publity |
Lower transaction activity in FY20
Real estate |
Scale research report - Update
2 July 2021 |
Share price graph Share details
Business description
Bull
Bear
Analysts
|
While publity continues to pursue its two-pillar strategy based on real estate asset management and own investments, it is in discussions with a large Asian conglomerate to sell a majority stake in PREOS, which (through publity Investor and GORE German Office Real Estate) holds the group’s investment properties. The parties are also negotiating the provision of an additional three-digit million euro in funding to PREOS (on the successful closure of the deal) to fuel its international portfolio expansion. Meanwhile, the FY20 results of the asset management business were below FY19 due to the impact of the pandemic on property transaction volumes.
Asset management fees affected by deal volume
Starting from FY20, publity presents only standalone accounts in line with German accounting standards (HGB), which mainly reflect its asset management business (and some minor property management and rental operations). The reduced property transaction activity in FY20 translated into a c 53% y-o-y decline in publity’s revenues to €16.0m in FY20. It booked a €15.2m net gain on disposals of financial assets, while FY19 results included a €304.5m gain from the business combination between publity Investor and PREOS (see our previous note for details). With a net financial result of €6.2m (vs €5.2m in FY19), driven mainly by interest income from PREOS convertible bonds, publity’s FY20 net profit was €12.1m versus €5.0m in FY19 (adjusted for the publity Investor-PREOS deal).
Office space demand dependent on WFH expansion
The revival in the German office market brought the Q121 take-up in the Big 7 cities almost back to pre-pandemic levels. However, the average vacancy rate increased slightly to 3.9% and could reach 4.5% in 2021, according to JLL. The potential adoption of a hybrid workplace set-up, including working from home (WFH), in a number of industries could dampen the demand for office space going forward, with existing properties that are not up to modern requirements most at risk.
Valuation: Over 40% share price decline in 2021 ytd
publity’s share price has declined ytd from €33.40 to €18.60 and it trades at a slight discount to peers based on the FY20 P/E multiple. publity’s 2020 AGM decided not to pay dividends based on FY19 earnings and management has not proposed any distribution from FY20 profit. We note that BaFin has recently launched an investigation into potential market manipulation in publity and PREOS shares.
Historical financials
Source: publity accounts. Note: standalone figures in accordance with HGB. |
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: Muted asset management performance
With the publication of the FY20 annual report, publity opted to give up IFRS reporting (which it previously provided voluntarily) and publish its financial statements using HGB only. According to management this still provides all the necessary data to the market, while enabling some cost savings. Having said that, we note that the published statement presents only the standalone results of the parent company, with the contribution of subsidiaries presented in the financial result.
Exhibit 1: Financial highlights
(€000s) |
2020 |
2019 |
y-o-y |
Revenue |
16,009 |
34,077 |
-53.0% |
Other operating income |
34,428 |
304,777 |
-88.7% |
Cost of materials |
(3,057) |
(3,069) |
-0.4% |
Gross profit |
47,380 |
335,786 |
-85.9% |
Personnel expenses |
(1,896) |
(1,467) |
29.2% |
D&A |
(145) |
(87) |
65.6% |
Other operating expenses |
(39,466) |
(27,444) |
43.8% |
EBIT |
5,874 |
306,786 |
-98.1% |
Income from a profit and loss transfer agreement |
682 |
1,063 |
-35.8% |
Income from other securities and from loans held as financial assets |
8,928 |
732 |
1119.5% |
Other interest and similar income |
684 |
6,015 |
-88.6% |
Interest and similar expenses |
(4,123) |
(2,588) |
59.3% |
Financial result |
6,171 |
5,222 |
18.2% |
Earnings before tax |
12,045 |
312,008 |
-96.1% |
Income tax and other taxes |
30 |
(7,518) |
NM |
Net income |
12,075 |
304,490 |
-96.0% |
Source: publity accounts
In FY20, publity reported revenue of €16.0m compared to €34.1m in FY19. The 53% y-o-y decline was mainly attributable to the asset management operations, as income within the segment fell from €33.2m to just €14.8m. As an asset manager, publity earns commission based on the value of assets under management, as well as transaction fees on property acquisitions and disposals, with the latter affected by lower property transaction volumes due to COVID-19. Meanwhile, the company reported a slight improvement in income from property management (€509k in FY20 vs €493k in FY19) and an increase in rental income (€646k vs €176k a year earlier).
The company also recognised €34.4m in other operating income in FY20, mainly due to the disposal of financial assets (€33.5m). In FY19, the corresponding figures were €304.8m and €304.5m respectively and were related to the combination of publity Investor (the real estate property investing subsidiary) with PREOS. publity also reported c 43.8% increase in other operating expenses to €39.5m, with €18.3m related to the aforementioned disposal of financial assets. Other operating expenses in FY20 included losses from the disposal of fixed assets (€6.0m), the cost of the bond issue and the tokenisation (the issue of digital blockchain-based tokens representing equity shares) of PREOS shares (€5.7m), as well as bad debt expenses and write-downs on receivables (€2.6m). This brough FY20 EBIT (per our calculations) to €5.9m.
The financial result line increased slightly y-o-y from €5.2m in FY19 to €6.2m on the back of improved interest income from subsidiaries (€9.0m in FY20 vs €6.7m), mainly from the 7.5% 2019/2024 convertible bond of publity’s listed subsidiary, PREOS (publity’s holding was valued based on the bond’s market price of €101m at end-2020 following the subscription to an additional €40m in October 2020). FY20 net income reached €12.1m compared with FY19 net income (adjusted for the publity Investor-PREOS combination) of c €5.0m, according to management. The company did not pay a dividend from FY19 earnings and it has not announced any distribution from the FY20 result. publity’s equity ratio sits at 88.2% at end-2020, compared to 90.6% 12 months earlier. We note however, that all the leveraged, asset-heavy business operations were already transferred to PREOS and are thus not reflected in publity’s standalone ratio.
PREOS will retain IFRS reporting to better reflect its business developments. Its FY20 figures are due to be released in July 2021, according to the company’s financial calendar. In H120 alone, PREOS reported a robust improvement in earnings, highlighted by a c 179% y-o-y increase in EBIT to c €70m (including €68.3m in revaluation gains) and net income including minorities for the period amounting to €30.9m, compared to €21.8m in H119 (€26.8m and €21.3m excluding minorities, respectively). The company targeted a property portfolio value of €2bn at end-2020 and €8bn by the end of 2024 (vs €1.5bn at end-June 2020). On 7 August 2020, PREOS approved a long-term dividend policy (effective from the FY20 results) with a targeted dividend yield of 5%. However, in December 2020 PREOS announced that it will postpone its cash dividend payments plans for at least one more year, opting instead for a bonus share issue.
As transaction activity in the office real estate market in Germany picked up in 2021 ytd, publity has already announced property disposals on behalf of its clients and subsidiaries, as well as several minor new lettings and prolonged lease agreements in H121. The management expects FY21 sales to be slightly below FY20 level and a net income for the year ranging from €9m to €12m.
German office market robust, though WFH a risk factor
The office market in the German Big 7 cities saw a robust take-up in Q121 at 715k sqm (close to the Q120 level) and JLL expects the take-up to increase by 10% y-o-y in 2021. While the average vacancy rate has increased recently it was still a moderate 3.9% in Q121, with JLL forecasting some further growth to an average 4.5% in 2021. However, it considers the vacancy risk to be significantly lower for new, flexible and well-appointed spaces. At the same time, JLL expects new office completions in the Big 7 German cities should stand at almost 1.9m sqm, which is 300k sqm below the expectations at end-2020, suggesting that development projects continue to be postponed. Overall, 4.2m sqm of new office space is under construction (of which around 50% has already been pre-let), representing a relatively moderate 4.4% of total stock.
However, we note that the COVID-19 lockdowns validated the ‘work from home’ set-up in a number of industries and we believe that a significant portion of employees will prefer to work at least in a hybrid set-up (eg three days in the office, two days working at home) even after the pandemic. This may encourage companies to reduce their leased office space, which could dampen office demand going forward. A good example is DWS which recently reached an agreement with the works council that allows it to reduce office space per employee by 30%. The impact could be exacerbated by a potential economic downturn once government support is phased out. We also note that employee expectations towards office design may change (eg in favour of a blend of private offices and open space). This may reduce the demand for existing office space that does not meet these requirements and may force owners to incur additional refurbishment expenses.
Valuation
Given that publity now only reports standalone figures, which only partially capture the earnings of subsidiaries (through dividends and profit-sharing agreements), we have decided to retain the peer group including real estate investors while also reinstating the previous peer group of asset managers. Given the lack of Refinitiv consensus estimates, we compare publity to peers based on FY20 reported figures. Its share price fell in early April 2021 from over €30 per share to less than €20, and it now trades at a slight discount to peers based on the FY20 P/E ratio. On an EV/EBITDA ratio, the company trades at significant premium, but we note that it does not capture income from PREOS which makes it less meaningful. We also note that recently BaFin launched an investigation regarding potential market manipulation in publity and PREOS shares.
Exhibit 2: Peer group comparison
|
Market cap |
EV/EBITDA (x) |
P/E (x) |
||||
(€m) |
2020 |
2021e |
2022e |
2020 |
2021e |
2022e |
|
Corestate Capital |
387 |
45.6 |
7.9 |
6.0 |
0.0 |
6.3 |
3.9 |
Patrizia |
2,033 |
16.5 |
13.6 |
12.4 |
52.4 |
25.8 |
23.3 |
VIB Vermogen |
999 |
18.1 |
19.4 |
18.7 |
15.1 |
14.9 |
14.1 |
TLG Immobilien |
3,179 |
5.0 |
20.3 |
22.0 |
6.1 |
15.2 |
14.3 |
Asset managers average: |
|
21.3 |
15.3 |
14.8 |
24.6 |
15.6 |
13.9 |
CA Immobilien Anlagen |
3,743 |
28.7 |
28.5 |
27.4 |
15.0 |
14.2 |
14.4 |
IMMOFINANZ |
2,411 |
N/A |
26.5 |
24.4 |
N/A |
15.7 |
17.8 |
DIC Asset |
1,209 |
15.2 |
16.4 |
15.6 |
16.8 |
15.3 |
15.0 |
Demire |
469 |
N/A |
19.7 |
17.5 |
54.4 |
13.2 |
10.7 |
Real estate investors average: |
21.9 |
22.8 |
21.2 |
28.7 |
14.6 |
14.5 |
|
publity |
277 |
54.1 |
|
|
23.0 |
|
|
Source: publity and peer accounts, Refinitiv consensus as at 2 July 2021
|
|||||||||||