Sirius Real Estate Limited (LSE:SRE, JSE:SRE, OTC:SRRLF) had a 'buy' rating reiterated by Panmure Gordon as part of a reivew of the wider sector, where it stands out as a "property risk champion".
A target price of 125p is the broker's target for the shares, versus recent levels around 79p.
Panmure Liberum analyst Tim Leckie said he sees the key question for 2025 as what stocks will have materially higher recurring earnings per share in 2030 compared to now, as "history shows that these stocks can deliver substantial share price appreciation".
Sirius fits into this category, with 2030 EPS forecasts of 8.5p, with a "solid margin of safety" from various factors, including assuming no like-for-like rental growth on acquisitions, around €350 million of acquisitions by 2026, 3.5% per year admin cost inflation and front loaded refinancing at 4.1%.
Assuming this level of EPS growth, the shares are "extremely discounted" as to justify current share price, Leckie said, average earnings over the next several years would have to fall to 6.7p per share, which implies like-for-like net rental income growth of 2% a year versus 5% guidance and averaging above 6% over 10 years in a period where German GDP grew less than 1% a year.
"With the acquisition pipeline gearing up and ‘property risk’ being restocked we remain very positive on the earnings and share price outlook."
Most misunderstood
Much misunderstood features of real estate risk are property risk versus market risk, the analyst said.
He defines market risk as being outside of management control, so market risk, including capital market risk.
"In our view, capital market risk has been a long-term tailwind for listed real estate and core real estate specifically".
Investors wanted "minimal property risk via long leases, prime tenants, and new, well-located assets to ride out economic cycles while enjoying the long-term benefit of lower refinancing rates or buyers able to pay more via a lower cost of capital.
"Going forward this looks to be no longer the case."
Meanwhile, property risk is specific to the property and distinguished from market risk as being within managements control.
These risks include vacancy, reversion potential, incremental or marginal capex opportunities that enhance cash flow, and are brought into the portfolio via acquisition or created via development.
"Cash flow focus favours property risk as this source of risk is avoided by many direct owners who don’t have the capability to manage it, ironically resulting in a higher net initial yield on property risk heavy assets making it that much easier to achieve an ‘equity style’ return."
Sirius concerns misplaced
Judging by the share price, Leckie said it was his view that the weakness in the Sirius shares is "caused by misplaced market concern over the potential for Sirius to utilise its targeted property risk opportunity to drive revenue, EBIT and earnings through the cycle, hence the retracement seen since September 2024 vs the EPRA UK index".
Sirius's approach is to make "properly priced" acquisitions from proprietary data, giving a starting cash return above its cost of capital.
"Economic conditions will of course determine the pace, and magnitude of leasing driven revenue growth, but there will still be growth."
Risk, says the analyst, is mitigated by Sirius’s proprietary data, driven by its own CRM channels, digital as well as in-person and on-site.
"Sirius knows the sector, quantity and price point of demand and factors this into its underwriting."
Sirius also benefits from a weighted average cost of capital (WACC) - the blended cost a company expects to pay to finance its assets - of less than 8% due to its ability to borrow in euro debt.
"We see the NIY spread over WACC for Sirius as comfortably 300 basis points. That’s a great place to start from," said Leckie, adding that in real estate and investing in general "it’s a lot easier to make your money on the way in than on the way out".
With the acquisition pipeline "gearing up" and property risk being restocked, "we remain very positive on the earnings and share price outlook", he concluded.