ARGAN SA ($ARG.PA) is a French REIT that gives a 5.5% dividend yield in the present day, but additionally presents a possibility to continue to grow revenues sooner or later. The primary clients of the corporate consist on nice well-known corporations like Carrefour, L’Oreal, DHL, Aldi, Decathlon, Amazon, or BMW.
Key Highlights:
ARGAN combines a excessive dividend yield with long-term income progress
Pores and skin within the recreation: the administration owns over 37% of the enterprise
Making use of a good valuation method, ARGAN trades at a reduction
The enterprise mannequin:
ARGAN’s enterprise consists on renting premium logistics amenities. They’ll construct, develop or purchase warehouses, after which hire it, caring for the property administration throughout the entire lease. The corporate was created in 2000 by Jean-Claude LE LAN, who remains to be the Chairman of the corporate. Listed in 2007, proper earlier than the Nice Monetary Disaster, the corporate has returned over 321% plus dividends.
Pores and skin within the recreation:
ARGAN is an organization with a market capitalization of 1.6 billion Euros. As we’ve stated earlier than, the founder remains to be within the firm, however not simply as an worker; his household nonetheless owns 37% of the shares excellent. This offers him and his household a long-term imaginative and prescient, since their wealth is tied to the efficiency of the enterprise. Predica, a subsidiary of Crédit Agricole Assurances, has owned 15% of the corporate for a very long time, serving as a very good counterweight for the household’s affect throughout the enterprise.
The present valuation:
ARGAN has generated 137 million Euros in Recurring Internet Revenue in 2024, up 9% from the earlier yr. Which means that the corporate is at the moment buying and selling at 11.6 occasions recurring earnings. For comparability, the present earnings ratio of the SP500 is 28 occasions.
The EPRA NAV NTA of the corporate, which is the Internet Tangible Worth of the belongings, stays at 85.5 Euros per share. With a present value per share of 63.30 Euros, we’re buying the corporate’s belongings at a 35% low cost to honest worth. This worth has grown by 8% in 2024, and is anticipated to continue to grow in 2025.
For 2025, the corporate expects to extend its income by 6%, given new initiatives and the listed will increase in value of the present tenants; and its internet recurring earnings by 11%, to 151 million Euros.
However is that this low cost?
A good valuation:
ARGAN has a skillful administration that has overcome tough occasions just like the Nice Monetary Disaster whereas delivering distinctive returns to shareholders. Additionally, their wealth is tied to the enterprise, so they’re incentivized to make ARGAN a profitable enterprise.
I think about two methods to securely method the valuation of ARGAN.
First, a a number of on the web recurring income. However there’s a trick right here. In 2021, the corporate managed to safe 500 million euros by way of a bond with a 1% rate of interest, which is due in November 2026. That is mainly free cash that the corporate is and has been utilizing. Nevertheless, as soon as the due date arrives, they’ll should refinance this cash. Most likely not the total quantity, but when they did, refinancing at a 3.5% rate of interest would cut back internet income by about 12.5 million euros.
Thus, I think about that the corporate’s earnings energy stays at 140 million Euros in 2025, being very conservative, which at a a number of of 15 occasions (in step with worldwide friends), provides us a margin of security of over 30%.
Second, it’s additionally honest to worth the corporate at e book worth. It might in all probability be clever to use a premium to it, given the higher than the typical high quality of the corporate’s belongings. However being conservative, and considering of e book worth as a very good valuation methodology, the corporate additionally trades at a 30% low cost in the present day.
If the corporate traded at a premium, which I believe is probably going, the low cost may go as much as 57% utilizing a multiplier of earnings of 18 occasions, or to 48% if we utilized a ten% premium on the e book worth of the corporate.
Not all the pieces is ideal:
Alternatives exist for a cause within the inventory market. And I discover 4 causes for ARGAN to be low cost:
1. Debt
Though the corporate has been deleveraging its steadiness sheet these days, the debt to belongings ratio is comparatively excessive. The present Mortgage to Worth ratio of the corporate is 43.1%, which signifies that debt funds 43% of the belongings; and the Debt to EBITDA ratio stays at 9.2 occasions. In 2023, these ratios had been 49.7% and 11 occasions, respectively, which reveals the hassle of the corporate to deleverage the steadiness sheet whereas nonetheless paying over 3 euros per share in dividends.
The present value of debt is 2.25%, in contrast with 2.30% in 2023, and is anticipated to go all the way down to 2.10% in 2025. 22.13% of the rental earnings is destined to curiosity on loans, whereas 22.54% was destined in 2023.
Sooner or later, the plan of the corporate is to maintain decreasing the debt whereas investing to develop extra. They plan to finance new investments promoting their current belongings. The factors they may comply with is: seniority (older amenities can be offered, ideally); profitability (amenities with decrease profitability can be offered, ideally); and ESG causes (amenities with greater CO2 emissions, that are usually older, will ideally be offered first).
2. Capital enhance
To struggle the excessive influence of debt on the corporate, coupled with the upper rates of interest state of affairs that we’ve lived through the previous two years, the administration determined to extend the capital in 2024. With a value of 74 euros per share, the corporate created 2 million new shares, valuing the corporate at 1.7 billion euros.
Though the corporate disclosed that this capital enhance was concentrating on new investments, it is usually a measure to adjust to their debt covenants and to keep up their BBB- score by S&P. Capital will increase are not often favored by traders, because it typically alerts overleverage and a possible mismanagement.
3. Writedowns
The French REIT trade has been impacted through the previous years of large writedowns. REITS are required to worth their belongings at honest worth, and in 2022 and 2023 ARGAN needed to writedown its belongings, decreasing its e book worth. In 2024 this development has reverted, though some opponents are nonetheless going by way of it.
The overvaluation of the e book worth is at all times a danger relating to REITs, and the current writedowns have scared traders. Nevertheless, ARGAN isn’t too affected by this, because the amenities they personal are comparatively new (11.6 years as a mean), and warehouses are much less affected by overvaluations than housing.
4. Focus of purchasers
Carrefour, ARGAN’s primary tenant, accounts for 29% of the rental earnings of the corporate. This will pose a danger to the corporate in the long run. Nevertheless, the typical mounted size of the leases is over 5 years, with 43% of the leases with a time period of over 6 years from 2024. In addition to, the corporate has been managing completely the occupancy ratio, which has been 100% prior to now two years, and hasn’t been decrease than 99% since 2016.
Conclusion:
ARGAN is a enterprise that’s buying and selling beneath its honest worth. With a reduction ranging between 30% to 50%, I believe that dangers are being overweighted by the market. The corporate has a stable historical past of income and dividend progress, even by way of tough occasions (Nice Monetary Disaster, pandemic). Moreover, the administration has pores and skin within the recreation and a confirmed trajectory of being too conservative when releasing estimates. Though the principle focus in the present day is decreasing debt, I don’t discard (nor do they, in response to their newest earnings name) that they turn out to be extra aggressive with leverage and progress if a very good alternative comes.
Catalysts:
Decrease rates of interest
Enchancment of European financial views
Enchancment of S&P score (2026)
Time
If no catalysts happen, I’m nonetheless comfortable to be ready for the market to acknowledge the worth of an organization whereas receiving a 5.5% dividend yield and a internet recurring earnings progress of excessive single digit.
Dangers:
Portfolio focus: Carrefour is an enormous a part of the income.
Debt: Though the corporate has traditionally had an occupancy price near 100%, decreasing it to market requirements (about 95%, though it relies upon extensively on the regio) may imply difficulties in paying down the debt.
Issue discovering new developments.
How do you see ARGAN? Do you discover the dividend and the potential progress compelling?
I personal a place in ARGAN on the time of writing.Â
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