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On Tuesday, BofA Securities took a favorable view on Inmobiliaria Colonial Socimi SA (COL:SM), upgrading the stock from Neutral to Buy and setting a price target of EUR6.50. The upgrade was prompted by the stock's significant underperformance compared to the market and its peers. Since January 2024, Colonial's share price has lagged behind the EPRA Index and Gecina (EPA:GFCP), trailing by 12% and 3%, respectively.
BofA Securities pointed out that Colonial now trades at a greater than 5% implied capitalization rate, or a 48% discount to its estimated Net Disposal Value (NDV) for the year 2026. This valuation is considered attractive compared to the firm's Eurozone real estate coverage, which has an average implied cap rate of 5.4% and a 22% discount to NDV. The firm's analysts highlighted Colonial's strong pricing power and its progress in reducing debt as key factors supporting the upgrade.
The analysts expect Colonial to continue improving its financial position. They project the company's Loan-to-Value (LTV) ratio to drop to around 40%, down from 45% in 2023, following a €0.6 billion capital increase in the third quarter of 2024. Additionally, a potential merger with SFL into Colonial in 2025 could further bolster the company's balance sheet. BofA Securities anticipates that the company's net debt to EBITDA ratio will fall to below 13 times once its developments are delivered, a significant improvement from the 22 times ratio recorded in 2021.
The improved leverage metrics are favorable when compared to the broader Eurozone real estate sector, where the average LTV stands at 48% and the net debt to EBITDA ratio is around 13 times. The upgrade reflects BofA Securities' confidence in Colonial's ability to outperform its Eurozone peers in the real estate industry.
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