OREANDA-NEWS. AFI Development is due to publish its 3Q09 IFRS results on 17 November and we expect it to record revenues of USD 9.4mn. Of this, we see USD 9.1mn coming from rental income, almost flat QoQ, as the company did not complete any projects in 1H09 (AFI currently receives rental income from the commercial part of Four Winds and other projects: H20, Ozerkovskaya, Berezhkovskaya and Kislovodsk).

According to Jones Lang LaSalle, after the sharp rental correction in 1Q-2Q09, average prime commercial rental rates stabilised in 3Q09 at USD 2,000-3,000/sqm in retail and USD 500-600/sqm in office. However, prime rents were down by another 5%QoQ in 3Q09 in dollar terms.

Vacancy rates in retail decreased from 8% in 2Q09 to 7% in 3Q09, while in office they dropped from 23% to 19% over the same period. The decrease can mainly be explained by the seasonally strong third quarter and we think that 4Q09 could see vacancies pick up again to 2Q09 levels on new space coming on to the market.

We estimate the company’s 3Q09 EBITDA at USD 5.8mn, compared with the USD 5.1 mn in 3Q08. We see 3Q09 as having been capital intensive for the company, mainly in connection with the construction of Mall of Russia (we estimate capex at USD 61mn).

Given both the weak market fundamentals that we foresee in 2H09-1H10 as well as company specific issues connected with a lack of financing to monetise the pipeline, there are no short-term triggers in the stock, in our view.

Please note that in our analysis we are switching from using a Fair Value to a 12-month Target Price in assigning our recommendations. Our new 12-month Target Price of USD 1.6 implies 20% downside potential from current levels and we are reiterating our Hold recommendation.