Rs6.9bn.

- What are the possible deal contours? PEPL may divest either full or partial stake in all or select assets to the Blackstone Group along with JV partners/land owners in identified projects. In the case of a 100% stake sale to Blackstone, PEPL may be able to reduce its gross debt in annuity/hotels business which is currently at Rs70.0bn (including under-construction debt of Rs7.4bn). In case of a partial stake sale to Blackstone, there is a possibility of a REIT listing in the medium term wherein both partners are able to monetise their holdings. As the final deal contours are subject to the consummation of the proposed transaction, we retain our estimates until further clarity emerges on the same.

Shares of PRESTIGE ESTATES PROJECTS LTD. was last trading in BSE at Rs.260.5 as compared to the previous close of Rs. 247.6. The total number of shares traded during the day was 26038 in over 1095 trades.

The stock hit an intraday high of Rs. 263 and intraday low of 246.1. The net turnover during the day was Rs. 6597244.

Source : Equity Bulls

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