European Residential Real Estate Investment Trust

European Residential Real Estate Investment Trust (TSX: ERE.UN) is an unincorporated, open-ended real estate investment trust. The company is Canada's first European-focused multi-residential real estate investment trust, with a current initial focus on investing in high-quality multi-residential real estate properties in the Netherlands. 

Key Highlights:

• Improved Occupancy amidst economic slowdown: The group reported an impressive occupancy rate of 98.3% in Q4FY20 in the residential segment (v/s 97.2% in Q4FY19), while the commercial segment reported 100% occupancy during Q4FY20 rate (improved from 97.2% in Q4FY19), which is commendable considering the current operating environment.                       

Source: Company Presentation

• ~41% of the portfolio located in High Growth Urban Markets: The group has an impressive presence across the urban locations, which has an impressive track record of strong rental growth. Thus, we expect that the above would lead to strong cash flow growth in the coming quarters.                  

Source: Company Presentation

• Recent Acquisitions: During the second half of FY20, the company solidified its presence across the Netherlands by purchasing four multi-residential properties amounting to EUR 80.9 million, excluding transaction costs and fees. The above was financed through mortgage financing of the principal amount of EUR 45.0 million.

FY20 Financial Highlights:

• The group announced its full-year result, wherein the company posted operating revenues of EUR 69.880 million, significantly higher than EUR 41.675 million in FY19. The increase was driven by higher revenue from investment properties (EUR 65.748 million v/s EUR 38.800 million in FY19).

• Net Rental Income stood at EUR 53.269 million v/s EUR 31.519 million in the previous year.
• The period was marked by higher general and administrative expense (EUR 8.7 million v/s 5.631 million in FY19) coupled with higher interest and other finance costs of EUR 11.422 million v/s EUR 8.44 million in FY19. Net movement in fair value of investment properties stood at EUR 46.006 million v/s EUR 52.474 million in FY19.
• Net income stood at EUR 118.657 million, significantly improved from a net loss of EUR 16.806 million in the previous year.

FY20 Income Statement Highlight (Source: Company Report)

Risks:  Change in consumer preferences of relocating from city centers to suburbs would lead to lower demand from the urban areas, which might be a key concern as the group derives a substantial portion of its revenue from the urban region.

Valuation Methodology (Illustrative): EV to Sales

Note: All forecasted figures have been taken from Thomson Reuters

Stock Recommendation:

The stock offers a dividend yield of ~3.8%, which is decent considering the current interest rate scenario. The company reported an impressive liquidity level of EUR 97 million, includes Cash on Hand and undrawn Credit Facilities, which seems to be sufficient to fund its working capital needs. During FY20 company’s operations remained encouraging as 68% growth was reported in operating revenues and 69% in net operating income, which is impressive. Moreover, the NOI margin improved to 76.2% in FY20 v/s 75.6% in FY19. Further, the multi-residential asset class in Europe seems resilient and highly defensive in nature, which indicates stable cash flow generation. We have valued the stock by using EV to Sales based relative valuation approach and arrived at a target price offering lower double-digit upside potential (in % terms). We have considered industry (Residential & Commercial REITS) median on an NTM basis. Hence considering the aforesaid facts, we recommend a ‘Speculative Buy’ stance on the stock of ERE.UN at the closing price of CAD 4.33 million on April 06, 2021.

One-year Price Chart (as on April 06, 2021). Source: Refinitiv (Thomson Reuters)

StageZero Life Sciences Ltd

StageZero Life Sciences Ltd. (TSX: SZLS) is a Canada-based company focused on developing and commercializing molecular diagnostic tests for early detection of cancer. It has developed Sentinel Principle platform technology, which determines biomarkers from whole blood.

Key Highlights 

• Introduction of multi-cancer test: Recently, the company introduced an early cancer diagnostic program AVRT centred around Aristotle, StageZero’s multi cancer test. It is a multi-cancer test from a single sample of blood. Under the Aristotle Female panel, there would be nine tests for cancer, while the male panel has six tests. Aristotle test would be priced at USD 1500 and would initially be offered to Care Oncology's current US patients (3,000 +) as well as immediate family concerned about their own risk for cancer. We believe this test would open new avenues for revenue in the coming time.

• Acquiring "HC Companies": The company has entered into a letter of intent to purchase all the business of Health Clinics Limited and of Health Clinics USA Corp. substantially (together, the "HC Companies") related to their current oncology business and expanding focus into early disease detection utilizing proprietary treatment protocols to facilitate progression. Together with Health Clinics, the company would focus on three of the highest growth areas within healthcare - liquid biopsy, early detection of disease and telemedicine, and further combining them into one innovative company. 

Financial overview of FY 2020

Source: Company 

• For FY2020, the company saw an increased revenue at USD 4.1 million, against USD 0.14 million in the previous corresponding period. The rise in revenue was primarily due to healthy performance from Cancer Testing and COVID Testing.

• On the back of higher revenues, the company managed to post a gross profit of USD 0.7 million compared to a loss of USD 0.96 million in pcp.
• The company reported a consolidated net loss of USD 6.86 million compared with a consolidated net loss of USD 3.48 million. An increased loss resulted from the impact of warrants' revaluation and change in fair value of conversion debentures. 

Risks associated with investment

The company’s success largely depends on collaborations, and strategic partnerships Failure in any of these would dampen the company’s revenue. Some other risk factors that could affect the business prospect are delay in regulatory approvals, foreign exchange, and competition.

Valuation Methodology (Illustrative): EV to Sales 

Note: All forecasted figures and peers have been taken from Thomson Reuters 

Stock recommendation

Recently, the company has launched an early cancer diagnostic program “AVRT” for multi-cancer test. Initially, it would be offered to 3000+ cancer patients and their families considered prone to disease at a price of USD1500. This would prove to be a new revenue stream for the company. Furthermore, company is also acquiring "HC Companies", which would help it to focus on the highest growth areas within healthcare - liquid biopsy, early detection of disease and telemedicine. Moreover, the Company is working to secure multi-year agreements with hospitals, integrated clinical networks, large physician groups and healthcare organizations for its risk assessment tests to assist in the early detection of cancer. Therefore, based on the above rationale and valuation, we recommend a "Speculative Buy" rating at the closing price of CAD 0.91 as on April 6, 2021. We have considered Microbix Biosystems Inc, Dyadic International Inc. as the peer group for the comparison.

1-Year Price Chart (as on April 6, 2021). Source: Refinitiv (Thomson Reuters)

Disclaimer

The advice given by Kalkine Canada Advisory Services Inc. and provided on this website is general information only and it does not take into account your investment objectives, financial situation and the particular needs of any particular person. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. The website www.kalkine.ca is published by Kalkine Canada Advisory Services Inc. The link to our Terms & Conditions has been provided please go through them. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as advice or recommendations later.