Stable AUM despite asset disposals

publity 31 August 2018 Update
Download PDF

publity

Stable AUM despite asset disposals

Real estate asset management

Scale research report - Update

31 August 2018

Price

€10.48

Market cap

€63m

Share price graph

Share details

Code

PBY

Listing

Deutsche Börse Scale

Shares in issue

6.05m

Last reported net debt as at 30 June 2018

€35.6m

Business description

publity is an asset manager with a focus on German office buildings. It has a 17-year track record as an investor in commercial real estate in larger German cities and manages a portfolio worth €4.6bn.

Bull

Experienced player with a focus on one segment of the property market.

New asset management mandates with institutional investors.

Strong demand in the German office market.

Bear

AUM growth below earlier guidance.

Dependent on banks for property sourcing.

Funding risk associated with convertible bonds.

Analysts

Milosz Papst

+44 (0) 20 3077 5700

After being able to considerably grow its assets under management (AUM) in 2017 (albeit below initial management guidance), publity’s focus in 2018 is on retaining the asset base in line with the prior year. Despite the disposal of several office projects covering 100,000 sqm of lettable office space in H118, AUM remained stable at €4.6bn. publity is confident the current advanced-stage discussions around asset purchases should allow it to maintain the AUM level at the end of 2018 despite another sizeable disposal announced in August. Meanwhile, the FY18 earnings guidance was lowered in June, discussions with bondholders continue and shareholders approved a new share issue.

H118 earnings meet revised company expectations

publity’s H118 net income declined c 20% y-o-y to €4.4m despite a 3.6% y-o-y revenue increase to €13.3m, mainly due to costs associated with property disposals executed in H118 as part of its asset management business (reflected in other operating expense line). Management highlighted that the H118 result is in line with their expectations. This follows a downward FY18 guidance revision announced in June, with current net income expectations in line with the FY17 level (final reported at €10.1m) compared with earlier guided range of €15-20m.

Talks with bondholders still in progress

publity continues its discussions with holders of its convertible bonds to resolve the issue related to an alleged covenant breach. Bondholders representing 30% of the initial face value (c €15m) declared the bonds due and payable and publity has already repurchased €2.04m. publity has made an offer to refinance the bonds with a new convertible bond issuance with a higher coupon rate. Moreover, publity’s shareholders approved the issue of up to 3.8m new shares to raise €40.5m of fresh equity.

Valuation: Reflecting profit uncertainty and dilution

publity shares are trading at a 53% and 26% discount to peer group on last 12-month (LTM) P/E and LTM EV/EBITDA ratio, respectively (no consensus forecasts are available for the company). We believe the main factors behind the low valuation include the ongoing discussions with holders of convertible bonds, dilution from the recently announced share issue, as well as overall uncertainty around future profits following the recent downward guidance revisions.

Historical financials

Year
end

Revenue
(€m)

PBT

(€m)

EPS

(€)

DPS
(€)

P/E

(x)

Yield
(%)

12/14

9.8

4.6

0.51

0.56

20.5

5.3

12/15

23.8

19.9

2.27

2.00

4.6

19.1

12/16

41.6

34.2

3.89

2.80

2.8

26.7

12/17

23.6

14.5

1.67

0.00

6.3

0.0

Source:publity

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: EBIT down despite slight top-line growth

Despite the slight increase in revenues at 3.6% y-o-y to €13.3m, publity has recorded a 10.3% y-o-y decline in EBIT to €7.3m and a nearly 20% y-o-y drop in net income to €4.4m in H118 (see Exhibit 1). This was driven by a 33.0% y-o-y increase in other operating expenses, which is mainly the result of costs associated with property disposals realised in the first half of the year as part of the company’s asset management business (in particular a large transaction representing total lettable space of 100,000 sqm), as well as expenses related to a claim settlement. Management revised its FY18 guidance back in June from the initial expectations of net income in the range of €15–20m (implying c 50–100% y-o-y growth) and is now guiding for a number in line with FY17 level (€10.1m), which implies a y-o-y improvement of c 24% in H218. Similarly, the company expects EBIT to be broadly flat y-o-y in FY18. This follows a profit warning issued in January 2018, when publity highlighted that FY17 net income would be below the FY16 level of €23.1m and that it missed AUM guidance (€4.6bn reported at end-2017 vs initial expectations at €5.2bn). publity has originally guided to AUM at €7.0bn in FY18, but subsequently applied a more cautious assumption in line with the FY17 level.

Exhibit 1: H118 highlights

€'000s unless otherwise stated

H118

H117

y-o-y change

Revenue

13,315

12,851

3.6%

Other operating income

259

51

405.9%

Cost of materials

(156)

(87)

78.3%

Personnel expenses

(937)

(941)

-0.4%

Other operating expenses

(5,709)

(4,291)

33.0%

D&A

(95)

(98)

-3.0%

Income from profit transfer

585

608

-3.8%

EBIT

7,261

8,092

-10.3%

EBIT margin (%)

54.5%

63.0%

-843 bps

Financial result

(645)

3

nm

PBT

6,616

8,095

-18.3%

Income tax and other taxes

(2,202)

(2,584)

-14.8%

effective tax rate (%)

33.3%

31.9%

137 bps

Net income

4,414

5,511

-19.9%

net margin (%)

33.1%

42.9%

-973 bps

Source: publity accounts, Edison Investment Research

New share issuance and further talks with bondholders

A significant part of publity’s capital represents the €50m convertible bonds issued in November 2015 with a 3.5% coupon and five-year maturity. The bond terms include a covenant related to the dividend payout ratio limit at 50% of annual net profit. As the payment from 2016 earnings was done at a payout ratio of 72%, part of the noteholders (30%) declared the bonds due and payable. Even though the management considers these terminations as unjustified (see our previous update note for details), €2.04m out of the total c €15m declared amount has already been repurchased by publity. Initially, the company proposed an exchange of the convertible bonds for acquisition rights to a new bond with 7% coupon and a 3.5% mark-up for the first six months. The noteholders were not willing to accept the deal back then but voted in favour of appointing a single third party (One Square Advisory Services) to represent the remaining bondholders to resolve the issue. The convertible bond trades at around 82% of face value. It is worth noting that as at end June 2018 the company held cash and cash equivalents amounting to €14.4m. The company’s net debt to equity ratio stood at 57% at end June compared with 73% at the end of 2017.

Meanwhile, publity’s shareholders approved the issuance of up to 3.8m new shares (representing a 62.5% dilution) at a price of €10.70 per share. The issuance’s success in raising c €40.5m of new share capital is underpinned by the declaration of TO-Holding (publity’s main shareholder) that it will subscribe for all new shares not subscribed for by other shareholders. The disclosed purpose of the issuance is to strengthen the capital base to fund future growth, but the offering is also associated with ongoing discussions with the convertible bonds holders, as some requested that publity raised additional equity. Still, it cannot be ruled out that publity will not be able to come to an agreement with the bondholders, which would likely lead to a litigation process and potentially force the company to redeem the remaining outstanding bonds early as well. Also, it is worth noting that the capital raise is conducted at prices close to all-time historical lows.

Office occupancy rates driven by strong take up

The German real estate market is shaped by a number of positive factors supporting further development. However, growth is also limited by persistent bottlenecks due to a shortage of workforce and general contractor capacity in the construction sector. Demand in the German office market remains strong, with H118 take up standing at 1.8m sqm, which is 18% ahead of the 10-year average, according to Colliers. At the same time, supply increased only moderately and, as a result, the vacancy rate for the big seven cities (Berlin, Cologne, Düsseldorf, Frankfurt, Hamburg, Munich and Stuttgart) reached a new record low level of 3.7% at the end of June 2018. As a result, average office rents increased across all big seven cities, with the strongest growth recorded in Berlin, Munich and Frankfurt (at 22%, 10% and 7% y-o-y in H118, respectively). The low vacancy rates in central business district (CBD) locations in selected cities has triggered the relocation of activities from CBDs to the city fringe submarkets (eg Munich, Hamburg and Düsseldorf). This may potentially prove beneficial to publity.

The tight demand/supply balance determines the characteristics of the properties publity is now acquiring. Initially, the company targeted properties with a certain level of vacancy, which are currently more difficult to find. All of the acquisitions announced by publity so far this year involved fully (or nearly fully) let office buildings, which require different value enhancement measures than merely an increase in occupancy rate. However, it should be highlighted that publity’s ‘manage-to-core’ strategy is not solely dependent on the ability to find projects with vacant space. The company benefits from its multi-year market experience and well-established business relations with German banks, which enable it to quickly acquire properties at attractive prices. Moreover, publity is embarking on other asset management initiatives, including optimisation of the tenant structure, lease length and rent roll. Finally, the company may benefit from the current upward trend in real estate prices in Germany upon asset disposal.

Along with the recent property acquisitions, publity has concluded disposals of several properties, including the delayed transactions from FY17. The two sizeable disposals announced by publity so far this year represent a total letting space of 170,000 sqm and significantly exceeded the total area of projects acquired until date (c 45,000 sqm). According to management, further purchase transactions are to be completed in the upcoming months with multiple advanced-stage negotiations underway, which should allow publity to keep its AUM level stable versus the end of last year.

The company was also able to secure two institutional asset management mandates with a total volume of €500m. The first agreement with a US investment company covers 10 office projects with a total office space of 115,000 sqm, with a mandate to expand the portfolio to 25 projects. The second contract involves five office buildings with 100,000 sqm of letting area on behalf of another institutional investor. publity was also able to sign a contract with the acquirer of office projects recently sold by Consus Real Estate (the company originally signed an asset management mandate with Consus).

Valuation

In our view, P/E and EV/EBITDA multiples are the most appropriate measures to value publity as it is an asset manager rather than a property fund, so it focuses on generating earnings rather than NAV growth. Given that consensus estimates for publity are no longer available, we have also included last 12 months (LTM) ratios for both the company and its peers. The company’s shares are trading at a 53% and 26% discount to peer group on LTM P/E and LTM EV/EBITDA ratio, respectively. This reflects the ongoing discussions with bondholders, earnings dilution resulting from the currently conducted share issuance and overall uncertainty around future profits following the recent downward guidance revisions.

As a further measure to strengthen its capital base (on top of the share issuance), the company decided to retain all FY17 profits and thus refrain from paying a dividend. As a result, the very attractive dividend yield valuation based on previous periods’ payments as well as earlier consensus forecasts is no longer valid.

Exhibit 2: Peer group comparison

 

Market cap

PE (x)

EV/EBITDA (x)

 

(€m)

LTM

2018e

2019e

LTM

2018e

2019e

Corestate Capital

949.2

11.8

7.9

7.2

8.8

9.9

8.9

Patrizia

1,666.0

21.0

22.7

17.0

12.5

15.1

11.7

VIB Vermogen

639.9

12.1

13.2

12.5

15.1

15.1

15.0

TLG Immobilien

2,326.7

15.2*

12.8

14.8

10.1*

22.4

20.3

Peer group average

-

15.0

14.1

12.9

11.6

15.6

11.9

publity

63.4

7.1

N/A

N/A

8.6

N/A

N/A

Premium/(discount) to peer group

-

(53.1%)

N/A

N/A

(26.3%)

N/A

N/A

Source: Company accounts, Bloomberg consensus as at 29 August 2018. Note: *Adjusted for the result from re-measurement of investment property.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors.

Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. 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. This document is provided 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “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.

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Share this with friends and colleagues