EPP, the JSE’s only property company exposed entirely to Poland, is reappearing on investor radars as the Eastern European country’s economy starts to emerge from the pandemic in seemingly better shape than many of its Western European counterparts.
The company, whose €2.4bn portfolio includes 29 shopping centres that span more than 1-million square metres, is Poland’s largest mall owner. Its flagship asset is the 85,000m² Galeria Mlociny in Warsaw.
Like many of its retail-focused peers, EPP fell dramatically out of favour last year.
By late October its share price had slumped to below R5, which pushed its discount to NAV to more than 70%.
The story is well known by now: lockdowns and retail trading restrictions prompted the company to withhold a dividend for the year to December, and concerns about its high loan-to-value (LTV) ratio of 55% further dented sentiment.
But, while it is still below its pre-Covid highs of R17-R18, the stock has since more than doubled to R11.
Naeem Tilly, head of research at Sesfikile Capital, ascribes the rebound to a recent rotation into value counters and rapid progress with the rollout of Poland’s vaccination programme.
By June 17, Poland had administered 26-million vaccine doses, with 42% of the country’s population on at least one jab.
That’s helped to kick-start the Polish economy, with all retail tenants (including entertainment venues, food and beverage sellers and cinemas) allowed to reopen in May. From last month, Poles have also been allowed to go to concerts, sports games and even nightclubs again.
Tilly says the recent easing of pandemic-related restrictions in Poland has already resulted in a strong uplift in foot count and spending at EPP’s 29 shopping centres, which bodes well for a recovery in earnings.
For instance, sales turnover in May was 13% ahead of that recorded pre-Covid in May 2019. Foot count, down 53% year on year in May last year, has recovered to 82% of May 2019 levels.
But Tilly is concerned about EPP’s high debt levels.
And though management is committed to lowering its 55% LTV ratio, he believes EPP’s ability to successfully degear its balance sheet by selling assets will be tough, as few companies are falling over themselves to buy retail stock.
But as Nedbank CIB analyst Ridwaan Loonat points out, though the company’s LTV is above the sector average, it remains well within Polish bank covenant levels.
EPP’s liquidity risk has also been reduced as its debt funders have already signalled their intention to roll over loans maturing in the next 12 months. However, Loonat says the market will welcome successful asset disposals at "respectable" prices, which will enable management to resume dividend payouts. "That, in turn, will support a further rerating of EPP’s share price."
Loonat believes Poland remains an attractive rand hedge destination for SA investors, given that GDP and retail sales growth are forecast to outperform other EU countries over the next two years. In fact, Oxford Economics has maintained its forecasts of cumulative Polish GDP growth of more than 8% for 2021 and 2022.
Poland, the EU’s sixth-largest economy, also led the global retail attractiveness index, which reflects retail sentiment in 15 key European markets, in the first quarter.
The index is compiled jointly by Union Investment and GfK and measures sales revenues, unemployment levels and consumer confidence. Poland was followed by Germany, Ireland, Finland and France — the only four out of 15 countries where consumer and retailer confidence levels increased year on year. The Czech Republic and Portugal posted the biggest annualised declines.
EPP CEO Tomasz Trzóslo tells the FM that Poland is on track to have 70% of its population fully vaccinated by October, which should further boost the recovery in foot count across the company’s mall portfolio. He says EPP is well placed to benefit from the country’s continued strong economic and consumption growth outlook, given that it has become increasingly difficult to obtain government approval and bank funding for new malls.
"EPP already sits on a number of high-quality and well-located retail assets, which means we have limited competition."
However, Trzóslo concedes that EPP needs to cut debt.
"Fixing our capital structure and lowering our LTV is the key focus for now," he says. "The plan is to find a co-investor, which will become a joint venture partner for some of our assets."
That will allow the company to sell a stake in certain malls instead of disposing of them in their entirety. Trzóslo is confident that he will be able to make an announcement in this regard by the northern hemisphere autumn (November at the latest) when retail markets have stabilised. He adds: "Once a joint venture partner is on board, we will have a comfortable base from which to make decisions on resuming dividends."
Meanwhile, Trzóslo reckons EPP’s share price of about R11 presents a bargain buying opportunity. "EPP is still trading at 40% below NAV. I believe there’s significant share price upside for those that get in now before the market recovers fully to pre-Covid levels."
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