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Sirius Real Estate Limited
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=== Absolute valuation approach === ==== DCF ==== Stockhub estimates that the expected return of an investment in the company over the next five years is negative xxx%. In other words, an Β£1,000 investment in the company is expected to return Β£xxx in five years time. The assumptions used to estimate the return figure can be found in the table below. {| class="wikitable" |+ !Description !Value !Commentary |- |Which valuation model do you want to use? |Discounted cash flow |Research suggests that in terms of estimating the expected return of an investment over a period of 12-months or more, the approach that is more/most accurate is the absolute valuation approach, so that's the approach that we suggest using to determine the estimated value of the company. |- |Which type of discounted cash flow model do you want to use? |Dividend discount model |Given Sirius' UK REIT status, the company must pay at least 90% of its UK tax-exempt profits (being rental income after deducting finance costs, overheads and tax depreciation) to shareholders as dividends. Also as a German REIT (or G-REITs, for short), the company is required to distribute at least 90% of all income (i.e. rental income and non rental income, such as the income from the sale of properties). Furthermore, the company has stated that one of its policies is to pay out 65% or more of funds from operations (FFO) as dividends. Accordingly, we suggest using the dividend discount model (DDM), which is one of the most common discounted cash flow models. |- |How many distinct stage of growth do you want to use? |One stage |For simplicity, we have used one stage here. |- |What is the expected lifespan of the business? |Perpetual |Again, for simplicity, we have assumed that the business continues forever. |- |What is the expected constant growth rate in dividends? |8% |Research shows that there's a correlation between GDP growth and the dividend growth of Real Estate Investment Trusts (REITs), such as Sirius. We note that the gross domestic product (GDP) growth rate in the last 20 years (2001 to 2022) is around 3% per year for the global economy, and around 2.25% for the United Kingdom and 1.95% for Germany. Given that Sirius is leveraged and the size of the leverage, we expect the dividend growth of the business to be much more than the GDP growth of the two countries in which the company operates (i.e. the United Kingdom and Germany). |- |Which financial forecasts to use? |Proactive Investors |Here, we have used our own forecast. To calculate the company's two year ahead dividend forecast figure (i.e. the relevant forecast figure for our model), we multiplied the current dividend figure (i.e. historic forecasts) by our estimated constant free cash flow growth rate. |- |What is the required return on equity? |12.24% |For estimating the required return on equity, we used the Capital Asset Pricing Model (CAPM), which provides an economically grounded and relatively objective procedure for required return estimation, and, therefore, it has been widely used in valuation. The calculation of the required return on equity (and the reasons behind the calculation) can be found in the table below. |- |What is the euros to pounds foreign exchange conversion rate? |0.89 |For simplicity, we have used the rate as of today (1:0.89). |- |What's the current value of the company? |88.10 pence per share |As at 16th February 2023, the current value of Sirius is 88.10p per share. |- |Which time period do you want to use to estimate the expected return? |Between now and five years time |Research suggests that following a market crash, the average amount of time it takes for the price of a stock market to return to its pre-crash level (i.e. the recovery period) is at least three years. Accordingly, we suggest that to account for general market cyclicity, it's best to estimate the expected return of the company between now and five years time. |} ==== Sensitivity analysis ==== The main inputs that result in the greatest change in the expected return of the Sirius Real Estate Limited investment are, in order of importance (from highest to lowest): #The size of the total addressable market (the default size is $xxx trillion); #Sirius Real Estate Limited peak market share (the default share is xxx%); and #The discount rate (the default time-weighted average rate is xxx%). The impact of a 10% change in those main inputs to the expected return of the Sirius Real Estate Limited investment is shown in the table below. {| class="wikitable sortable" |+Sirius investment expected return sensitive analysis !Main input !10% worse !Unchanged !10% better |- |The size of the total addressable market | | | |- |Sirius Real Estate Limited peak market share | | | |- |The discount rate | | | |} ==== Other ==== A key, and common, way to value real estate is by dividing the estate's net operating income<ref>Net operating income is the rental and other income from investment properties generated by a property less directly attributable costs.</ref> by the estate's capitalization rate (or cap rate, for short)<ref>Capitalization rate is a financial metric used to estimate the potential return on a real estate investment. It is expressed as a percentage and is calculated by dividing the net operating income (NOI) of a property by its market value or purchase price. The formula for cap rate is: Cap Rate = Net Operating Income / Property Value For example, if a property generates $100,000 in NOI and is valued at $1 million, the cap rate would be 10% ($100,000 / $1,000,000). Cap rate is a useful tool for comparing different real estate investment opportunities and evaluating their potential returns. Generally, the higher the cap rate, the better the potential return on investment. However, it's important to consider other factors such as market conditions, location, and the condition of the property before making an investment decision.</ref>. The average cap rate for commercial properties can vary widely depending on the location, property type, and market conditions. In the United Kingdom and Germany, the average cap rate for commercial properties is typically in the range of 5-7%, according to ChatGPT. In the United Kingdom, the average cap rate for commercial properties in prime locations, such as central London, is typically lower, in the range of 3-5%, due to the high demand for real estate in these areas. In secondary markets, the average cap rate may be higher, in the range of 7-9%. In Germany, the average cap rate for commercial properties, with prime locations such as central Berlin or Munich having lower cap rates, in the range of 4-6%. In other regions, the average cap rate may be higher, in the range of 6-8%. We note that the current cap rate of Sirius is 6.8%, which is on the high-end of the for commercial properties in the United Kingdom and Germany (5-7%). In the company's most recent full-year results (i.e. the 12-month period ended 31st March 2022), net operating income (NOI) is β¬122.5 million. In the company's most half-year results (i.e. the 6-month period ended 30th September 2022), net operating income is β¬73.2 million, which, based on the most recent cap rate (i.e. 6.8%) and portfolio value (i.e. β¬2,032 million), equates to an annual income of β¬137.9 million. We note that a β¬5 million improvement in NOI (from β¬137.9 million to β¬142.9 million) equates to a β¬74 million improvement in the valuation of the portfolio, all other things being equal. Similarly, a half a percentage point reduction in the cap rate (from 6.8% to 6.3%) equates to a β¬162 million improvement in the valuation of the portfolio, again, ceteris paribus. We anticipate that any improvements (in the valuation of the portfolio) will translate to an almost identical increase in the valuation of the company. So, for example, if the improvement in the property valuation is β¬74 million, then the company valuation will also increase by β¬74 million. {| class="wikitable" |+Net yield against net operating income ! !5.50% !6.00% !6.50% !7.00% !7.50% !8.00% |- |'''125.0''' |2,273 |2,083 |1,923 |1,786 |1,667 |1,563 |- |'''130.0''' |2,364 |2,167 |2,000 |1,857 |1,733 |1,625 |- |'''135.0''' |2,455 |2,250 |'''2,077''' |'''1,929''' |1,800 |1,688 |- |'''140.0''' |2,545 |2,333 |'''2,154''' |'''2,000''' |1,867 |1,750 |- |'''145.0''' |2,636 |2,417 |2,231 |2,071 |1,933 |1,813 |- |'''150.0''' |2,727 |2,500 |2,308 |2,143 |2,000 |1,875 |}
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