Description

Neinor: €7.90 last, €624mm mkt cap, €260mm net debt

Spanish homebuilders are cheap equities with downside support and a solid cyclical backdrop. They trade at a significant discount to realizable liquidation value, so unlike many other businesses slowing (or shrinking) is not horrible as the business harvests capital.

Neinor is among the cheapest and is the furthest along in its development cycle of the three public Spanish builders. Neinor was slated to do €1.35 of EPS and €145mm of EBITDA run-rate starting from 2021. Not clear what will happen near-term given the current backdrop, but the run-rate earnings power should be maintained given the undersupplied housing market and demand pull. At €7.90, HOME trades at 6x EPS, 6x EBITDA, and 50% of assessed NAV. Homebuilder earnings multiples move around, but we think 10x is certainly achievable over 1 – 2 years, driving 65% upside. More importantly, downside appears limited at 50% of liquidation value. 

Cyclical Backdrop

Spanish housing market has been decimated. Was a bubble in the early 2000s. Burst during the financial crisis. All new home building stopped. Chart below is new home sales in Spain – essentially zero. The vast majority of homebuilders went out of business – most became owned by banks. In 2014, distressed funds and PE started buying up landbanks from the banks and re-capitalizing them to form homebuilders.

Spain New Home Sales

Long-Term Spain Housing Starts

Seems like a classic cycle. The lack of new homes has ultimately tightened the market, and home prices have been increasing +6% YoY since 2014. Building new homes in select areas (major cities, Eastern industrial part of the country) is starting to make sense.

Spain Home Price Index – still ~20% off 2007 highs, bottomed in 2013 – 2014

Here is a good summary slide from Neinor:

Neinor, Aedas, and Metrovacesa were the 3 builders that went public, and despite good land banks and home price appreciation, all 3 have massively underperformed. Why? They were all starting from zero, with large land banks (of varying quality) but no operations. A general observation from miners, E&Ps, LNG facilities, etc is that stocks often don’t work in a ramp-up phase until they turn the corner, start generating earnings, and become cleaner, easier stories. 

HOME is 1 year ahead of AEDAS and MVC on ramp-up and should reach run-rate in 2021 following several years of growing pains. At that point, the earnings and dividend power will be readily apparent.

COVID has brought the business to a halt, but the underlying assets value should be unchanged. As  the economy re-starts, Neinor should be able to re-start homebuilding activity. Importantly, Spain remains an under-supplied housing market with significant demand pull. Ultimately earnings power should be unchanged.  

Catalyst

Achieving run-rate earnings