Significant step forward in AAM

DeA Capital 6 August 2019 Update
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DeA Capital

Significant step forward in AAM

Acquisition

Financial services

6 August 2019

Price

1.27

Market cap

€329m

Holding company net financial position (€m) at 31 March 2019

92.5

Shares in issue
(excluding treasury shares)

259.2m

Free float

24.4%

Code

DEA

Primary exchange

BIT

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.3

(16.3)

3.0

Rel (local)

2.0

(13.3)

6.2

52-week high/low

€1.6

€1.2

Business description

DeA Capital, a De Agostini group company, is Italy’s leading alternative asset manager of real estate, private equity and NPLs, with AUM of c €11.9bn at 31 March 2019. The investment portfolio, including co-investment in funds managed, investment in the asset management platform and direct investment, amounted to c €372m.

Next events

Half year results

5 September 2019

Analysts

Martyn King

+44 (0)20 3077 5745

Andrew Mitchell

+44 (0)20 3681 2500

DeA Capital is a research client of Edison Investment Research Limited

A series of agreements with Quaestio Group and its main shareholders mark a further important step in the development of DeA’s alternative asset management (AAM) platform. Upon completion, the agreed transactions will increase AUM, enhance DeA’s NPL management offering and broaden its investor reach. The planned strategic agreement between the two companies will add the capability to provide added-value investment solutions and capital allocation strategies.

Year end

Closing AUM (€bn)

AAM fees* (€m)

NAV/share
(€)

DPS (declared) (€)

P/NAV
(x)

Yield
(%)

12/17

11.7

59.8

1.92

0.12

0.66

9.4

12/18

11.9

63.3

1.84

0.12

0.69

9.4

12/19e

12.2

62.4

1.73

0.12

0.74

9.4

12/20e

12.6

61.4

1.65

0.12

0.77

9.4

Note: NAV as reported, including goodwill. *Divisional AAM fees before group consolidation adjustment for own funds managed. Forecasts are unchanged at this stage.

The agreements with Quaestio

DeA has agreed the acquisition of the NPL management business of Quaestio SGR, a Milan-based independent asset management company, mainly comprising the management contracts for the Atlante and Italian Recovery Funds. DeA also plans to acquire a stake of up to 44% in the Quaestio SGR holding company from its founder and minority interests. This will make DeA the single largest investor, cementing a product and marketing partnership between the two companies whereby Quaestio will offer DeA’s alternative asset management products and DeA will offer Quaestio’s liquid asset based product. DeA will gain access to Quaestio’s added-value investment solutions and capital allocation capabilities.

A significant boost to AAM development

Completion is expected in early 2020, subject to regulatory and investor approval (for the transfer of the NPL asset management contracts to DeA). DeA will acquire c €2.5bn of NPL AUM directly and significantly broaden its capabilities. The Quaestio Holdings stake will be equity accounted but including the traditional liquid AUM retained by Quaestio SGR, the broad DeA group AUM will increase to more than €20bn. The near-term profit impact is unclear at this stage but should be accretive. Quaestio SGR earned €2.9m in net profit in 2018 and DeA plans to fund its c €25m investment from its substantial cash resources (€92.5m at end-Q119), which currently contribute little to earnings. In the longer term, DeA hopes to benefit from its additional scale in alternative AUM, broader product capabilities, enhanced investor reach and both directly and indirectly (through its equity investment) from the product and marketing partnership with Quaestio.

Valuation: Low P/NAV and high yield

At c 0.7x DeA has the lowest P/NAV among a range of peers and also has the highest yield. Our forecasts are unchanged for now, but this transaction has the potential to lift the valuation by increasing the scale and growth prospects of AAM while lifting sustainable ROE.

Background and details

Quaestio: A complementary independent asset manager

The Quaestio Group is a Milan-based asset management company, founded by its chairman, Alessandro Penati, in 2009. Its main operations comprise asset management and non-performing loan (NPL) management through its wholly owned subsidiary Quaestio SGR and NPL servicing through Quaestio Cerved Credit Management, a 50.1% joint venture with Cerved Group, a large Italian credit rating agency and information provider.

Quaestio SGR has assets under management of c €10bn and is a leading provider of investment solutions for institutional and professional investors only (no retail), based on its range of UCIT and alternative investment funds (AIF) products provided through its multi-asset/multi-manager platform. The platform allows it to structure customised investment solutions, tailored to the specific risk and return objectives of the investor, and offering administrative, accounting and tax simplification.

Up until 2016 Quaestio had focused on tradeable, liquid assets such as domestic and international equities and bonds. From 2016 onwards it diversified into non-performing loans through the launch of two AIFs, Atlante Fund and Italian Recovery Fund, established to invest in and support the capital strength of a variety of Italian banks by contributing to share capital increases and acquiring securities representing the junior tranches of non-performing loans. Investors in the funds include the Italian banks themselves, banking foundations, and a range of domestic and foreign institutions. The Italian Recovery Fund was established in 2018 with an initial investment in the mezzanine tranche of the securitisation of €25bn gross of distressed loans held by Banca Monte dei Paschi di Siena. It is the largest investor in the Italian NPL market and is currently invested in four NPL securitisations with a gross book value of c €30bn.

More recently, Quaestio has signalled its intention to refocus on the traditional asset management segment, which the sale of the NPL business to DeA will achieve. The additional investment by DeA into the holding company will additionally facilitate a reorganisation of the ownership and structure, facilitating the exit of the founder and introducing a strong and stable long-term investor to support its continued development.

The transaction details

DeA has agreed with Quaestio Group and its main shareholders, in particular Fondazione Cassa di Risparmio delle Provincie Lombarde (‘Cariplo Foundation’) and Professor Alessandro Penati (the chairman of Quaestio Holding and Quaestio SGR), that it will:

Acquire the NPL management business unit of Quaestio SGR for €12.2m. This consists primarily of the management contracts and team responsible for Atlante Fund and Italian Recovery Fund. The NPL AUM represents approximately €2.5bn of the total Quaestio SGR AUM of c €10bn and in the year ended 31 December 2018 the revenues associated with NPL management were c €7m out of total Quaestio SGR revenues of c €37m. No Quaestio SGR profit split is available although we believe that the NPL activities were a significant contributor to Quaestio SGR net profit for the year of c €2.9m.

Acquire an equity interest in Quaestio Holding, the parent company of Quaestio SGR, alongside the holding company’s existing shareholders. The current shareholders of Quaestio Holding, on a fully diluted basis taking account of outstanding warrants, are:

Cariplo Foundation with a 41.2% interest;

Professor Alessandro Penati and the management team with a total interest of 27.8%;

Other institutional investors, including Cassa Italiana di Previdenza ed Assistenza dei Geometri Liberi Professionisti, Fondazione Cassa di Risparmio di Forlì and Direzione Generale Opere Don Bosco, with a total interest of 31.0%.

The investment by DeA is conditional upon it acquiring a stake of between 35% and 44% by acquiring shares from several minority interests, in addition to all of the shares held by Professor Alessandro Penati. The maximum cash investment (based on 44%) is expected to be €13.2m. DeA will become the single largest shareholder although no shareholder will control the company. Cariplo Foundation will retain an equity interest of at least 24% in Quaestio Holding. The Quaestio NPL activities will be fully consolidated by DeA, through its wholly owned DeA Capital Alternative Funds subsidiary while the minority stake will be held as an associate and equity accounted.

The two transactions involve regulatory approval as well as approval from investors for a reassignment of the management contracts for the Atlante and Italian Recovery Funds and are expected to complete early in 2020.

Significant boost to AAM development and growth

DeA is already active in the non-performing loans sector through its DeA Capital Alternative Funds subsidiary, which DeA believes is the largest Italian multi-bank platform in the ‘unlikely to pay’ (UTP) segment. DeA’s two closed-end credit funds, Corporate Credit Recovery (‘CCR’) I and II funds had assets of €221.8m and €514.6m, respectively, as at 31 March 2019, and aim to help relaunch medium-sized Italian companies that are facing financial difficulties but have solid business fundamentals, sharing the profits between creditors and new investors. Both operate in a similar way, although CCRII recently added a shipping loan segment.

Beyond the immediate addition of c €2.5bn in NPL AUM and c €7m in revenues, more strategically the agreed acquisition of the Quaestio NPL business will extend DeA’s activities into the small-ticket NPL/UTP sector and brings an experienced work-out team with a solid track record of managing these larger-scale portfolios. The transaction also expands DeA’s potential investor base to include a series of major institutional players, including Cariplo Foundation and the shareholder-investors of the Atlante Fund and Italian Recovery Fund.

Although DeA will not consolidate its investment in Quaestio Holdings, it will be the largest single shareholder, and including both the acquired NPL mandates and the c €7.5bn of multi-asset AUM that will be retained by Quaestio SGR, the broadly defined AUM of DeA (both direct AUM and indirect) will increase to more than €20bn.

DeA and Quaestio will also enter into a marketing and product partnership that will see Quaestio continue to focus on ‘liquid asset’ products and DeA on ‘illiquid assets’ such as private equity, real estate and NPLs. Each will market the other’s product. Cariplo Foundation has committed not to acquire equity interests of more than 2% in listed companies and of 5% in unlisted companies engaging in similar businesses in direct competition with those currently managed by DeA and Quaestio.

We will review our forecasts with the interim results

We have made no changes to our forecasts at this stage and will review this with the interim results that are due to be announced on 5 September. Assuming that the deal completes and in the timescale expected, we would expect a positive impact on the alternative asset management division revenues and profits and a positive impact on the group ROE, although there is insufficient financial information available at this stage to forecast this with accuracy. The return on the cash that DeA will invest (up to c €25m) is currently minimal and with a holding company net financial position of €92.5m at 31 March 2019, DeA has ample liquid resources to both invest and maintain attractive shareholder distributions. In the longer term, DeA hopes to benefit from its additional scale in alternative AUM, broader product capabilities, enhanced investor reach and both directly and indirectly (through its equity investment) from the product and marketing partnership with Quaestio that will provide it with the capability to offer added-value investment solutions and capital allocation strategies across both liquid assets and illiquid alternative assets.

Exhibit 1: Financial summary

Period ending 31 December (€000s)

2014

2015

2016

2017

2018

2019e

2020e

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Alternative Asset Management fees (after inter-company eliminations)

66,045

62,416

59,114

57,944

62,422

61,761

61,023

Income (loss) from equity investments

(786)

(539)

524

3,898

(59)

1,618

1,926

Other investment income/expense

(56,149)

72,464

12,338

8,633

37,848

271

8,714

Income from services

19,176

18,496

8,509

2,208

2,505

104

0

Other income

3,204

288

144

141

0

0

Revenue

28,286

156,041

80,773

72,827

102,857

63,754

71,663

Expenses

(87,957)

(128,514)

(66,888)

(98,616)

(56,232)

(55,355)

(56,114)

Net Interest

2,905

4,982

(1,220)

(84)

485

181

0

Profit Before Tax (norm)

(56,766)

32,509

12,665

(25,873)

47,110

8,580

15,549

Tax

1,720

6,452

(199)

(420)

(5,765)

(2,778)

(3,431)

Profit After Tax (norm)

(55,046)

38,961

12,466

(26,293)

41,345

5,802

12,119

Profit from discontinued operations

(887)

286

0

682

0

0

0

Profit after tax

(55,933)

39,247

12,466

(25,611)

41,345

5,802

12,119

Minority interests

(1,668)

1,825

(39)

13,959

(30,275)

(1,191)

(1,038)

Net income (FRS 3)

(57,601)

41,072

12,427

(11,652)

11,070

4,611

11,081

Profit after tax breakdown

Private equity

(60,739)

78,322

7,859

8,327

39,152

(3,115)

5,184

Alternative asset management

9,464

(37,304)

7,309

(31,073)

9,228

12,511

11,594

Holdings/Eliminations

(4,658)

(1,771)

(2,702)

(2,865)

(7,035)

(3,594)

(4,659)

Total

(55,933)

39,247

12,466

(25,611)

41,345

5,802

12,119

Average Number of Shares Outstanding (m)

273.8

266.6

263.1

258.3

253.8

258.9

258.9

IFRS EPS - normalised (c)

(21.0)

15.4

4.7

(4.5)

4.4

1.8

4.3

Distributions per share (declared basis) (€)

0.30

0.12

0.12

0.12

0.12

0.12

0.12

BALANCE SHEET

Fixed Assets

786,141

558,086

559,335

454,156

372,650

372,418

353,059

Intangible Assets (inc. goodwill)

229,711

167,134

156,583

117,233

114,768

114,493

114,493

Other assets

39,988

38,590

35,244

10,305

8,939

27,048

27,048

Investments

516,442

352,362

367,508

326,618

248,943

230,877

211,518

Current Assets

117,585

173,882

141,521

178,161

185,446

176,880

177,242

Debtors

50,711

20,694

15,167

32,955

18,729

16,811

16,811

Cash

55,583

123,468

96,438

127,916

143,767

133,259

133,621

Other

11,291

29,720

29,916

17,290

22,950

26,810

26,810

Current Liabilities

(36,193)

(31,294)

(26,979)

(34,783)

(37,902)

(40,905)

(40,905)

Creditors

(35,833)

(30,643)

(25,757)

(34,583)

(37,698)

(38,279)

(38,279)

Short term borrowings

(360)

(651)

(1,222)

(200)

(204)

(2,626)

(2,626)

Long Term Liabilities

(40,911)

(15,514)

(12,830)

(12,475)

(14,414)

(28,893)

(28,893)

Long term borrowings

(5,201)

0

(19)

0

(2,859)

(17,280)

(17,280)

Other long term liabilities

(35,710)

(15,514)

(12,811)

(12,475)

(11,555)

(11,613)

(11,613)

Net Assets

826,622

685,160

661,047

585,059

505,780

479,499

460,503

Minorities

(173,109)

(138,172)

(131,844)

(95,182)

(39,299)

(32,490)

(33,527)

Shareholders' equity

653,513

546,988

529,203

489,877

466,481

447,010

426,975

Year-end number of shares m

271.6

263.9

261.2

255.7

253.8

258.9

258.9

NAV per share

2.41

2.07

2.03

1.92

1.84

1.73

1.65

CASH FLOW

Operating Cash Flow

188,419

188,492

19,148

91,146

96,408

29,566

31,478

Acquisitions/disposals

(1,476)

70

(290)

(633)

(275)

(202)

0

Financing

(157,756)

(38,148)

(4,362)

(26,073)

(46,994)

(7,606)

0

Dividends

0

(82,432)

(33,494)

(32,962)

(33,098)

(32,264)

(31,116)

Other

Cash flow

29,187

67,982

(18,998)

31,478

16,041

(10,506)

362

Other items

0

(97)

(8,032)

0

(190)

(1)

0

Opening consolidated cash

26,396

55,583

123,468

96,438

127,916

143,767

133,260

Closing consolidated cash

55,583

123,468

96,438

127,916

143,767

133,260

133,622

Financial debt

(5,561)

(651)

(1,241)

(200)

(3,063)

(19,906)

(19,906)

Closing consolidated net (debt)/cash

50,022

122,817

95,197

127,716

140,704

113,354

113,716

Holding company net financial position

40,600

90,016

79,739

92,301

100,600

104,379

104,741

Source: Company data, Edison Investment Research


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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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

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.

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.

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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

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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