Capital structure rejig to continue, unlocking value; TP up to Rs 1,250; ‘Buy’ maintained
In the last decade (2011-2021), PML has rejigged the ownership structures of its malls. PML is known in the industry as an active and aggressive mall manager. However, in the last decade it has also created value by active shareholder and capital management. The first half of the last decade saw its malls commissioned with capital contributions from land owners and numerous private equity (PE) players. As the malls were completing their first five years of operations, PML bought out the stakes owned by these investors at valuations which look cheap in hindsight.
The second half of the decade saw ownership dilution of the same malls but to stronger sovereign partners with deeper pockets, longer fund life in periods of low interest rates and strong performance. CPPIB entered in 2017 and GIC in 2021. This allowed PML to fund growth for its next set of malls, lower its leverage and unlock value.
The next decade (2022-32) will also continue to see a rejig which will unlock further value and generate new sources of income. CPPIB has continued to invest beyond its earlier defined commitment on a project specific basis. GIC will also invest further to increase its stake from 26.44% to c32-36% in the platform as per a press release. On the other hand, PML will acquire a 100% stake in PMC, Chennai from Crest Ventures in April’22. It also has a 50% partnership with a local Bsafal group for its upcoming mall in Ahmedabad. In addition, PML continues to look for new greenfield projects. All these structures will again be moved, in our view, over the next 10 years. GIC will look to monetise its investment in 3-5 years. Further, we believe PML will also look to recycle capital as it patiently aims to achieve its vision set in 2007. In addition, these platform deals also generate fee income for PML.
Investment view and valuation. We believe PML is now set to resume its growth trajectory and capture the upside. Backed by its strong balance sheet and sovereign funds as partners, we expect PML to benefit from distressed acquisition opportunities and create a more formidable portfolio, which should increase its bargaining power with retailers, reduce individual asset risk, and, as such, generate higher shareholder returns.
We adjust our earnings estimates to account for the merger of Phoenix Hospitality with PML, stake sale of up to 35.9% in Plutocrat and 26.44% stake sale in GIC platform. We use a DCF-based SOTP approach to value the cash flows from assets using a WACC of 10.5% to arrive at our target price of Rs 1,250 (from Rs 1,220).