Lloyd Fonds — Continued business repositioning

In H119, Lloyd Fonds reported a 22% y-o-y increase in revenue to more than €3.7m. This was primarily the result of higher transaction fees (details below), which stood at €1.2m compared to €0.2m in H118. Management fees remained broadly stable, amounting to €2.5m (vs €2.7m in the comparable period). The new funds set up under Strategy 2019+ were launched for seed investors in April 2019 and offered to the public from end May, and therefore made a limited contribution to H119 figures. However, improved sales did not translate into higher earnings, with an EBIT loss of €4.6m in H119 vs a loss of €0.8m in H118. We believe this reflects the early stage of LF’s strategic realignment, with the company already incurring associated costs, but a related improvement in revenues is yet to be recorded. Implementation of the new strategy resulted in an almost doubling in headcount, with 53 employees at 30 June 2019 vs 29 at 30 June 2018. Therefore, personnel costs increased to €3.5m in the reporting period vs €2.0m in H118. Similarly, in other operating expenses, expenditure related to accounting, legal and advisory services increased to €2.2m in H119 (vs €1.0m in H118) on the back of consultancy fees. The company also recorded higher IT-related costs (€0.9m vs €0.2m), driven by development and integration of the Digital Asset Platform 4.0, which is an essential part of the new business model.

In parallel with the implementation of new strategy, LF is still operating its legacy real assets business, with three significant disposals concluded in H119. Alongside the aforementioned transaction fees, LF benefited from profit sharing agreements related to the sold assets, recording financial income of €5.5m in H119 (vs €0.5m in H118). These profits fully offset additional expenditure and brought the company’s pre-tax profit to €0.7m compared to a €0.5m loss in H118. LF has also used tax loss carry-forwards, which put net profit for the period at €0.9m (€0.09 per share) vs a loss of €0.8m (€0.08 loss per share) in H118.

Management expects expenditure attributable to its strategic realignment to further shape its financial results in H219. As new funds are still in the early stages of development, targeted break-even in FY19 should be largely achieved through further use of tax loss carry-forwards.

LF’s new strategy is aimed at transforming itself into an investment and active asset manager outside the real assets space. Once implementation is completed, the company’s operations will be divided into three segments: 1) LF-Linie – active asset management of open-ended equity, fixed income, mixed and real estate funds; 2) LF-System – digital portfolio management using artificial intelligence; and 3) LF-Vermögen – direct wealth management.

LF has made the first strategic steps in developing LF-Linie by offering seed-class shares in four primary funds to investors in April and May 2019, before offering to the general public. These include Lloyd Fonds – European Hidden Champions (an equity fund), Lloyd Fonds – European Quality & Growth (an equity fund), Lloyd Fonds – Best of Two Worlds (a mixed fund) and Lloyd Fonds – Special Yield Opportunities (a corporate bond fund).

Each of these funds will have an actively managed, concentrated portfolio with just 40–50 positions. According to the last available data as at 12 September 2019, proceeds totalling more than €60m were collected for all four funds. To build a high-performance team of experienced fund managers, LF carried out two acquisitions in H119, which will also come with sizeable assets under management, as discussed below.

In December 2018, LF announced the acquisition of Lange Assets & Consulting (LA&C), which was approved by the regulator on 16 September. According to LF, the deal should be concluded in the coming weeks. LF will acquire a 90% stake in LA&C against newly issued LF shares and an additional cash component. The remaining 10% stake can be sold after a minimum of four years. The transaction adds a total of €350m to both LF-Vermögen’s and LF-Linie’s AUM through the money market-oriented ASSETS Defensive Opportunities UI fund and the bonds-oriented ASSETS Special Opportunities mixed fund. Additionally, Thomas Lange, managing partner of LA&C, will become a managing director of LF to help source new high net worth individuals and institutional clients.

On 25 April 2019, the acquisition of SPSW Capital was announced, which will contribute a further €650m AUM to LF’s portfolio with two mutual funds (SPSW – WHC Global Discovery A and SPSW – Global Multi Asset Selection A) and one special fund (SPSW – Active Value Selection). The German regulator approved the transaction on 2 October 2019. Following completion, Achim Plate, the managing director of SPSW, will serve as a LF’s CEO with a four-year tenure. This agreement is crucial from a short-term portfolio expansion perspective, as it helps meet management guidance for FY19 of more than €1bn AUM in LF-Linie and LF-System (the target for LF-Vermögen of more than €0.2bn has already been met with the LA&C transaction). In the medium term, LF targets total AUM of €7bn, with €5bn in the first two segments and €2bn in the latter by 2023.

The company’s realignment and expansion are accompanied with a number of financial events. On 20 May 2019, LF announced a convertible bonds issue without subscription rights to selected investors. Investors may convert bonds into shares on predefined dates after a one-year lock-up period. The aggregate principal amounts to €6.1m with an initial conversion price set at €6.1 (vs the current share price of €4.86) and a three-year term starting on 3 June 2019. The bonds bear a 3.75% coupon paid semi-annually in arrears. The issue was closed on 28 May, following subscription exclusively by investors from Germany and Luxemburg.

The aforementioned acquisitions will be concluded against issuance of own shares. Although the final purchase price for LA&C has not yet been announced, LF believes it will reach the upper single-digit million euros, whereas the preliminary conditions set a minimum consideration of €4.5m. Having said that, it has already been agreed that LF’s capital will increase by 193,608 new shares (a 1.9% dilution) with an implied value of c €1.0m. Acquisition of the 90% stake in SPSW capital is partially against contributions in kind and will result in issuing 1.5m new shares, with the subscription rights waived by shareholders (which is usual in such cases). To avoid dilution of the existing shareholders, a further 1.5m shares at €6 per share will be offered in Q419, thus providing an additional €9.0m to finance the strategical realignment. We estimate that LF’s outstanding number of shares at end 2019 will therefore be c 13.3m.

Although the company is in the process of implementing its new strategy, it still manages significant assets in closed-end investment funds, which may provide additional income from divestments and, as a result, support the reorientation.

In the real estate segment, LF manages five funds invested in properties in Germany and the Netherlands. The total rental area of 58k sqm includes offices (79%), hotels (20%) and retail (1%) and is leased to 33 tenants. This business area had the most significant impact on the company’s H119 results due to successful disposals of an office building in central Eindhoven (fully leased to a health insurance company) and two hotels in Hamburg and Sylt. Capital flowback before tax from the office building sale amounted to c 190% of initial investment and constituted a return of c 10% pa, while the disposal of hotels generated 227.4% and over 11%, respectively.

In the shipping segment, LF managed 19 vessels fully owned by its clients at 30 June 2019 (vs 20 at 31 December 2018), including 12 container ships (up to 8.5k TEU) and seven tankers (eight at end-December 2018). The company also manages three funds holding shares in second-hand ships, which currently include 42 container ships, 23 tankers and 1 bulker (down one tanker compared to 31 December 2018). Even though the shipping portfolio remained broadly stable in the analysed period, analysis of the y-o-y results reveals a 21.7% and 66.3% decline in segment revenue and net income due to fleet reduction in H218. At end June 2018, LF managed 24 vessels fully owned by its clients and held shares in a further 78 ships through secondary market funds.

At 30 June 2019, the other assets segment included four airplane funds with an AUM of €350m, seven British life insurance funds and a private equity fund. The aircraft fleet includes two long-distance and two medium-distance Airbuses, leased to Singapore Airlines, Virgin Atlantic and Germania Flug (with the latter taking over the leases following the insolvency of Germania Fluggesellschaft). Within the segment, LF is rapidly exiting the life insurance funds business as in the last 12 months the number of managed policies has been reduced by half from 1,100 at 30 June 2018 to 520 at 30 June 2019.

Although LF’s transformation to an investment and active asset manager is underway, it is at a relatively early stage and still operating within the real asset segment. Therefore, we believe that a relevant peer group for LF should still contain local asset managers active in the shipping and/or real estate domain, with Ernst Russ (no consensus estimates) and MPC Capital as its closest peers. We acknowledge that LF’s valuation may already capture its business repositioning to some extent, but we have not been able to identify any relevant local peers that represent a good reference point in this respect. The closest potential listed peer is PEH Wertpapier, but there are no consensus forecasts available for the company. Other comparable businesses, such as DJE Kapital, Flossbach or Scalable Capital are not listed.