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Building strongly

RCM Beteiligungs 14 August 2019 Update
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RCM Beteiligungs

Building strongly

Real estate

Scale research report - Update

14 August 2019

Price

€2.12

Market cap

€30m

Share price graph

Share details

Code

RCMN

Listing

Deutsche Börse Scale

Shares in issue

14.0m

Net bank debt at December 2018

€24.2m

Business description

RCM Beteiligungs is a property developer, acquiring rental income-producing assets in and around Dresden and investing in refurbishment with the aim of improving the tenant mix to enhance value. RCM also invests in financial assets. It is a large shareholder in KST Beteiligungs, a financial investor.

Bull

Low unemployment levels in Dresden.

Focus on a defined region leads to greater understanding of opportunities.

Established business concept and strong partner network in the region.

Bear

Small company, largely dependent on the development of the Dresden region.

Low interest rate environment may end.

Dependence on positive macro environment in the region and attractive sourcing potential.

Analyst

Richard Finch

+44 (0)20 3077 5700

RCM Beteiligungs continues to please with H119 PBT of €4.1m comfortably exceeding management’s guidance of an improvement in full-year PBT (€2.9m+). Although the driver may have been a bumper c €10m disposal in Q1, the second quarter also saw a y-o-y step-change in PBT, boosted by markedly lower finance costs thanks to interim reinvestment of asset sale proceeds. Even if 2019 guidance has not been updated, favourable macro factors and scope for efficiencies and asset development support RCM’s positive outlook, as does its commitment to re-build its portfolio (both commercial and residential), as confirmed by two recent deals of size.

H119: Another a tale of two quarters

The half to June followed the pattern of its y-o-y comparative with a flying start reflecting an unusually large disposal (a well-invested 8,900 sqm development for c €10m), which was reported late last year but recognised in Q1. The transaction was also particularly profitable (would increase 2018 asset sale margin from 33% to 49%). Q2 was predictably quieter than Q1 but again driven by property disposals, so revenue and PBT were well ahead of Q218. Significantly, a halving of rental income owing to rationalisation was made good by lower finance costs (c €0.5m gain in H1) as sale proceeds (properties cut from 47 to 19 in 2017 and 2018) were reinvested, notably in high-yielding bonds. The impact was further curbed by efficiencies (rental admin costs down by a third) and enhanced unit returns.

Set fair

Even without elaboration of March guidance H119 looks to have assured a 2019 profit ‘beat’ by clearly exceeding management’s full-year target (PBT €4.1m vs €2.9m+). Moreover, the company is confident about the rest of the year, given market conditions and increasing benefits from restructuring its portfolio, eg fewer locations, a focus on its Dresden core and higher average unit size. Longer-term growth is being secured by active portfolio expansion, eg in Q2 two properties amounting to c 6,500 sqm, which increases the estate by over a third.

Valuation: Long-term appeal

2018 P/E of under 12x is undemanding and likely to reduce visibly in FY19 given a strong H1 performance, positive guidance and continued share buybacks. A 1.3x 2018 P/BV ratio is also unchallenging as it compares with the book value, which does not take into account hidden reserves (RCM reports under HGB standards).

Historical financials

Year
end

Revenue
(€m)

PBT

(€m)

EPS

(€)

DPS
(€)

P/E

(x)

Yield
(%)

12/15

14.7

1.3

0.08

0.04

26.5

1.9

12/16

11.4

1.8

0.11

0.04

19.3

1.9

12/17

19.4

2.1

0.11

0.06

19.3

2.8

12/18

17.6

2.9

0.18*

0.06

11.8

2.8

Source: RCM Beteiligungs. Note: *Based on 14.0m shares (14.7m shares in 2015–17).

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.

Review of H119 results

Exhibit 1: Analysis of quarterly revenue and profit

Year end December (€m)

Q118

Q218

H118

Q119

Q219

H119

Asset sales

11.30*

12.09**

Rental income

0.64

0.57

1.21

0.50

0.29

0.79

Change (%)

-14%

-22%

-18%

-30%

-49%

-35%

Revenues

12.13

1.75

13.88

12.80

6.36

19.16

Pre-tax profit

2.33

0.07

2.40

3.45

0.65

4.10

Margin (%)

19%

4%

17%

27%

10%

21%

Source: RCM Beteiligungs. Notes: *Including c €11m disposal. **Including €9.8m transaction.

As evident in Exhibit 1, the half to June 2019 continued to be marked by opposing trends of an upward step-change in asset sales and a reduction in rental income as a function of higher transaction business (the portfolio was c 14,800 sqm at end 2018 against c 38,000 sqm a year earlier). Although the breakdown of revenues is not disclosed other than with regard to rental income, Q1 was notable for the substantial recognition of a c €10m sale of a residential and commercial complex, originally reported in Q418 and broadly matching another bumper deal in the y-o-y comparative. Further significant asset sales followed in Q2. Rental income (down by 35% in the half) was a casualty of such disposals but the company remains committed to building the share of recurrent income as a key component of its business model.

In keeping with this financial discipline, RCM managed to limit the top-line rental impact with significantly lower admin costs (€0.09m against €0.17m y-o-y or 11% of rental income compared with 14% in H118 and 23% in 2014). Such operating efficiency is attributed to streamlining activities after the sale of residual assets away from the company’s core Dresden area. 2018 saw further active implementation of strategic focus with a virtual elimination in the number of properties outside Dresden (from nine to two) and in the number of investment locations (just two against seven at the end of 2017). This process continued in H119.

In the absence of a balance sheet at June 2019, we highlight a reported c €0.5m interest benefit in H1 from reinvestment of asset sale proceeds, notably in high-yielding bonds. This may be a temporary factor as portfolio expansion is newly reiterated to be a business priority.

Continued optimism

The lack of elaboration on guidance for 2019, introduced in March, is arguably disappointing, given the apparent profit excess in H1. However, the relative vagueness of the PBT forecast (to exceed €2.9m) leaves scope for positive surprise.

Management remains positive about the real estate market, thanks to persistently low interest rates and the growing appeal of second-tier locations such as Dresden, which still offer attractive rental yield despite rising prices. It has broadened its business policy to embrace commercial properties.

Strong finances allow a resumption in expansion after a pause in 2017 and 2018, notwithstanding a continued commitment to investment in existing holdings to enhance value (c €2.5m spend last year).

Valuation

RCM’s business model sits between that of an asset holder and a developer, making direct comparisons to listed companies somewhat difficult. Its FY18 P/E ratio is at a premium to Noratis, which has a similar model (trailing 8.1x). However, its P/BV (2018) ratio is markedly lower at 1.3x, vs 3.0x for Noratis.

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Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

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.

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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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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

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United States of America

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