Slower project progress and asset write-offs

MPC Muenchmeyer Petersen Capital 26 February 2019 Update
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MPC Capital

Slower project progress and asset write-offs

Financial services

Scale research report - Update

26 February 2019

Price

€2.11

Market cap

€68m

Share price graph

Share details

Code

MPC

Listing

Deutsche Börse Scale

Shares in issue

33.5m

Last reported net cash at 31 Dec 2018

€22.0m

Business description

MPC Capital is an independent asset and investment manager for real assets in the shipping, real estate and infrastructure sectors. It initiates, structures, finances and manages real assets, targeted at institutional investors. It is a subsidiary of MPC Group (c 46% shareholding), founded in 1994 and listed in 2000. AUM as at end December 2018 were €4.3bn.

Bull

Strong demand for real asset investments.

Increased share of recurring revenues with margin growth potential.

Scalable operating platform.

Bear

Strong competition for assets and investors from large incumbents.

Interest rate rises and/or economic weakness may slow investment in real assets.

Regulatory risks, particularly legacy products.

Analyst

Milosz Papst

+44 (0) 20 3077 5700

MPC Capital’s overall performance in 2018 was rather subdued, affected by project delays and low transactional activity, as well as the write-down of a large legacy project. The latter, together with asset disposals, resulted in a decrease in assets under management (AUM) to €4.3bn. However, as MPC also attracted €0.8bn of institutional assets in FY18, the share of new, higher-yielding business in the current AUM has risen. Moreover, the company retained its solid cash position (€28.6m at end-2018) and equity ratio (at 74.3%), and aims at positive EBT in FY19.

Legacy write-off and lower transaction fees

MPC reported an FY18 EBT loss of €16.7m, which resulted from several one-off items, including a c €17.2m write-off on financial assets and receivables related to an oil rig project in MPC’s legacy portfolio. When adjusted for this, EBT reached €0.6m, meeting the revised company guidance of a slightly positive pre-tax profit. We note that results were also affected by other one-off items, which we discuss below. Revenues stood at €42.7m (vs guidance of €40–42m), falling 9.7% y-o-y on the back of a more than 40% decline in transaction fees.

Lower AUM but with improved quality

Following the above-mentioned write-down, as well as asset disposals of retail legacy assets, AUM dropped to €4.3bn compared with €5.1bn at end-2017. At the same time, MPC acquired €0.8bn of new assets and, as a result, the share of higher-yielding institutional business in total AUM increased to c 60% vs 47% at end-2017. Expanding the managed asset base will be crucial for the management fees to cover MPC’s operating expenses. The macro environment remains broadly favourable for both the real estate and shipping business, even if growth has been slowing down recently and subject to several geopolitical risk factors.

Valuation: Trading below book value

MPC may be considered a cyclical company in a transitional phase, and as such suffered a substantial share price decline in 2018, which was also a function of the guidance downgrade in November. However, given the subdued earnings outlook as measured by Refinitiv consensus, MPC is trading at a visible premium to peers on P/E multiples for FY19e and FY20e. Its current market cap stands at c 1.3% of its AUM at end-2018 and translates into a P/BV ratio of 0.6x.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

47.3

17.4

0.41

0.00

5.1

N/A

12/18

42.7

(16.7)

(0.57)

0.00

N/A

N/A

12/19e

44.2

2.5

0.06

0.00

35.2

N/A

12/20e

49.8

6.3

0.10

0.00

21.1

N/A

Source: MPC Capital, Refinitiv consensus as at 21 February 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.

FY18 results: Shaped by one-off events

MPC reported €42.7m revenues in FY18, slightly above the revised guidance of €40–42m, but also c 10% below FY17 results. As management services income remained broadly stable at €36.3m (0.4% y-o-y decline), the decrease in sales is due to a significant drop in fees from transaction services of around 41% y-o-y to €6.1m. The company has recognized a sizeable write-down on financial assets related to an oil rig project at €9.6m, as well as €7.6m on related receivables. These were associated with two indirect investments in a deep-sea exploration platform from the company’s legacy business. Consequently, reported EBT stood at - €16.7m (vs a positive €17.4m in FY17). The company has also reported EBT adjusted for this one-off item at €0.6m, which was broadly in line with management guidance (slightly positive earnings).

Both FY18 and FY17 figures have been also influenced by other non-recurring items, which (together with the above-mentioned oil rig write-down) amounted to a negative €8.4m and positive €17.2m, respectively:

€3.0m opportunistic sale of a land plot in Lisbon and disposal of BLAAK16 office project (FY18) and the sale of The Cloud project with income of 12.3m (FY17).

€2.6m net reversal of write-downs on receivables in FY18 (vs 3.6m in FY17).

15.5m write-downs of financial assets in FY18 (vs 0.8m in FY17).

€1.3m reversal of provisions (€3.4m in FY17).

€0.6m positive net FX result (vs -1.3m in FY17).

€0.6m costs related to capital increase in FY18.

€0.3m gains from deconsolidation in FY18.

After factoring in the above, our calculations yield an adjusted EBT stands of a negative €8.3m in FY18 vs positive €0.1m in FY17. The decline was related to the slowdown in transaction services income, as well as the result of associates carried at equity being €2.7m lower than in the prior year due to losses from the disposal of retail business investments and lower earnings from MPC Global Maritime Opportunities (€0.3m loss vs €1.5m profit last year). However, it was partially offset by an €0.6m increase in income from equity co-investments.

Exhibit 1: FY18 results highlights

€000s unless otherwise stated

FY18

FY17

Change y-o-y

Management services

36,348

36,497

-0.4%

Transaction services

6,146

10,445

-41.2%

Other

233

376

-38.0%

Revenue

42,727

47,318

-9.7%

Other operating income

12,547

22,716

-44.8%

Cost of materials/purchased services

(3,465)

(3,110)

11.4%

Personnel expenses

(28,592)

(27,137)

5.4%

Depreciation & amortisation

(1,782)

(1,772)

0.6%

Other operating expenses

(24,643)

(24,219)

1.8%

Operating profit

(3,208)

13,796

N/M

Income from equity investments

2,302

1,744

32.0%

Other interest & similar income

1,398

1,250

11.8%

Write-downs on financial assets

(15,515)

(787)

nm

Interest & similar expenses

(774)

(444)

74.3%

Share of profit of associates

(875)

1,794

N/M

Pre-tax profit

(16,671)

17,353

N/M

Consolidated net profit

(18,673)

13,150

N/M

Source: MPC Capital, Edison Investment Research

The company has experienced some project delays, especially with respect to a high-volume infrastructure project in North America. Moreover, progress in securing new micro living assets was below company expectations. On the positive side, it is important to note that MPC recorded a c 30% increase in technical and commercial ship management income, due to the expansion in managed fleet of MPC Container Ships, as well as third-party accounts managed by Ahrenkiel and Contchart.

MPC plans to acquire €0.5–0.8bn of new institutional assets in 2019, which is somewhat below the long-term target of €1.0bn pa. Nevertheless, it should result in a slight increase in revenues. Combined with lower expected distribution by subsidiaries, EBT is forecast to remain stable. Furthermore, management expects no further large write-downs similar to the one booked in FY18, given the now-improved balance sheet quality, which is almost entirely clear of former retail business area risks (now representing less than 5% of financial assets). The company also expects positive cash flow from operations in 2019, but this is dependent on the recognition of a certain amount of transaction fees.

Cash position remains firm on the back of capital measures

MPC’s balance sheet remains healthy, as illustrated by the high equity ratio of 74.3% and stable cash balance at €28.6m at the end-December 2018 (vs €28.9m at end-2017). However, this was largely assisted by several capital measures, including MPC’s secondary public offering completed in March (€16.7m), capital increases at fully consolidated project companies (€5.8m), as well as proceeds from minority shareholders in conjunction with MPC’s co-investments (€2.6m). Operating cash flow was - €8.9m compared to - €1.3m in FY17, which reflects the lower transaction fees and the fact that MPC’s management fees do not cover its ongoing operating expenses yet. The company recognized net cash outflows from investing activities at €15.2m, with investments in financial assets (largely MPC’s co-investments) being broadly comparable with last year at €28.6m, asset disposals amounting to €10.1m (mainly the sale of a land plot in Lisbon and BLAAK16 office building) and €4.2m proceeds from reducing the share in consolidated companies.

AUM down due to disposals and write-offs

As at end-2018, the company’s assets under management (AUM) fell to €4.3bn from €5.1bn as at end-2017, primarily as a result of disposals of retail legacy assets and revaluation effects. The decline was attributable to H218 developments, as AUM as at end-June 2018 stood at €5.2bn. The new business in this period brought €0.2bn in additional assets (€0.6bn in H118), which was offset by disposals amounting to €0.6bn (€0.5bn in H118). Moreover, revaluation and currency effects resulted in a decrease of €0.6bn in FY18, which includes, in particular, the impact of the oil rig write-down discussed earlier. Importantly, AUM in the real estate and infrastructure segments remained unchanged, amounting to €2.1bn and €0.3bn respectively.

As a consequence of the above, the AUM structure improved further as the company continues to refocus its business towards higher-yielding institutional business (now representing 60% of AUM vs 47% at end-2017). With the quality of the assets improving, the critical factor to enhance MPC’s profitability will be further AUM growth. On the back of cost reduction measures, the company expects the break-even point will now be reached below the previously estimated level of around €6.5bn in AUM.

Demand/supply balance remaining broadly supportive

The macroeconomic environment should remain positive for the shipping markets, as global trade volumes are expected to increase by a healthy 4.0% in 2019, according to the International Monetary Fund’s (IMF) estimate. However, this represents a downgrade from 4.8% forecast in June last year. Global economic growth is expected to continue into 2019 and reach 3.5% y-o-y (vs 3.7% in 2018), but there are first indications of a possible slowdown, as IMF expectations were downgraded from 3.7% in October and 3.9% in July 2018. This is the result of several potential risk factors, including further trade tensions between the US and China, the materialisation of a ‘hard’ Brexit scenario, a slowdown in the German economy, Italian fiscal policies, as well as the partial US government shutdown. Still, momentum is so far expected to hold up well in 2020, with global growth forecast at 3.6%.

Clarkson estimates global container turnover in 2018 at 4.6%, which is somewhat below earlier expectations presented in the Ernst Russ quarterly shipping market report for Q318 at 5.4%. This is also behind the increase in container fleet capacity in the first 11 months of 2018 at 5.9% (to 22.3m Twenty-Foot Equivalent Unit [TEU] as at December 2018). However, it must be noted that order books remain at historically low levels (around 12% of current total fleet), which suggests that the market should remain relatively balanced in the near term. This should be assisted by ship downtime, as ships are being equipped with scrubbers to comply with the IMO 2020 regulation. The bulker and tanker segment saw roughly comparable growth in supply and demand in 2018, respectively, with prospects for the latter outstripping the former (according to Ernst Russ). Interestingly, the transition to low-sulphur fuel oil (LSFO), coupled with a limited number of refineries delivering the fuel, may assist the demand for tankers. The direct impact of changes in charter rates on MPC’s top line is rather limited, as only fees related to commercial ship management, which represent c 25% of overall management fees in the shipping business, are tied to these rates.

The German residential real estate market continues to be supported by both macroeconomic and demographic factors, including the considerable housing deficit across major cities. In this context, MPC intends to accelerate its expansion in the micro-living segment in Germany, as it considers it an attractive niche with high development potential. Similarly, the German commercial market is characterised by a tight demand/supply balance translating into low vacancy rates and compressing yields, on which MPC aims to capitalise. In Q418, the average prime yield in the largest cities stood at 3.11% (vs 3.20% in Q318), with the lowest value of 2.90% recorded in Berlin, according to JLL.

Valuation

MPC Capital may be considered a cyclical company that is still undergoing a business transition and as such suffered a substantial share price decline in 2018, exceeding the 18.3% decrease in the broad equity market illustrated by the DAX index. The negative market trend, combined with a profit warning issued in November, has cut the share price from €6.44 at the beginning of the year to €2.73 as at end-December and below €2.00 ytd. This effect was accompanied by a still subdued earnings outlook, as indicated by Refinitiv consensus.

We believe that a relevant peer group for MPC should contain local asset managers active in the shipping and/or real estate domain. MPC is trading at a considerable premium to the selected peers on P/E multiples for FY19e and FY20e.

Given that MPC’s earnings are largely dependent on the size of its AUM, it may also be instructive to examine the market cap/AUM ratios for MPC and its peers based on last reported asset figures. MPC’s market cap represents c 1.3% of its AUM, which is ahead of Ernst Russ (0.5%), but below the figures for Corestate Capital and Patrizia (2.8% and 4.5%, respectively). The company’s P/BV ratio, based on last reported equity, stands at 0.6x.

Exhibit 2: Peer group comparison

 

EV/EBITDA (x)

P/E (x)

Company

Market cap (€m)

2019e

2020e

2019e

2020e

Corestate Capital

657

6.1

5.6

4.9

4.5

Patrizia

1,810

13.3

12.3

20.5

18.7

VIB Vermogen

632

15.7

14.8

10.8

10.7

TLG Immobilien

2,652

23.4

21.9

19.6

18.4

Average

14.60

13.7

14.0

13.1

MPC Capital

68

N/M

11.3

36.4

22.2

Premium/(discount)

N/M

-17.4%

160.4%

69.8%

Source: MPC Capital, Refinitiv consensus as at 21 February 2019.

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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).

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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

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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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