Deutsche Beteiligungs |
Market decline weighs on H118 performance |
Investment companies |
25 May 2018 |
Share price/premium performance Three-year performance vs index
Gearing
Analysts
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Deutsche Beteiligungs (DBAG) reported €19.3m net income for the first half of FY18, with a 4.5% dividend-adjusted NAV return. NAV per share declined slightly to €29.43 at end-March 2018, after payment of the €1.40 FY17 dividend. Management has lowered earnings guidance for FY18 due to a decline in market valuation multiples that also weighed on returns in the first half, while the underlying progress of portfolio companies remains broadly on track. The recent sharp decline in the share price premium to NAV to 19.6% suggests the market may now be applying an underlying discount to the NAV of the private equity investment portfolio.
12 months ending |
Share price |
NAV |
LPX Europe (%) |
LPX Europe NAV (%) |
SDAX (%) |
FTSE All-Share (%) |
30/04/14 |
11.8 |
10.0 |
18.8 |
9.9 |
22.7 |
14.0 |
30/04/15 |
60.8 |
16.4 |
24.6 |
15.3 |
17.7 |
21.0 |
31/03/16* |
(7.0) |
12.6 |
(1.3) |
1.4 |
4.6 |
(14.2) |
31/03/17 |
24.0 |
16.8 |
20.0 |
16.0 |
14.6 |
13.0 |
31/03/18 |
26.8 |
17.4 |
13.0 |
7.0 |
18.2 |
(1.2) |
Source: Thomson Datastream, Bloomberg. Note: *11-month period due to change in financial year end. Discrete total return performance in euros.
Steady underlying progress in H118
DBAG reported a €20.3m overall net investment gain for H118, with valuation gains for the majority of its investments over the period. Higher expected earnings for portfolio companies in 2018 versus 2017 made the largest contribution to valuation gains, but this effect was offset to a large extent by a decline in market valuation multiples. Both DBAG’s private equity investments and fund investment services businesses reported positive earnings. New MBO investments were completed in Sjølund and netzkontor nord alongside the DBAG ECF fund, but the half year was characterised by a high level of transaction activity at the portfolio company level.
Outlook: Reduced earnings guidance for FY18
The market decline in the first quarter of 2018 led to lower market earnings multiples being used to value DBAG’s portfolio companies at end-March 2018. As a result, DBAG’s management has lowered its guidance for FY18 and now expects net income to be 10% to 20% lower than the €43.0m average of the last five financial years. This compares to previous guidance for a more than 20% increase in net income versus the reference level. This revision does not reflect any significant change in the underlying outlook for portfolio companies. We note that the guidance assumes constant market earnings multiples and so is subject to upward or downward revisions following significant market moves.
Valuation: Premium to NAV has sharply narrowed
DBAG’s share price premium to NAV has sharply narrowed from 72.1% in mid-January 2018 to 19.6% currently. With no factors to suggest any change in the outlook for the fund services business, it appears the market may be applying a c 16% underlying discount to the NAV of the private equity investment portfolio, compared to a c 37% premium previously (see page 4).
Exhibit 1: Company at a glance
Investment objective and fund background |
Recent developments |
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DBAG is a Germany-based and listed private equity investment and fund management company that invests in mid-sized companies in Germany and neighbouring German-speaking countries via MBO transactions and growth capital financings. There is a focus on growth-driven profitable businesses valued between €50m and €250m. DBAG’s core objective is to sustainably increase net asset value. |
■ 8 May 2018: Q218 results – NAV TR +1.6% vs LPX Europe NAV TR -1.6%. ■ 16 April 2018: FY18 earnings guidance reduced, primarily due to the effect of lower market valuation multiples at end-March 2018. ■ 5 April 2018: DBAG invests up to €11m in portfolio company duagon as part of capital increase to finance merger with MEN Mikro Electronik. ■ 8 February 2018: Q118 results – NAV TR +2.6% vs LPX Europe NAV TR +5.3%. ■ 15 January 2018: Announcement of MBO investment in netzkontor nord, a fibre optic network construction and network management services provider. |
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Forthcoming |
Capital structure |
Fund details |
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AGM |
February 2019 |
FY17 net expense ratio* |
0.4% (0.8% unadjusted) |
Group |
Deutsche Beteiligungs |
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Quarterly results |
7 August 2018 |
Net cash |
30.6%** |
Manager |
Team managed |
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Year end |
30 September |
Annual mgmt fee |
N/A (self-managed) |
Address |
Boersenstrasse 1 60313 Frankfurt am Main, Germany |
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Dividend paid |
February 2019 |
Performance fee |
N/A (self-managed) |
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Launch date |
December 1985 |
Company life |
Unlimited |
Phone |
+49 69 95787-01 |
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Continuation vote |
N/A |
Loan facilities |
€50m |
Website |
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Dividend policy and history (financial years) |
Share buyback policy and history (financial years) |
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DBAG’s policy is to pay a stable or rising annual dividend. Prior to FY16, a base dividend was paid, supplemented by a surplus dividend based on realised gains. |
Share buybacks and capital increases are used to manage longer-term capital requirements. In FY16, €38.6m was raised through a 10% capital increase. |
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Concentration of portfolio value by size (as at 31 March 2018)*** |
Portfolio exposure by sector (as at 31 March 2018)*** |
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Shareholder base (as at 24 May 2018) |
Portfolio companies’ revenues by region (latest available data)*** |
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Source: DBAG, Edison Investment Research, Bloomberg, Thomson Reuters. Note: *Based on expenses net of fee income; adjusted for non-recurring items. **Including €73.8m of securities classified as long-term assets. ***Does not include co-investment funds.
Highlights of the first half of FY18
DBAG reported €19.3m net income for the first half of FY18, with a 4.5% dividend-adjusted NAV return. Higher expected portfolio company earnings in 2018 versus 2017 made the greatest contribution to valuation gains, but this was largely offset by a decline in the market earnings multiples used to value portfolio companies. In the first quarter of FY18, there was an expected reduction due to moving from 2017 to 2018 EV/EBITDA market multiples, and this effect was compounded by a broad market decline in the second quarter of the financial year. Pre-tax earnings were positive for both business lines for the half year, with private equity investments generating €16.5m and fund investment services contributing €2.9m. NAV per share declined slightly from €29.57 at end-September 2017 to €29.43 at end-March 2018, after payment of the €1.40 per share FY17 dividend, as illustrated in Exhibit 2.
Exhibit 2: DBAG’s NAV per share progression in H118 |
Source: DBAG, Edison Investment Research |
Although lower market earnings multiples had a substantial negative effect on valuations across the portfolio at end-March 2018, there were positive valuation changes for most investments over the half year. There were valuation gains for 11 portfolio companies and the two international buyout funds, with the investments in four portfolio companies included at fair value for the first time (having been held at cost for the first year following acquisition). Valuations were reduced for nine portfolio companies, and four investments held for less than one year were still valued at their acquisition cost at end-March 2018.
Although DBAG completed two new investments (Sjølund and netzkontor nord) alongside DBAG ECF during the first half of FY18, the period was characterised by a high level of transaction activity involving DBAG’s existing portfolio companies. During the first quarter, Cleanpart sold its healthcare business line; Silbitz was partially disposed to strategic investor JFSC Sistema, which had already taken a minority stake in Gienanth; Pfaudler agreed two strategic acquisitions; vitronet agreed three strategic acquisitions; and Polytech agreed a merger with Israeli company G&G Biotechnology, accompanied by a capital increase. During the second quarter, the merger of duagon with MEN Mikro Elektronik was agreed, with DBAG investing up to €11m alongside DBAG Fund VII to finance the transaction as part of a capital increase. In the same quarter, DBAG increased its stake in Unser Heimatbäcker alongside DBAG Fund VI, and international buyout fund DBG Eastern Europe sold one of its two remaining investments.
Commitments and financial resources
At 31 March 2018, DBAG had €226.8m in undrawn capital commitments to the DBAG ECF and DBAG Fund VII funds. Based on these two funds’ expected investment programmes, DBAG’s management anticipates an average annual investment run rate of c €70m.
During the first half of FY18, DBAG’s financial resources (including fixed-income funds and fixed-rate securities, acquired as cash investments but classified as long-term assets) declined from €161.6m to €135.5m. Cash outflows to meet capital calls for new and follow-on investments totalled €42.5m, largely covered by €35.6m of cash inflows relating to disposals and refinancing of investments, and the €21.1m FY17 dividend was paid to shareholders in the period. Although DBAG’s outstanding commitments exceed its current financial resources, DBAG has sufficient funds to meet its expected financial commitments over at least the next 12 months. In addition to its current funds, portfolio realisations would add to financial resources and DBAG can also draw on its €50m credit facility to manage short-term cash-flow timing differences.
Lowered FY18 earnings guidance
In April 2018, DBAG announced that it expects to report net income for the year to 30 September 2018 that is moderately (10% to 20%) lower than the €43.0m average of the last five financial years (the reference level previously used for management’s earnings guidance). Previous guidance, first given at the time of the FY17 results and confirmed with Q118 results, was for a significant (more than 20%) increase in net income. Management’s new guidance for €34m to €39m net income in FY18 is materially lower than the previous guidance, which implied net income of more than €51m.
The revision to the forecast is largely due to lower market earnings multiples being applied in the valuation of portfolio companies at 31 March 2018, which is primarily a consequence of the market decline in the first quarter of 2018. There is also a smaller negative effect from individual portfolio companies not yet achieving the planned strategic and operational improvements in the current financial year. However, management notes that the development of portfolio companies rarely follows a linear progression individually or in aggregate, particularly over shorter time periods, and is not overly concerned by any of the deviations from plan that occurred in the half year. The guidance assumes constant market earnings multiples and so is subject to upward or downward revisions following significant market moves.
Peer group comparison
Exhibit 4 shows a comparison of DBAG with a group of listed private equity investment companies that are primarily focused on Europe, although DBAG is the only company in the peer group that specialises in mid-sized companies in German-speaking countries. DBAG also manages third-party funds, which further differentiates it from most listed private equity peers, other than 3i in the UK. As noted above, we view this as the primary reason for DBAG’s shares trading at a significant premium to its reported NAV, in contrast with the majority of the peers that do not manage third-party funds, some of which are trading at a significant discount to NAV. DBAG’s 4.0% yield is the second highest in the peer group, and is appreciably higher than the peer group average.
DBAG’s NAV total return in sterling terms to 31 March 2018 is ahead of the peer group average over one, three, five and 10 years, ranking second or third out of eight over each period. DBAG’s share price total return has outperformed its NAV total return over most periods to end-March 2018, reflecting the shares moving from a discount to a premium to NAV over five and 10 years, while the premium has seen significant expansions and contractions since the end of 2014, contributing to the share price total return being lower than the NAV total return over three years.
Exhibit 4: Listed private equity investment companies peer group as at 24 May 2018*
Group/Investment |
Region |
Market cap £m |
NAV TR 1 year |
NAV TR 3 years |
NAV TR 5 years |
NAV TR 10 years |
Price TR 1 year |
Price TR 3 years |
Price TR 5 years |
Price TR 10 years |
Premium/(discount) |
Dividend yield (%) |
Deutsche Beteiligungs |
Europe |
460.9 |
20.3 |
91.9 |
113.4 |
168.2 |
29.9 |
73.4 |
166.6 |
331.4 |
19.6 |
4.0 |
3i |
Global |
9,586.9 |
25.2 |
112.3 |
191.5 |
25.4 |
18.1 |
99.0 |
229.5 |
73.8 |
38.8 |
3.0 |
Electra Private Equity |
UK |
348.4 |
0.6 |
67.3 |
121.2 |
210.9 |
2.6 |
72.4 |
130.3 |
243.4 |
(18.3) |
0.0 |
HgCapital Trust |
UK |
705.4 |
18.7 |
68.3 |
81.0 |
151.2 |
19.1 |
76.4 |
80.3 |
184.2 |
(0.0) |
2.4 |
ICG Enterprise Trust |
UK |
587.3 |
13.6 |
51.3 |
69.2 |
111.5 |
19.9 |
47.4 |
78.6 |
115.9 |
(11.8) |
2.5 |
Oakley Capital Investments |
Europe |
373.8 |
7.4 |
26.0 |
39.9 |
155.9 |
14.4 |
5.7 |
13.6 |
77.2 |
(25.7) |
2.5 |
Princess Private Equity |
Global |
612.3 |
9.6 |
71.5 |
78.1 |
98.2 |
14.1 |
89.3 |
109.0 |
161.6 |
(9.2) |
5.4 |
Standard Life Private Equity |
Europe |
508.9 |
10.5 |
56.8 |
81.6 |
70.6 |
10.8 |
60.3 |
101.4 |
76.4 |
(14.7) |
3.8 |
Average |
1,648.0 |
13.2 |
68.2 |
97.0 |
124.0 |
16.1 |
65.5 |
113.7 |
158.0 |
(2.7) |
2.9 |
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Rank in peer group |
6 |
2 |
2 |
3 |
2 |
1 |
4 |
2 |
1 |
2 |
2 |
Source: Morningstar, Edison Investment Research. Note: *Performance data to end-March 2018. TR = total return. All returns expressed in sterling terms.
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