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Consus Real Estate 30 April 2019 Update
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Consus Real Estate

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Real estate

Scale research report - Update

30 April 2019

Price

€7.35

Market cap

€989m

Share price graph

Share details

Code

CC1

Listing

Deutsche Börse Scale

Shares in issue

134.5m

Last reported net debt at 31 December 2018

€2,104m

Business description

Consus Real Estate, based in Berlin, is the leading listed residential real estate developer in the nine largest cities in Germany. Following acquisition of SSN Group, the company's portfolio consists of 64 projects with a gross development value of €9.6bn.

Bull

Supply shortage in the German residential market.

Cost-effective and lower-risk business model.

Extensive development pipeline.

Bear

Lower selling prices due to forward sale model.

High degree of financial leverage.

Dependency on institutional clients.

Analysts

Milosz Papst

+44 (0)20 3077 5700

Michal Mierzwiak

+44 (0)20 3077 5700

In FY18 Consus completed its transformation into the largest listed pure-play residential real estate developer in the top nine cities in Germany and will now focus on optimising its operations. With a relatively young portfolio representing €9.6bn of gross development value (GDV), Consus expects a significant increase in earnings as key projects progress beyond the planning stage. The strong forecast consensus earnings growth in 2019–2021 should be further assisted by improving rental income multiples at which projects are sold and ongoing digitalisation. This is illustrated both in the management guidance and current market consensus.

Financials: Mid-term guidance confirmed

Consus reported adjusted EBITDA (pre-purchase price allocation (PPA) and excluding one-offs) of €204m in FY18, which on a pro forma basis reached €253m. Management confirmed it is targeting adjusted EBITDA of €450m in 2020, which implies significant operational improvement in the upcoming periods. According to management, earnings momentum should be an important contributor to leverage moderation, with the company’s targeted mid-term net debt to adjusted EBITDA multiple of c 3.0x (vs 8.3x in pro forma FY18). Moreover, debt refinancing measures should provide material benefits for interest expense from FY20.

Successful forward-sale strategy boosts cash flows

At end-2018, the company had already forward sold projects amounting to €2.5bn GDV, which represents 24% of the entire portfolio. This includes letters of intent (LOI) already signed or under negotiation. It translated into €356m prepayments received, which resulted in strong operating cash flow of €132m. In Q119, Consus completed three further forward sales with a GDV of €170m and is negotiating another two LOIs. Two transactions were done to rebalance the portfolio and reduce the higher-cost debt.

Valuation: Discount implied by bottom-line growth

The superior earnings growth prospects implied by the current Refinitiv consensus translate into an FY19e P/E premium to peers of 34%, changing to a c 35% and 45% discount based on FY20 and FY21 estimates, respectively. Based on the EV/EBITDA ratio for FY20 and FY21, Consus trades broadly in line with its peers. The difference against P/E ratio may be associated with Consus’s higher leverage than the market average.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/18

467.6

(11.5)

0.02

0.0

N/A

N/A

12/19e

1,077.2

104.4

0.53

0.0

13.9

N/A

12/20e

1,915.5

250.3

1.22

0.0

6.0

N/A

12/21e

1,867.8

342.7

1.64

0.0

4.5

N/A

Source: Consus accounts, Refinitiv consensus as at 24 April 2019

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: Earnings reflect early-stage portfolio

As FY18 was a period of transformation into a pure-play residential real estate developer, there are no reliable comparable data available for Consus. The transformation involved consolidation of CG Gruppe, the acquisition of SSN Group and the disposal of Consus’s commercial portfolio. Consus recorded total revenue of €467.6m in FY18, with €445.1m from CG Gruppe and €16.7m from SSN Group, which represents one month of sales as full consolidation was effective from December 2018. EBITDA reached €107.9m, which translates into a 23.1% margin. This includes the impact of PPA and one-offs such as consulting and advisory fees related to the latest M&A activity. EBITDA adjusted for these charges amounted to €203.7m (43.6% margin).

However, the company reported a modest net loss of €0.3m. This is due to a combination of the relatively early stage of Consus’s key projects (as its portfolio is still in ramp-up phase, see our comment below) and the company’s high leverage level. Consus’s total gross debt (including SSN Group) at end-December 2018 was €2,196m at an average rate of 8.1% (net debt was €2.1bn). Importantly, the management aims for significant lowering of interest expense, targeting up to 2pp average interest rate reduction. However, we understand that the refinancing benefits may not be visible until 2020. Until now, Consus’s efforts to limit financing expenses resulted in a steady q-o-q decline of total debt excluding SSN Group. When we compare the total gross debt (excluding SSN Group) of €1.19bn with group equity at the end of FY18 of €1.16bn, we arrive at the equity ratio of 102%, which compares with 155% at end-June 2018 and 195% at end-December 2017. We believe the company’s focus on deleveraging is illustrated by the appointment of Theo Gorens as chief risk officer. He is a risk-management, finance and financing specialist who previously served as a member of the executive board at SSN Group and has been on the extended management board at Consus since the end of 2018.

Consus has provided pro forma figures for FY18 that assume the above-mentioned group changes from 1 January 2018 (no comparable data provided). Pro forma sales reached €656m and adjusted EBITDA stood at €253m after removing €15.5m of one-off costs on advisory fees related to the above. As SSN Group holds even more expensive debt than CG Gruppe (11.3% vs 7.6% as of November 2018), the pro forma financial expense exceeded €200m, putting pre-tax loss and net loss at €45.9m and €24.3m respectively.

Exhibit 1: Financial highlights

€000s, unless otherwise stated

2018

2017

Pro forma 2018

Income from letting activities

32,796

7,691

29,659

Income from real estate inventory disposed of

163,515

-

163,515

Income from property development

408,461

-

443,830

Income from service, maintenance and management activities

10,199

18,565

Total income

614,971

7,691

655,569

Change in project related inventory

(147,352)

-

(31,464)

Overall performance

467,619

7,691

624,104

Other operating income

38,872

15,344

40,273

Operating expense

(398,591)

(18,337)

(508,907)

EBITDA (earnings before interest, taxes, depreciation and amortization)

107,901

4,697

155,470

Depreciation and amortization

(2,175)

-

(3,026)

EBIT (earnings before interest and taxes)

105,726

4,697

152,444

Financial income

4,620

445

11,467

Financial expenses

(121,834)

(7,864)

(209,783)

Share of profit or loss of associates accounted for using the equity method

-

(1,198)

EBT (earnings before taxes)

(11,488)

(3,920)

(45,872)

Income tax expenses

11,192

(5,214)

21,617

Net income (earnings after taxes) from continued operations

(296)

(9,134)

(24,255)

Net income (earnings after taxes) from discontinued operations

1,464

1,188

Consolidated net income

1,168

(7,946)

(24,255)

Source: Consus accounts, Edison Investment Research

Process enhancement through Diplan and new plant

Consus holds a portfolio of 64 projects with €9.6bn of GDV, up by €5.0bn vs end-2017, with €3.5bn attributable to the SSN Group acquisition. According to management guidance, GDV should remain stable throughout FY19. The portfolio is spread across the nine largest cities in Germany, with the largest markets by GDV Hamburg (20%), Stuttgart (18%), Leipzig (13%) and Frankfurt (13%). Even though c 10% of total GDV is located in smaller cities in the metropolitan areas of the larger cities, the company has no intention to visibly increase exposure to tier-two cities and will remain focused on its core markets. In terms of portfolio concentration, it is worth highlighting that Consus’s largest project represents 10% of total GDV and the share of top 10 investments exceeds 50%. Importantly, two have already entered the construction stage, although the others are not expected to do so until 2020. This means the latter are yet to fully contribute to the company’s earnings, as only a smaller part of total project EBITDA is recognised at forward-sale agreement signing. Overall, only 30% of Consus’s portfolio by GDV is under construction, compared with the company’s target of 40–50%.

Consus also has made steady progress in executing its forward sale strategy, which is expected to be 80% of the current GDV. At end-2018 €2.5bn had been already forward sold, including LOI under negotiations and pre-sold condominiums. A further €1.8bn was subject to outright sale at the pre-construction stage, which means more than half of the target has been already achieved. In Q119, Consus has already signed three forward sale agreements for a total GDV of €170m as well as one letter of intent. The company also sold a development project in Leipzig and is negotiating another six or seven material forward sales. Consus is benefitting from strong conditions in the German real estate market (see the market outlook section below), which allows the company to sign new agreements at better terms with respect to transaction multiples. Recent forward sale transactions were executed at multiples from 22.8x (Ernst-Reuter-Platz) to 25.9x (Cologneo I Corpus), which compares with the range of 20–25x targeted by the management.

Following the acquisition of the proptech company Diplan, Consus is looking to leverage its competitive advantages through extensive process digitalisation based on the building information model (BMI), which enhances the construction processes by means of a six-dimensional approach. Apart from 3D digital planning, it covers dimensions such as time, cost and the project lifecycle. BMI has been already implemented in 20 projects and will be introduced in all new ones. Together with the automated pre-fabrication plant in Erfurt (with the start of production scheduled for 2020), it should enable Consus to improve its construction processes. The plant’s capacity will facilitate pre-fabricating wall and ceiling units for c 1,950 residential units per year. As per management estimations, the plant should allow Consus to save up to six months in the development timeline, reduce labour costs and produce wall units at a cost 30% below market prices.

Market benefits sustainable in the medium term

In the German real estate market, high demand combined with supply shortages drives up rents in the residential sector – 5% y-o-y increase in newly completed and 3.5% in existing homes. Strong demographic expansion increases the gap between housing demand and supply, despite the number of completions improving on a yearly basis (going from 188,000 in 2013 to 245,000 in 2018). Moreover, the divergence between residential projects approved and the actual number dwellings completed is still widening. There is no indication of conditions easing in the upcoming months as building land is becoming scarcer and capacity in the construction sector has been largely exhausted. As a result, social discontent is growing, leading to protests against housing policies becoming more frequent and intense. According to DZ Bank, the key issues include a lack of designated building land, the long-winded planning permission process, speculative investments in building plots and limited spare capacity in the construction sector. As a result, approvals for residential buildings in Germany increased by just 2.0% in 2018. It is important to note this was driven exclusively by multi-family housing (+4.7% y-o-y), whereas approvals for detached and semi-detached houses declined by 1.0% and 6.5% y-o-y respectively. Consus is exclusively engaged in multi-family housing projects.

The real estate market in Germany is less cyclical than in other European countries due to the large share of rental properties and conservative financing practices, which makes it more resilient to property bubbles. The residential rental price index by Destatis shows no decline in rental pricing over the last 20 years, even though the global economy clearly suffered from downturns in this period. We believe the current structural housing deficit in conjunction with the limited cyclicality of the German housing market offers an attractive risk-reward profile. Further growth potential comes from the relatively high affordability of German housing. The price-to-salary multiple stands at 5.0x compared to 9.8x in the UK, while the share of rent in disposable income stood at 20.6% compared to the EU average of 23.8% (data from 2017; 2018 not available yet). Consus believes its focus on affordable housing translates into a defensive profile as demand in this segment in the top nine cities in Germany is not expected to decline in the medium term.

Valuation: Extending discount to peers

The limited number of domestic comparators for Consus has guided us towards including international peers in our analysis. This is not a strict comparison and should only be taken as a guide. There are differences between the companies shown below, but the essential nature of business in that land is bought, developed and then resold with a profit remains the same. It is worth noting that although Consus is sensitive to the global macroeconomic climate, similar to the peers below, its forward sale agreements with staggered payments provide significant revenue and cash flow visibility over the medium term.

Both market consensus and management guidance imply significant bottom-line improvement, resulting in a reduction in the premium or a widening discount to peers in both the P/E and EV/EBITDA ratios for FY20e and FY21e in comparison to FY19e figures. At the P/E ratio level, the superior earnings growth prospects implied by the current Refinitiv consensus translate into the FY19e premium to peers of 34% changing to a 35% and 45% discount based on FY20e and FY21e numbers. Based on the EV/EBITDA ratios for FY20 and FY21, Consus trades broadly in line with its peers. The difference against P/E ratio may be associated with higher leverage level than market average. We note that the FY21 EV/EBITDA peer average does not include UBD Development data due to a lack of consensus estimates. Because the future valuation of the company is highly dependent on management’s ability to deliver on the high growth expectations, the share price can be quite volatile (and has been in recent months).

Exhibit 2: Peer group comparison

Market
cap (mLCY)

P/E (x)

EV/EBITDA (x)

Company

2019e

2020e

2021e

2019e

2020e

2021e

Instone Real Estate

799

15.7

11.9

6.7

10.3

8.2

5.1

Helma Eigenheimbau

156

9.1

8.0

7.4

11.1

10.0

9.3

UBM Development

304

7.8

6.9

n/a

11.5

11.2

n/a

Barrat Development

6,229

8.8

8.7

8.2

6.1

6.0

5.7

Taylor Wimpey

6,272

9.3

9.1

8.8

6.6

6.5

6.3

Bonava

13,892

11.5

10.8

9.7

11.5

11.0

10.1

Peer group average

10.3

9.2

8.1

9.5

8.8

7.3

Consus Real Estate

989

13.9

6.0

4.5

16.5

8.5

8.2

Premium/(discount) to peers

34.0%

(34.7%)

(44.9%)

73.8%

(3.5%)

12.7%

Source: Refinitiv consensus at 24 April 2019.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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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.

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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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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.

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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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