RCM Beteiligungs — Muted transaction activity in H121

RCM Beteiligungs (DB: RCM)

Last close As at 18/03/2024

2.10

0.00 (0.00%)

Market capitalisation

28m

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Research: Financials

RCM Beteiligungs — Muted transaction activity in H121

RCM Beteiligungs (RCM) recorded group revenues of €1.6m in H121 (versus €10.2m in H120), as the group has not sold any property in the period. In H120 disposals contributed €8.4m to revenue and translated into €3.5m disposal gains. RCM reported rental income of €0.7m in H121 derived from its residential and commercial property portfolio valued at c €18.5m (based on company data as at August 2021). According to management the H221 results will be assisted by €1.9m in revaluation gains on its equity holdings.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Financials

RCM Beteiligungs

Muted transaction activity in H121

Real estate

Scale research report - Update

20 October 2021

Price

€2.20

Market cap

€29m

Share price graph

Share details

Code

RCMN

Listing

Deutsche Börse Scale

Shares in issue

13.1m

Last reported net debt at 30 June 2021*

€7.5m

*Calculated on a standalone basis

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 with a more than 10% stake in KST Beteiligungs, a financial investor, held by its subsidiary, SM Wirtschaftsberatungs.

Bull

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

Established business concept and strong partner network in the region.

Healthy level of liquid resources available for portfolio expansion during market revival.

Bear

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

Low interest rate environment may end.

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

Analysts

Milosz Papst

+44 (0) 20 3681 2519

Michal Mierzwiak

+44 (0) 20 3077 5700

RCM Beteiligungs (RCM) recorded group revenues of €1.6m in H121 (versus €10.2m in H120), as the group has not sold any property in the period. In H120 disposals contributed €8.4m to revenue and translated into €3.5m disposal gains. RCM reported rental income of €0.7m in H121 derived from its residential and commercial property portfolio valued at c €18.5m (based on company data as at August 2021). According to management the H221 results will be assisted by €1.9m in revaluation gains on its equity holdings.

Net profit driven by investments in securities

In H121, RCM reported €0.5m in pre-tax profit versus €2.1m in H120. The standalone earnings before tax and net profit fell to €0.6m and €0.5m respectively, versus €1.6m and €1.1m in H120. At the parent company level, the lack of capital gains on property disposals (amounting to €2.7m in H120) has been partially offset by a positive result from its investments in securities (€804k versus €165k in H120) and lower costs of trading in financial instruments (€9k versus €450k).

Commercial real estate leads market revival

Although volume of investments in the German real estate market declined by c 20% yoy to €34.1bn in H121 according to Jones Lang LaSalle (JLL), activity is gradually picking up from the pandemic slowdown. The €17.5bn of investment recorded in Q221 is 5.9% above the Q121 figure (though this is still 9.8% below the five-year quarterly average of €19.4bn). The revival is driven by an increase in transaction volumes within the commercial real estate segment, with office properties having the largest share in overall transaction volumes in Q221 (34%). Total investments in commercial real estate during 9M21 reached €38.3bn, according to Colliers, which forecasts Q421 volume ranging from c €16.7bn to €21.7bn.

Valuation: 3.2% dividend yield

With limited RCM group data available with H121 reports and a lack of consensus estimates for the company, we compare its valuation to Noratis (the closest peer) based on a market cap to the last 12 months’ earnings before tax (LTM EBT) multiple. This implies a c 40% premium reflecting the low levels of activity during the period. On 24 August 2021, RCM paid a dividend of €0.07 per share, which translates into a 3.2% yield compared to 2.4% recorded by Noratis.

Historical financials

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

19.4

2.1

0.11

0.06

20.0

2.7

12/18

17.6

2.9

0.18

0.06

12.2

2.7

12/19

21.1

4.4

0.28

0.06

7.9

2.7

12/20

16.8

4.1

0.23

0.07

9.6

3.2

Source: RCM Beteiligungs accounts

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: Property disposals on hold

In H121 RCM group reported c 84.3% y-o-y decline in revenues to €1.6m, including €0.7m in rental income (versus €0.8m in H121) with the rest mostly attributable to property management, as it has not recorded any income from property sales (versus €8.4m in H120, which translated into disposal gains of €3.5m). We note that the broader German real estate market is already showing some signs of revival with transaction activity picking up (please see below for details). Therefore, we believe that the halt in the company’s disposals may be at least partially attributable to the completion of the portfolio repositioning process in FY20, which left it with a more limited number of properties ready for sale. The group posted €0.5m in interest and dividend income in H121 (in line with H120), which was ahead of the group’s interest expense of €0.3m (versus €0.4m in H120). At the same, write-downs of securities stood at €0.2m versus €0.8m in H120. Management highlighted that the group will recognise €1.9m of revaluation gains on its equity holdings in Q321. We note that as at end-June 2021, the group’s equity ratio remained strong, siting at 52% – on a par with H120.

Exhibit 1: Financial highlights

RCM Group results (in €m)

H121

H120

change y-o-y

Group revenue, of which:

1.6

10.2

-84.3%

Rental income

0.7

0.8

-12.5%

Property disposal

0.0

8.4

-100.0%

Group pre-tax profit

0.5

2.1

-76.2%

Equity ratio

52%

52%

-

RCM Beteiligungs standalone results (in €000‘s)

H121

H120

change y-o-y

Total revenue, of which

251.2

5,798.3

-95.7%

Rental revenue

240.0

246.3

-2.6%

Property disposal

0.0

5,552.0

-100.0%

Other revenue

11.3

0.0

N/M

Change in inventories of property available for sale

0.0

(2,814.1)

-100.0%

Total performance

251.2

2,984.2

-91.6%

Other operating income

804.3

165.1

387.1%

Costs of goods and services

(27.7)

(180.0)

-84.6%

Personnel expenses

(155.8)

(165.2)

-5.7%

Depreciation and amortization

(18.6)

(16.1)

15.2%

Other operating expense

(281.5)

(737.7)

-61.8%

Income from associates

0.0

0.0

N/M

Income from other securities and loans

387.4

388.6

-0.3%

Other interest and similar income

2.1

5.4

-61.8%

Write-downs on financial assets and securities

(147.5)

(607.2)

-75.7%

Interest and similar expenses

(173.7)

(207.3)

-16.2%

Pre-tax profit

640.2

1,629.7

-60.7%

Income taxes

(176.3)

(521.9)

-66.2%

Other taxes

(0.4)

(0.4)

0.0%

Net income

463.5

1,107.4

-58.1%

Source: RCM Beteiligungs accounts

On a standalone basis, RCM Beteiligungs’ H121 results were also shaped by a standstill in property divestment activity, which contributed €5.5m to the top line in H120 and resulted in a €2.7m gain on disposals. Consequently, total parent company’s performance for the period fell by 91.6% y-o-y to €251k. The decline has in part been offset by other operating income reaching €804k (versus €165k in H120) on the back of positive result from its investments in securities, which contributed €511k in H121 versus €110k in the previous year (which we assume covers both debt and equity securities). As RCM recorded a 61.8% y-o-y decline in other operating expenses, driven by lower costs of trading in financial instruments, it reported pre-tax and net profit amounting to €640k and €464k respectively (compared to €1,630k and €1,107k respectively in H120). We note, however, that AGMs of RCM’s subsidiaries have been postponed to Q321 and as a result dividend income from associates of c €0.7m will be recognised after the balance sheet date.

Focus on larger commercial and residential projects

According to the last available release, dated 16 August 2021, the group’s portfolio value, calculated based on the purchase price increased by any subsequent renovation costs already incurred, sits at c €18.5m (representing leasable space of 20.4k sqm). The repositioning process, completed in FY20, saw the company’s investment focus shift away from relatively small residential properties with additional commercial space towards higher-volume residential complexes or larger apartment buildings. The company has also added investments in commercial properties with development potential through the implementation of tailored-use concepts to its investment scope. Due to recent price developments in the broad real estate market, the company’s current focus in terms of new investments is mostly or even exclusively in the later segment.

Investments shift towards commercial real estate

Total investment volume in the German real estate market declined in H121 by c 20% y-o-y to €34.1bn, according to JLL data. The decrease is largely attributable to Q121 (€16.6bn versus €27.9bn) as it is compared with the robust Q120, which was the last pre-pandemic quarter. In Q221, the market has already shown some signs of revival as the investment volume of €17.5bn was 21% higher than in the corresponding period last year. Having said that, we note that the first two quarters of 2021 are both below the five-year quarterly average of €19.4bn.

With persisting market uncertainties surrounding the new COVID-19 variants and incomplete vaccination process, the resilient ‘living’ sector (including residential, student housing and micro living) continues to see the highest demand, with €11.9bn in transactions in H121 (35% share) according to JLL’s research. We note, however, that the German investment real estate market is slowly returning to its pre-pandemic structure, with the living sector’s share of overall trade volume in Q221 alone falling to 25% ranking it second to the office segment (c 34% share). Among commercial properties, it is worth highlighting the healthy performance of logistic properties, benefiting from increasing private consumption, with a significant role played by e-commerce expansion. The €3.5bn trade volume within the segment in H121 constitutes over 10% of the broad market total, which is above the pre-pandemic level of c 8% in 2019.

According to a recent Colliers report (published on 11 October 2021), which is focused on commercial properties only, the investment volume in 9M21 reached €38.3bn, which fell only just short of the €40bn threshold that was exceeded during the first nine months in each of the three previous years. Having said that, Colliers expects further improvement in investment activity in Q421, as it forecasts transaction volume for the year reaching €55bn to €60bn.

Valuation

RCM continues the share buyback programme that it started in 2017, currently limited to 1.31m shares, which until 15 October 2021 (last available data) resulted in the repurchase of over 540k shares at an average price of €2.15 per share (open market transactions only). In 2021 ytd alone, the company repurchased c 56.3k shares at an average price of €2.18 per share. In August 2021 RCM announced an increase in its share in SM Wirtschaftsberatung from 72% to 75% in exchange for a consideration of 500k of RCM’s treasury shares. RCM reported that the parent company held c 496k own shares as at 30 June 2021. Consequently, we calculate that the total number of treasury shares currently held almost exclusively by RCM’s subsidiaries amounts to c 1.1m or c 8% of all outstanding shares.

As RCM’s business model is positioned between that of an asset holder and a developer, and is similar to Noratis, we continue to use this company as a comparator for valuation purposes. Due to lack of consensus estimates for RCM in Refinitiv and limited group level reporting we have calculated a market cap to LTM EBT multiple for the purpose of RCM’s relative valuation. Based on this measure, RCM’s shares trade at a c 40% premium to Noratis as RCM’s market cap/LTM EBT multiple sits at 11.6x, compared to 8.3x recorded by Noratis.

On 19 August 2021, RCM’s AGM approved a dividend payment amounting to €0.07 per share, which is slightly higher than €0.06 paid between 2017 and 2019 and translates into 3.2% dividend yield. It also sits above the 2.4% yield for Noratis, based on the last dividend payment from FY20 earnings.


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