Management change amid weak results

Heliad Equity Partners 25 April 2019 Update
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Heliad Equity Partners

Management change amid weak results

Investment companies

Scale research report - Update

25 April 2019

Price

€4.41

Market cap

€44m

Share price graph

Share details

Code

HPBK

Listing

Deutsche Börse Scale

Shares in issue

9.87m

NAV/share as at 31 December 2018

€6.20

Business description

Heliad Equity Partners is a Germany-based investment company focused on listed and unlisted smaller companies in German-speaking countries. Investments typically comprise growth and venture-stage technology companies operating disruptive business models or addressing structural issues.

Bull

The shares trade at a substantial discount to the value of assets and net liabilities.

Invests in markets likely to experience strong growth in major economies.

Recent managerial change may result in improved performance.

Bear

Portfolio concentration: the largest investment comprises more than half of the portfolio.

Early-stage investments are inherently higher-risk.

2.5% management fee paid to a company owned by the main shareholder.

Analyst

Milosz Papst

+44 (0) 20 3077 5700

Heliad has experienced a c 50% reduction in NAV per share in FY18 and reported a loss per share at €5.72. This was driven by the overall negative market sentiment, but also company-specific challenges, in particular at Sleepz. We understand that the recent changes in the company’s management (with two board members of its largest shareholder FinLab replacing the previous CEO) are a consequence of this poor performance. The company’s shares now trade at a c 29% discount to last reported NAV.

Results burdened by significant write-downs

Heliad booked an IFRS net loss of €56.6m in FY18 on the back of negative valuation effects related to both listed and non-listed holdings. Specifically, it has incurred an €8.1m write-down on Sleepz and recognized the share price decline of FinTech Group, MagForce, Max21 and Elumeo in its accounts. Moreover, the value of its non-listed holdings reduced by €11.6m (vs a decline of €7.7m in FY17). As a result, Heliad’s NAV per share went down to €6.20 at end-December 2018 (compared with €12.22 at end-2017).

Further restructuring measures introduced at Sleepz

Sleepz has recently entered the next stage of its restructuring, which involves the agreement to sell nearly all shares held by Heliad (which had a 23.77% stake in the company at end-2018), as well as other important shareholders, to a strategic investor (WAOW). This is despite several capital measures introduced last year, including a €5.0m funding agreement with Heliad and Apeiron Investment Group in October 2018. The agreement also involves the commitment by Sleepz’s debt holders (including Heliad) to waive their claims to repayment of loans and the convertible bond in full against granting a debtor warrant. It is worth noting that Sleepz acquired two of Heliad’s other portfolio companies last year (Cubitabo and Urbanara).

Valuation: Considerable discount to net asset value

Heliad currently trades at a c 29% discount to the last reported NAV as at end-December 2018. After the balance sheet date, the shares in its largest listed holding (FinTech Group) appreciated by c 23%, while some of the other holdings posted a share price decline. If we take these movements into account, Heliad is trading at a c 35% discount to NAV, according to our estimates.

Historical financials

Year
end

Net revenue
(€m)

PBT
(€m)

EPS
(€)

P/E
(x)

NAV/share
(x)

P/NAV
(x)

12/15

29.2

23.0

2.4

    1.8

10.9

0.4

12/16

(16.6)

(22.2)

(2.3)

N/A

8.4

0.5

12/17

43.1

39.6

4.0

1.1

12.2

0.4

12/18

(50.6)

(57.6)

(5.7)

N/A

6.2

0.7

Source: Heliad Equity Partners accounts. Note: P/NAV based on current share price.

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: Heavy write-downs reducing NAV by half

Heliad reported a net loss in FY18 of €56.6m (IFRS) compared with a net profit at €39.1m in FY17. This includes the recently announced €8.1m write-down on Sleepz, a German e-commerce group focused on sleep products. In the adverse equity market environment, the company recorded a minor net disposal loss of €111k in FY18, compared with a €4.8m net disposal gain in FY17. During the year, Heliad reduced its position in FinTech Group (in order to reduce reliance on this largest portfolio holding), DEAG Deutsche Entertainment and Cyan. On top of this, the company incurred a heavy net revaluation loss of €51.0m compared with a net gain of €37.8m in FY17. Apart from the write-down on Sleepz, we believe the major contributors in terms of listed holdings here were FinTech (share price down 45% in 2018), MagForce (-15%), Max21 (-45%) and Elumeo (-85%). However, the company has also recognized a net reduction in the fair value of non-listed holdings at €11.6m (FY17: €7.7m). Heliad’s costs of management and liability (including fees paid to Heliad Asset Management) increased to €4.4m from €2.4m in FY17. Consequently, the diluted loss per share amounted to €5.72 vs earnings per share of €4.02 in FY17.

Heliad’s NAV per share as at end-December 2018 stood at €6.20 (which already accounts for the Sleepz write-down), translating into a c 49% decline vs the €12.22 reported at end-2017. This is significantly below the revised management guidance of €10.00 published towards the end of November 2018.

Exhibit 1: Results highlights

€000s

FY18

FY17

change y-o-y

Income from the sale of financial assets

15,298

19,483

(21.5%)

Other operating income

47

91

(48.4%)

Gains from revaluation

1,260

47,057

(97.3%)

Retirement of financial assets

(15,409)

(14,724)

4.7%

Income from investments

-

51

N/M

Depreciation of financial assets

(52,218)

(9,266)

N/M

Financial revenue

457

481

(5.0%)

Financial expenses

(49)

(59)

(16.9%)

Other operating expenses

(6,953)

(3,516)

97.8%

Amortization of intangible assets

(4)

(4)

0.0%

EBT

(57,570)

39,594

N/M

Income taxes

961

(520)

N/M

Net result for the period

(56,609)

39,074

N/M

EPS (diluted, €)

(5.72)

4.02

N/M

Source: Heliad Equity Partners accounts

Recent portfolio developments

Given that the write-down of Heliad’s holding in Sleepz had a considerable impact on the FY18 results, we have decided to look into the background of this company in more detail. On 29 March, Heliad revealed that it would sell most of its shares in Sleepz together with other significant shareholders to WAOW Group. It is worth noting that Heliad and other creditors of Sleepz have decided to waive their claims for the repayment of loans and the convertible bond in full against granting a debtor warrant. WAOW Group will provide bridge financing to Sleepz and intends to restructure the company.

In the first nine months of FY18, Sleepz’s sales declined from €8.8m to €7.9m and net income stood at -€3.7m vs -€2.9m in the comparable period of FY17. According to the company, its business performance was adversely affected by strong competition on the mattress market, which led to a decline in margins. At that time, the company did not expect the price war to ease in the medium term, even though some of Sleepz’s competitors had exited the German market or become insolvent.

In the last few months, Sleepz has undertaken several capital measures to improve its balance sheet position. In October 2018, the company entered into a €5.0m funding agreement with Heliad and Apeiron Investment Group. This included a private placement of a €2.0m convertible bond and granting a €3.0m long-term loan. Sleepz has also issued 5.3m shares in exchange for contributions in kind for the acquisition of shares in Urbanara, an online shop for home accessories, based on a valuation of €1.20 per Sleepz share. Consequently, Sleepz’s capital increased from €12.4m to €17.8m. At the end of FY18, Sleepz further increased its capital to €18.7m in a private placement by issuing 892k shares at an issue price of €1 per share. However, it seems that the above measures proved insufficient to turn around the business. Interestingly, at the beginning of 2018, Sleepz acquired Cubitabo, another portfolio company of Heliad.

In terms of other portfolio developments, FinTech Group (also covered by Edison Investment Research – see our last report) announced in November that it had abandoned the planned banking joint venture with Austrian Post. This is because the respective regulatory authorities highlighted that approving a new banking licence could take 1.5–2.0 years. FinTech Group’s decision supports the company’s near-term earnings and leaves the business focused on its online brokerage activities. In recent months, MagForce completed a capital increase to fund its pivotal US prostate cancer trial to completion and also started its expansion outside Germany. However, the company’s remunerated glioblastoma treatments declined as a consequence of both a change in revenue recognition and a lower number of patients treated in Germany, stemming from a transition away from foreign, private to reimbursed treatments and expansion in Europe progressing slower than anticipated. This seems to have negatively affected the company’s market valuation. In contrast, Cyan’s long-term contract with Orange announced in December 2018, which the company expects to significantly improve its profit starting from 2020, proved to be a positive stock catalyst. The decline in Max21’s share price might be associated with the recent personnel changes, including the resignation of the company’s CEO (Nils Manegold) and the departure of the CEO of KeyIdentity, one of Max21’s two major subsidiaries. Subsequently, the company communicated the intention to divest KeyIdentity. Elumeo continues its restructuring process, while posting a year-on-year decline in revenues and margins in the first nine months of 2018. It is worth noting that Heliad sold all its shares in DEAG in January 2019, following the company’s positive business performance in the first nine months of FY18 and raised FY18 guidance in November. However, since end-January 2019, DEAG’s share price has increased by c 30%.

Valuation

Heliad assesses its own NAV per share on the basis of the valuation of listed and unlisted holdings. The company is currently trading at a 29% discount to the last published NAV of €6.20. Movements in the discount between publication of the quarterly NAV tend to reflect the valuation of listed holdings, which made up c 77% of NAV (c 56% for FinTech Group alone) at end-December 2018. We estimate that FinTech’s c 23% share price increase between end-December 2018 and 24 April 2019 translates into an incremental NAV per share improvement of c 12% (or c €0.75 per Heliad share). On the other hand, the negative impact of a share price change in Heliad’s remaining listed holdings over the same period might have resulted in NAV deterioration of c €0.19 per Heliad share, according to our estimates. Adding the net figure (c €0.56) to Heliad’s last reported NAV per share suggests the underlying discount may be now closer to 35%. This means that the market is currently valuing Heliad’s shares predominantly based on the value of listed holdings, attaching no value to the non-listed companies. However, we understand that at least part of the discount is associated with the recent poor performance of Heliad’s portfolio.

Exhibit 2: Heliad’s NAV and share price performance

Exhibit 3: Heliad’s discount to NAV

Source: Heliad Equity Partners corporate website

Source: Heliad Equity Partners corporate website, Edison Investment Research

Exhibit 2: Heliad’s NAV and share price performance

Source: Heliad Equity Partners corporate website

Exhibit 3: Heliad’s discount to NAV

Source: Heliad Equity Partners corporate website, 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

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1,185 Avenue of the Americas

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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.

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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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