Diös: Surprisingly strong near-term outlook - ABG

Inflation drives rental income and NOI by ~3-4%...

…while interest rates hold back CEPS (~0% to -3%)

~15-40% below peers on last reported figures

Good and even accelerating net letting
Diös speaks of accelerated interest from tenants driven by the inflow of new companies to its cities, with a consequent need for offices and urban services. As there seem to have been no larger terminations, this bodes well for net letting in Q3. We judge that most of its office tenants (52% of rents) should be able to absorb CPI-adjusted rental increases for 2023, while the aggregated effect from the other segments will be lower. The 10-20% cost increase for projects impacts the Biet office project (5,000 sqm) and may put two residential projects on hold (3,900 sqm) Rather than cost inflation, management views potential supply cuts of building materials as the largest threat to its project budgets.

Basically no impact from rising energy costs
The effect of raised energy and heating costs is negligible on Diös’ earnings, as >90% of its electricity bills for ‘22-‘23 are hedged. Energy prices for Northern Sweden have also been distinctly lower compared to other parts of Sweden. We forecast rental income increases from indexation of 6% in 2023 and 4% in 2024, up from 3% and 2.5% previously. The estimate cuts on CEPS stem from updated interest rate assumptions in accordance with the Riksbank’s most recent rate path (September). In addition, we assume four margin increases of 10bps in ’23-’24e. We favour its main exposure to bank (65% of outstanding debt) and secured bonds (7%) but dislike its short interest maturity (1.0y).

Short-term strengths, long-term uncertainties
At ~9x LTM P/IFPM and ~0.65x reported EPRA NRV, the share is ~15-30% below its historical averages and ~15-40% below the average of peers CAST, EAST, NYF and WIHL. We forecast record-high CEPS growth of 10% in ‘22e driven by acquisitions, completed projects and improved occupancy rate. In ’23-‘24e, there is currently ...
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