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On Wednesday, Goldman Sachs (NYSE:GS) downgraded shares of Inmobiliaria Colonial Socimi SA (COL:SM) from Neutral to Sell, adjusting the price target to €4.80 from the previous €6.50. The downgrade followed the firm’s evaluation of the company’s financial year 2024 results and year-to-date performance. Goldman Sachs analysts noted that Inmobiliaria Colonial’s shares had outperformed their coverage by 7% since the beginning of the year. The revision was also influenced by the impact of higher bond yields on the weighted average cost of capital (WACC).
The updated assessment by Goldman Sachs included a change in the M&A rank for Inmobiliaria Colonial, which was lowered to 3 from 1, indicating a low probability (0%-15%) of the company becoming an acquisition target. This adjustment was based on the anticipated low return on capital employed (ROCE) as the company undertakes redevelopment of several assets. The analysts projected an 11% downside potential to the revised price target, compared to the sector’s average 17% upside.
The downgrade reflected concerns about the company’s future growth prospects. Despite a solid operational performance recently, Goldman Sachs expects lower inflation from 2025 onwards, which could lead to reduced organic growth for Inmobiliaria Colonial. Additionally, the firm sees limited operational upside from an occupancy perspective, even though vacancy rates have recently increased to about 4%.
Goldman Sachs forecasts a low ROCE of 2.8% for Inmobiliaria Colonial by 2026, which is significantly below the newly calculated 5.06% WACC. This is attributed to the extensive ongoing redevelopment program that is likely to suppress returns. Furthermore, the analysts expect limited growth in the near to mid-term, forecasting a 2% five-year earnings per share compound annual growth rate (CAGR).
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