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publity 18 April 2019 Update
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publity

Back on track

Real estate asset management

Scale research report - Update

18 April 2019

Price

€28.2

Market cap

€277m

Share price graph

Share details

Code

PBY

Listing

Deutsche Börse Scale

Shares in issue

9.8m

Last reported net debt at 31 December 2018

€21m

Business description

publity is an asset manager with a focus on German office buildings. It has an 18-year track record as an investor in commercial real estate in larger German cities and manages a portfolio worth €4.6bn.

Bull

Experienced player with a focus on one segment of the property market.

New asset management mandates with institutional investors.

Strong demand in the German office market.

Bear

Limited AUM growth potential.

Dependent on banks for property sourcing.

Funding risk associated with convertible bonds.

Analyst

Milosz Papst

+44 (0) 20 3077 5700

In FY18, publity managed to post a rebound from the weak FY17, with an almost 50% y-o-y increase in revenues, PBT and net income (close to record-high FY16 figures). The company has also been moving closer to resolving its dispute with convertible bondholders, with a new share issue and partial bond repurchase that will continue in FY19. As the covenant limiting the increase in financial liabilities beyond €5m was recently waived, publity continues to review options for a potential new bond issue, which would support further business development, including further property purchases by publity Investor GmbH.

High transaction activity supporting earnings

Even though AUM in FY18 remained flat at €4.6bn, publity recorded a 46.7% yoy increase in sales to €34.6m. This was driven by both recurring revenue and finder’s fees from asset acquisitions and participation in disposal gains. It translated into similar improvements in PBT (up 48.4% y-o-y) and net income (up 47.8%). However, as the company issued 3.78m new shares last year, the dilutive effect outweighed the increase in profits, resulting in a 9.1% y-o-y EPS decline. Management also expects that AUM in FY19 will remain stable, which should result in only a slight EBIT increase according to the company.

Office demand in Germany remains solid

The imbalance between demand and supply for office space persists in the big seven German cities, which drives vacancy rates down and rents up. The unleased area in the attractive locations is almost exhausted, which limits further increase in take-up. Robust market conditions coupled with high liquidity from foreign investors supported growth in investment volumes by 18% in 2018. Due to limited capacity and increase in development and construction costs, there is a possibility that this trend will not be reversed in the near future, limiting further development in prime locations in the big seven cities and opening up opportunities class B locations.

Valuation: Trading close to peers

The company’s shares are trading at a 16.4% premium and a 1.4% discount to the peer group on FY19e and FY20e P/E consensus estimates, respectively. The company has announced that it intends to pay a dividend from FY18 income at €1.5 per share, which translates into a dividend yield of c 6.0%.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

23.6

14.6

1.67

0.0

16.9

N/A

12/18

34.6

21.6

1.52

1.5

18.6

5.3

12/19e

38.5

N/A

2.04

0.0

13.8

N/A

12/20e

44.3

N/A

2.45

0.0

11.5

N/A

Source: publity accounts, Refinitiv consensus as at 16 April 2019, based on forecasts of one analyst

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Financials: Lower EPS despite rebound in net income

In FY18, publity recorded a c 50% increase in revenues, PBT and net income, reaching €34.6m, €21.6m and €14.9m respectively, which was achieved despite assets under management (AUM) remaining flat compared to FY17 at €4.6bn. The top-line increase was driven by recurring revenue, but also transaction-related income, including finder’s fees in conjunction with asset acquisitions and participation in disposal gains of properties within the asset management mandates. An example of the large transactions finalised last year is the sale of four office properties to Demire Deutsche Mittelstand Real Estate concluded in November 2018, as well as two other sizeable disposals completed earlier in 2018. Revenues in the asset management segment almost doubled in FY18 as they reached €29.8m compared with €15.5m in the preceding period.

The published figures stand close to the lower end of the latest management guidance published in December 2018. The company’s expectations were for a 50–70% annual growth rate across sales, EBIT and net income, which would imply a net income in the range of €15–17m. Despite the above-mentioned earnings improvement, publity’s EPS decreased by 9.1% y-o-y to €1.52. This was due to the issue of 3.8m new shares completed in October 2018 (see our detailed comment below). As per management guidance, the company’s results are expected to record only a slight increase in 2019 based on the assumption that AUM will remain stable throughout the period.

Exhibit 1: Financial highlights

€000s, unless otherwise stated

FY18

FY17

y-o-y change

Revenue

34,583

23,571

46.7%

Cost of materials

(5,804)

(3,314)

75.1%

Personnel expenses

(1,670)

(1,974)

-15.4%

Other operating expenses

(6,911)

(7,160)

-3.5%

D&A

(166)

(196)

-15.3%

Income from profit transfer

1,005

1,160

-13.4%

EBIT

21,037

12,087

74.0%

EBIT margin (%)

60.8%

51.3%

955bp

PBT

21,624

14,576

48.4%

Income tax and other taxes

(6,721)

(4,490)

49.7%

Net income

14,902

10,086

47.8%

Net margin (%)

43.1%

42.8%

30bp

EPS (€)

1.52 

1.67

-9.1%

Source: publity accounts, Edison Investment Research

Balance sheet

The main changes in the company’s balance sheet reflect the strategic decision to develop publity Investor GmbH (publity’s fully owned subsidiary) as its own investment vehicle acquiring attractive office real estate located in the largest German cities. Last year, publity invested €20m in the entity, which increased its investments in subsidiaries to €20.8m (compared with €0.9m in FY17). This position also includes publity AG’s stake in publity Performance GmbH and publity Emissionshaus GmbH.

Another important development in FY18 was the capital increase concluded in October, with gross proceeds amounting to €40.5m. The purpose of the issue was to strengthen the capital base to fund future growth. However, the offering was also associated with ongoing discussions with the convertible bonds holders related to an alleged covenant breach in relation to the dividend payout ratio (see our previous update notes for a detailed discussion). During the negotiations, one of the conditions highlighted by some bondholders was that publity should raise additional equity. Thomas Olek, the CEO and sole shareholder of TO-Holding GmbH, committed to subscribe to all new shares not subscribed to by other investors and, as a result, he acquired the majority of shares offered (more than 80%, according to our estimate). In conjunction with the subsequent (and still ongoing) high-volume director’s dealing activity, his stake in the company stands at c 70%.

Meanwhile, the company has repurchased some of the convertible bonds and, as a result, the balance declined to €46.95m at the end of FY18 compared with €50.0m in FY17. According to management, an additional €10.0m may be redeemed before 1 July 2019 based on agreement with one of the bondholders. As a consequence of all the above, publity’s cash position improved from €8.0m in FY17 to €26.0m at end-2018.

Following the strengthening of the capital base, publity has initiated some ‘market sounding’ initiatives in conjunction with the potential placement of a new bond. In this context, in March 2019, publity was able to obtain the approval of convertible bondholders to waive one of the bond’s covenants, according to which publity cannot increase its financial liabilities by more than €5m. In return, the bondholders were granted the right to redeem part or all of their bonds, plus any accrued interest, in the case of an increase in liabilities by more than €5m. With the right to take up new financial liabilities, the company will continue its ongoing review of options for a potential new financing in the debt markets, announced on 28 January 2019.

Nevertheless, it is important to note the possibility that another dispute with bondholders may emerge, as some consider the significant increase in stake owned by Thomas Olek as a result of last year’s share issue a breach of the covenant related to a change of control in the company.

Vacancy rates exhausting any downward potential

Corporate demand for office space in Germany remains solid in a still favourable macroeconomic environment despite signs of slowdown seen recently. Transaction volumes in the real estate market increased by 5.2% in 2018 to reach €61.1bn, 63% of which were generated in the big seven cities. However, Zentraler Immobilien Ausschuss (ZIA) expects this amount to fall slightly in 2019. The office segment still dominates the real estate investments spectrum with a share of 47.1% in 2018, ahead of the five-year average of 45.2%. Office investment volumes in Germany recorded an above average improvement of 18% y-o-y. Even though the office take-up decreased by 6.5% in Q418, it still remains at high levels and is fully attributable to the scarce supply of new office space. According to JLL, total office take-up, in the big seven cities only, fell just short of 4m sqm, which constitutes the second-best all-time result (behind 2017). Following a decrease by 1.1pp since end-2017, the vacancy rate in the big seven cities at end-2018 stood at 3.6%, including 2% in Berlin, 2.2% in Stuttgart and less than 3% in Munich.

Importantly, the robust office real estate market is not accompanied by a sufficient volume of newbuild space. Even though office completions in 2018 increased by almost 8% y-o-y to 927k sqm, this number is below the previous market forecasts due to significant delays, caused by limited capacity, and increase in development and construction costs. JLL expects that only 1.68m sqm of new office space will be completed in 2019, instead of the 1.8m sqm planned by developers. Similarly, in 2020 completions should reach 2.1m sqm instead of the previously projected 2.3m sqm. Consequently, the vacancy rate is expected to fall even further to reach 3.5% on aggregate in the big seven cities according to JLL forecasts.

As a result of the persistent imbalance between the demand and supply of space, all of the big seven cities recorded significant increases in rental prices, which reached 6.4% on aggregate in 2018. The highest rate was recorded in Berlin, where the y-o-y rent improvement stood at 13.3%. In six of the seven largest markets (except Cologne), the upward trend is expected to prevail but with the projected aggregate annual rate falling to 3.5% in 2019. Interestingly, it may result in Munich replacing Frankfurt as the most expensive office market in terms of rents, according to JLL.

Valuation: Trading close to peers

In our view, P/E and EV/EBITDA multiples are the most appropriate measures to value publity, as it is an asset manager rather than a property fund, so it focuses on generating earnings rather than NAV growth. The company’s shares are trading at a 16.4% premium changing to a c 1.4% discount to the peer group on 2019e and 2020e P/E consensus. Given that consensus estimates for publity’s EBITDA are no longer available, we have not included this ratio in our analysis. The company has also announced that it intends to pay a dividend for FY18 amounting to €1.5 per share, subject to approval at the Annual General Meeting (24 May 2019). Total disbursement should reach €14.8m, 49% of which would come from FY18 net income and the remainder being derived from the previous years’ results. This translates into a dividend yield of c 5.3%.

Exhibit 2: Peer group comparison

Market cap (€)

P/E (x)

Yield (%)

Company’s name

2019

2020

2019

Corestate Capital

836.0

6.0

5.6

6.4%

Patrizia Immobilien

1,729.6

18.2

16.8

1.4%

VIB Vermögen

700.1

11.3

10.8

2.6%

TLG Immobilien

2,736.1

11.8

13.4

4.9%

Peer group average

11.8

11.6

3.8%

Publity

276.6

13.8

11.5

5.3%

Premium/(discount) to peer group

16.4%

(1.4%)

150bp

Source: Refinitiv consensus as at 16 April 2019, company accounts, Edison Investment Research


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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been prepared and issued by Edison. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a) (11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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