Strong cash used to grow asset management

DeA Capital 5 December 2018 Update
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DEA Capital

Strong cash used to grow asset management

Update on Q318 results

Financial services

5 December 2018

Price

€1.29

Market cap

€327m

Holding company net financial position (€m) at 30 September 2018

140.3 3

Shares in issue
(excluding 52.9m treasury shares

253.8m

Free float

24.5%

Code

DEA

Primary exchange

BIT

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

2.3

7.9

1.6

Rel (local)

1.5

13.4

15.3

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 €11.4bn at 30 September 2018. The investment portfolio, including co-investment in funds managed, investment in the asset management platform, and direct investment amounted to c €322m.

Next events

Approval of FY18 results

April 2019

Q119 results

May 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

DeA reported a solid Q318, with growth in AUM and a further strong increase in its net financial position driven by net reimbursement from fund co-investment. Since the end of Q3, it has increased its stake in its main real estate asset management subsidiary, which increases the share of AAM in the total, simplifies the group structure and is accretive to earnings and our adjusted net asset value, increased to €1.94 per share.

Year end

Closing AUM* (€bn)

AAM fees** (€m)

NAV/share
(€)

DPS (declared)
(€)

P/NAV
(x)

Yield
(%)

12/16

10.6

61.0

2.03

0.12

0.64

9.3

12/17

11.7

59.8

1.92

0.12

0.67

9.3

12/18e

11.6

60.2

1.84

0.12

0.70

9.3

12/19e

12.4

61.1

1.78

0.12

0.73

9.3

Note: NAV as stated, including goodwill. *AUM is ex-SPC Credit Management. **Fees from alternative asset management before inter-company eliminations on own funds managed.

AUM growth and strong cash flow in Q2

Q318 AUM increased to c €11.4bn from €11.2bn at the end of Q2, and asset management fees for the first nine months are c 3% ahead of the prior year. Management expects a positive trend in H2 from new funds. The net financial position increased by €53.4m (to €140.3m/€0.55 per share) or 30% of NAV. NAV per share was €1.83, down on Q218 (€1.87) but up from the end of FY17 (€1.80 adjusted for €0.12 in distributions paid since). The majority of the fund co-investment showed valuation gains in the quarter, but these were offset by negative adjustments on two real estate funds and the indirect investment in Migros, the listed Turkish retailer, although the value of the latter has improved from the lower levels seen during the quarter.

Accretive growth in AAM

Already a leader in Italy in alternative assets, providing an integrated platform comprising private equity, real estate and non-performing loans, DeA has a strong and liquid balance sheet to support further growth in Italy and into wider Europe. Since the end of Q318, DeA has increased its stake in DeA Capital Real Estate to 94.0% from 64.3% at book value, for €40m (or a maximum €44.5m under an earn-out clause), funded from its strong cash position. We believe the transaction is accretive of earnings and our adjusted NAV and simplifies the group structure. It follows the recent creation of a real estate JV in France.

Valuation: Cash flow for yield and growth

The shares trade at a 30% discount to Q318 IFRS NAV, larger than for any of the peers listed in Exhibit 7, and trade at a larger 34% discount to our adjusted NAV of €1.94 (up from €1.91). Our adjusted NAV includes a peer group valuation of the AAM platform and a mark-to-market value quoted investments. A strong balance sheet and cash flow position supports an attractive yield and provides resources for investment to grow AAM further.

The Italian leader in alternative assets

DeA Capital is a leader in the Italian AAM sector. It manages assets of around €11.4bn across its integrated AAM platform, comprising private equity, real estate and NPLs, and operates as an investor in its own funds managed, and invests directly, from its permanent capital base. The group is majority-owned by De Agostini, a family-owned private group founded in 1901, itself owned by the Boroli and Drago families. De Agostini operates in the media, gaming, services and, through DeA Capital, AAM sectors. De Agostini has a 58.3% stake in DeA and, through the loyalty share scheme approved by shareholders in 2015, has a voting interest of around 70%.

In recent years, DeA has been reducing its ‘large ticket’ direct private equity investments and refocusing on supporting the growth of its AAM platform, investing in new capabilities and seeding new fund launches. AAM has good growth prospects as low interest rates continue to stimulate demand for alternative assets (private equity, real assets and hedge funds) from investors seeking sustainable yields. The AAM platform mainly comprises DeA Capital Real Estate, in which DeA has recently increased its ownership to 94% from 64.3%, the leading real estate manager in Italy with AUM of €9.1bn (measured by total managed assets) and DeA Capital Alternative Funds, which manages €2.3bn (measured by total commitments) of private equity funds. In addition, 80.0%-owned SPC provides NPL management and the 45%-owned associate YARD provides property services to the real estate sector, including DeA. Key strategic goals for the AAM business are to further expand the base of investors and the range of products offered and DeA recently announced the creation of DeA Capital Real Estate France, a first step in creating a pan-European real estate platform.

DeA has a strong and liquid balance sheet. Net asset value at 30 September 2018 was €463m, or €1.83 per share. The net assets of the AAM business (31%), investments in private equity and real estate funds (27%), and a significant net financial position (30%), together represent 88% of the NAV. The direct investment portfolio account represents the balance.

For a detailed analysis of DeA Capital and its strategy, please see our June Outlook note.

Exhibit 1: DeA Capital group financial position at 30 September 2018

Net assets (€m)

Net assets per share (€)

% of total NAV

September (Q3)

June
(Q2)

December*

September (Q3)

June
(Q2)

December*

September (Q3)

June
(Q2)

December*

2018

2018

2017

2018

2018

2017

2018

2018

2017

Private equity investments

Kenan (Migros)

19.7

30.2

45.6

0.08

0.12

0.18

4%

6%

10%

Private equity/real estate funds

126.4

180.7

170.9

0.50

0.71

0.67

27%

38%

37%

Other (Cellularline, IDeaMI ….)

31.6

32.4

33.4

0.12

0.13

0.13

7%

7%

7%

Total private equity investment

177.7

243.3

249.9

0.70

0.96

0.98

38%

51%

54%

Alternative asset management

DeA Capital Real Estate

97.9

98.1

101.2

0.39

0.39

0.40

21%

21%

22%

DeA Capital Alternative Funds

40

39.2

39.9

0.16

0.15

0.16

9%

8%

9%

Other (YARD, SPC)

6.8

6.5

6.0

0.03

0.03

0.02

1%

1%

1%

Total alternative asset management investment

144.7

143.8

147.1

0.57

0.57

0.58

31%

30%

32%

Investment portfolio

322.4

387.1

397.0

1.27

1.53

1.55

70%

82%

86%

Other net assets/(liabilities)

0.7

(0.6)

0.6

0.00

0.00

0.00

0%

0%

0%

Holding company net financial positions

140.3

86.9

61.8

0.55

0.34

0.24

30%

18%

13%

Net asset value

463.4

473.4

459.4

1.83

1.87

1.80

100%

100%

100%

Source: DeA Capital. Note: *December 2017 adjusted for subsequent distribution of €0.12 per share.

Q3 saw strong cash flows continuing

Q3 saw growth in AUM and a continuation of strong cash flows, primarily driven by net reimbursements from mature fund co-investments. Investment performance was held back by negative revaluation movements on the residual indirect stake in Migros, the listed Turkish retailer. The majority of the fund investments showed gains, but these were offset by negative adjustments on two real estate funds. Since the end of the quarter, DeA has proposed the cancellation of 40m treasury shares, which we view positively. More significantly, it has increased its stake in DeA Capital Real Estate from 64.3% to 94.0% at what we believe to be favourable price. The key Q3 highlights were:

Assets under management increased to €11.4bn as at 30 September from €11.2bn in June. DeA Capital Alternative Funds completed the launch of the IDeA Agro Fund in July, which will invest in environmentally sustainable agricultural companies operating in Italy. The real estate AUM also benefitted from the establishment of the Tessalo fund, a closed-end sale and lease-back fund with an Italian healthcare group. DeA Capital Real Estate has supported the fund with an investment of €18.5m.

The group NAV per share was €1.83 at 30 September compared with €1.87 in June, and €1.80 at end-2017, adjusted for the subsequent annual distribution of €0.12 per share. The main driver of NAV growth during the year has been gains on private equity funds managed by DeA, in which it is co-invested.

Group NAV and the DeA Capital Real Estate reported earnings were negatively affected by a €2.6m provision against valuation losses, mainly attributable to a development fund which has incurred a planning consent set-back, and a sale and lease-back fund with a bank where the bank will repurchase the assets at (lower) more recent market values. The Q3 adjustment brings the year to date adjustment in respect of these funds to €4.4m. Our adjusted earnings for the AAM division adjust for fund valuation movements, positive and negative.

Within the direct investment portfolio, the remaining indirect investment in Turkish retailer, Migros incurred unrealised losses, in respect of the Migros share price and the Turkish lire of €10.5m or €0.10 per share. The valuation has improved by c €13.5m since our last published adjusted NAV, adding €0.05 per share.

In addition to the Tessalo investment, during Q318, €3.6m was invested in the existing funds and DeA received €56.5m in distributions. Year to date, the net holding company liquidity generated by the investment portfolio amounts to €83.8m.

As a result of the continuing positive cash flow being generated by the investment portfolio, the holding company net financial position increased to €140.3m (€0.55 per share), or 30% of NAV, as at 30 September (June: €86.9m).

Ownership of DeA Capital increased to 94%

On 21 November 2018, DeA announced that it had completed the acquisition of an additional c 29.7% of DeA Capital Real Estate, from minority partner INPS, increasing DeA’s ownership to c 94.0%. We believe this development is positive as it underlines DeA’s focus on the growth of its AAM platform, increases the share of AAM earnings within the group, appears to us to be attractively priced, and is a significant move towards simplifying the DeA corporate structure. The divestment by INPS is in line with its strategy, initiated in 2017, to gradually dispose of non-core real estate investments. The remaining 6% is owned by Fondazione Carispezia, a private foundation that remains one of the main shareholders in the Italian bank, Credit Agricole Carispezia.

The consideration for the acquisition of the stake is €40m, based on the book value of DeA Capital Real Estate, wholly financed from DeA’s significant internal cash resources. In addition, there is a maximum earn-out of €4.5m over the three-year period 2019-2021 which is subject to DeA Capital meeting undisclosed set targets for new assets under management.

We estimate that DeA is paying between 9.7x and 11.7x our forecast underlying earnings for FY19 to acquire the additional stake in DeA Capital Real Estate. The additional (forecast) post tax, pre-minority adjusted earnings acquired are €2.3m. In addition to assumed investment gains, our adjusted earnings adds back the recurring non-cash purchase price amortisation (PPA) in relation to the intangible value of customer relationships that was recognised on formation of the real estate subsidiary. In calculating the acquisition multiple, we adjust the acquisition cost for the 30 September value of the additional share of available for sale fund investments, owned by DeA Capital Real Estate, that have been acquired (c €17.2m). This adjusted acquisition cost (an amount of between €22.8m and €27.3m) represents the amount paid for the additional earnings.

Exhibit 2: DeA Capital Real Estate stake acquisition appears attractively priced

€000's unless stated otherwise

FY19e

DeA capital Real Estate net income (before minority)

8,751

Adjustments (after tax, pre-minority)

PPA

770

Other investment income

(1,635)

DeA Capital Real Estate adjusted net income

7,886

Share of profit acquired

29.7%

Profit acquired

2,342

Minimum acquisition cost

40,000

Maximum acquisition cost

44,500

Adjustment for DeA Capital Funds acquired:

Value of funds owned by DeA Capital Real Estate

57,826

Share of funds acquired

29.7%

Funds acquired

17,174

Minimum acquisition cost adjusted for funds acquired

22,826

Maximum acquisition cost adjusted for funds acquired

27,326

Minimum P/E

9.7

Maximum P/E

11.7

€000's unless stated otherwise

DeA capital Real Estate net income (before minority)

Adjustments (after tax, pre-minority)

PPA

Other investment income

DeA Capital Real Estate adjusted net income

Share of profit acquired

Profit acquired

Minimum acquisition cost

Maximum acquisition cost

Adjustment for DeA Capital Funds acquired:

Value of funds owned by DeA Capital Real Estate

Share of funds acquired

Funds acquired

Minimum acquisition cost adjusted for funds acquired

Maximum acquisition cost adjusted for funds acquired

Minimum P/E

Maximum P/E

FY19e

8,751

770

(1,635)

7,886

29.7%

2,342

40,000

44,500

57,826

29.7%

17,174

22,826

27,326

9.7

11.7

Source: Edison Investment Research

Cancellation of treasury shares

DeA is proposing to cancel 40m of the 52.9m treasury shares (c 17% of the shares outstanding) that it has acquired over the past few years under its ongoing share repurchase programme. Although this will have no impact on reported liquidity, NAV, earnings, or EPS, as the treasury shares are deducted from this calculation, we welcome the move as we believe it shows that management believes its significant net positive financial position is sufficient to support its current growth plans without the need to reissue the shares. Should this situation change, management can make the case for new share issuance based on the merits of the investment opportunity. As the shares are in any case withdrawn from the market, cancellation should have no negative impact on share trading liquidity.

The reason for the cancellation is that with ongoing repurchases, the free float has recently fallen beneath the minimum level that is required to maintain DeA’s listing in the STAR market segment of Borsa Italiana’s Mercato Telematico Azionario (MTA) equity market. This segment of the market is dedicated to mid-sized companies with a market capitalisation of less than €1 billion, which voluntarily adhere to comply with the requirements to:

High transparency and disclosure requirements

High liquidity

Corporate governance practices that are in line with international standards.

To restore and maintain compliance with these requirements, DeA will propose the cancellation of shares to shareholders at an extraordinary general meeting, planned for April 2019. Meanwhile, the parent company De Agostini has already waived 50% of its double voting right entitlement on the shares that it owns, awarded under the company’s shareholder loyalty programme. Assuming shareholder approval for the share cancellation, Exhibit 3 shows the effect on the number of shares and the parent company voting position, which is broadly unchanged as a percentage.

Exhibit 3: Impact of treasury share cancellation and loyalty vote waiver

In million shares

Before

After

Shares in issue

306.7

266.7

Treasury

52.9

12.9

Shares ex treasury (used for NAV and EPS)

253.8

253.8

Shares with double voting rights

180.3

90.9

Total votes (inc treasury)

487.0

357.6

De Agostini shares

178.8

178.8

De Agostini shares (% of total)

58.3%

67.0%

De Agostini votes

357.6

268.2

De Agostini votes (% of total)

73.4%

75.0%

Source: DeA Capital, Edison Investment Research

Financials

We have made a number of relatively small adjustments to the AAM earnings estimates to reflect recent trends, but the main change is an increase in attributable earnings resulting from the reduced minority interests.

Our assumptions for AUM are little changed although we have slightly reduced our expected average fee margins in line with recent experience. Forecast management fees are lower as a result, but the effect on adjusted earnings, before minority interests, is partly offset by lower forecast expenses, again reflecting recent experience. It should be noted that the fall in expenses that we forecast, from FY18 to FY19, is more than accounted for by the assumed non-repetition of the provisions taken in FY18 within DeA Capital Real Estate. Reported earnings also benefit from a higher forecast other income/expense related to the notional return assumed on fund investments, which have increased to c €57m as a result of the €18.5m investment by DeA Capital Real Estate in the Tessalo fund in Q3. These notional returns are stripped out of adjusted earnings figure, which is also adjusted for non-cash purchase price amortisation (PPA) and other one-off items.

Our forecast adjusted earnings is reduced by c 5% for the current year (to €10.0m) but in FY19 a full year impact from the reduction in minority interests more than compensates for our underlying earnings reduction, leaving adjusted attributable earnings c 12% higher.

Exhibit 4: AAM division detailed forecasts

New

Old

Change

 

2016

2017

2018e

2019e

 

2018e

2019e

2018e

2019e

AuMs (€bn) – end period

DeA Capital Alternative Funds

1.937

2.190

2.213

2.213

2.085

2.085

0.128

0.128

DeA Capital Real Estate

8.672

9.542

9.391

10.191

9.472

10.472

(0.081)

(0.281)

Total AuM (€bn) – end period

10.609

11.732

11.604

12.404

11.557

12.557

0.047

(0.153)

AuMs (€bn) – average

DeA Capital Alternative Funds

1.844

1.944

2.202

2.213

2.154

2.085

0.048

0.128

DeA Capital Real Estate

8.059

9.282

9.258

9.691

9.289

9.972

(0.030)

(0.281)

Total AuM (€bn) – average

9.903

11.226

11.461

11.904

11.443

12.057

0.018

(0.153)

Management fees/AuM bps

DeA Capital Alternative Funds

112

95

89

88

91

92

(2)

(4)

DeA Capital Real Estate

50

45

44

43

45

45

(1)

(2)

Figures in €000s

DeA Capital Real Estate

40,261

41,381

40,614

41,671

41,509

44,874

(895)

(3,203)

DeA Capital Alternative Funds

20,724

18,438

19,605

19,474

19,593

19,182

12

292

Total alternative asset management fees

60,985

59,819

60,218

61,146

61,102

64,056

(883)

(2,910)

Income from equity investments

531

822

1,119

1,197

1,395

1,231

(276)

(33)

Other income/expense

1,088

1,676

(705)

2,336

(949)

1,624

243

712

Income from services

8,336

703

1,678

1,400

1,503

1,400

175

Revenue

70,940

63,020

62,310

66,079

63,051

68,310

(741)

(2,232)

Total expenses

(60,245)

(91,116)

(48,444)

(46,806)

(46,329)

(47,416)

(2,115)

610

Finance income/expense

19

13

(16)

(15)

(1)

Profit before tax

10,714

(28,083)

13,850

19,273

16,707

20,894

(2,857)

(1,622)

Taxation

(3,405)

(2,991)

(4,416)

(5,709)

(4,807)

(6,171)

391

462

Profit after tax

7,309

(31,074)

9,434

13,563

11,900

14,723

(2,466)

(1,160)

Minority interests

1,178

13,575

(1,442)

(525)

(2,406)

(3,594)

964

3,069

Attributable profits

8,487

(17,499)

7,992

13,038

9,494

11,129

(1,502)

1,909

Adjustments (net of tax & minorities)

PPA

1,042

592

566

724

545

495

21

229

SFP

1,494

2,460

Goodwill

24,897

Other income/expense

(1,017)

(859)

271

(1,537)

438

(731)

(167)

(806)

Provisions against investment impairment

1,170

1,170

Adjusted attributable earnings

10,006

9,591

9,999

12,225

10,477

10,893

(478)

1,332

o/w DeA Capital Real Estate

5,058

5,889

4,622

7,413

5,176

6,237

(554)

1,175

o/w DeA capital Alternative funds

3,776

3,133

3,783

3,649

3,912

3,459

(129)

190

o/w other alternative asset management (inc SPC, YARD)

1,173

570

1,595

1,163

1,389

1,197

206

-33

Source: DeA Capital, Edison Investment Research

Other group earnings

In addition to our estimates for the AAM profit contribution, our NAV forecasts seek to capture at least part of the potential for growth in NAV from the majority of the investment portfolio that is not captured within the AAM segment. This includes the private equity fund holdings and the direct investments (Kenan Investments/Migros, Crescita/Cellularline and IDeaMI).

We assume 7.5% per year ‘normalised’ growth in the carried value of all of the private equity fund investments and 4% per year for real estate funds (substantially representing the expected income returns), whether carried as available for sale investments, consolidated or equity accounted. We believe this to be a useful way to capture at least some of the returns that may be earned on these investments even though our approach differs from the way these assets are actually managed, seeking to maximise IRR. Our forecasts assume no change to the last published value (or income from) the quoted investments, Migros (Kenan Investments), Cellularline (formerly Crescita) and IDeaMI, but in our valuation (see below) we do adjust these to market values.

In Exhibit 5, we break down our group forecasts (shown in Exhibit 12) by segment, as reported by the company, which feed through into our NAV forecast. The most significant change relates to the Private Equity segment where our normalised return methodology described above does not adjust for a reversal of the negative investment returns in Q318.

Exhibit 5: Summary of DeA Group segmental forecasts

Attributable profit/(loss) for the period (€m)

New

Old

Change

(IFRS, unadjusted)

FY18e

FY19e

FY18e

FY19e

FY18e

FY19e

AAM

8.0

13.0

9.5

11.1

(1.5)

1.9

Private Equity

8.8

6.3

21.1

8.3

(12.3)

(2.0)

Holdings

(6.6)

(4.3)

-6.8

-4.3

0.2

0.0

Group

10.2

15.1

23.8

15.1

(13.6)

(0.0)

Source: Edison Investment Research

Exhibit 6 shows a summary of some of the key group level forecasts. The strong cash generation in Q3 can be seen in the relatively modest reduction in the forecast holding company net financial position, despite the €40m cash payment related to the real estate minority interest acquisition. Given the strong cash flow, we continue to expect further strong dividend distributions. The slight reduction in our forecast NAV per share reflects the Q3 investment returns discussed above.

Exhibit 6: Group level changes in key forecasts

AUM
(€bn)

Fees from AAM*
(€m)

Holdco net financial position (€m)

NAV/share
(€)

Dividend
(€)

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

Old

New

% chg.

2018e

11.6

11.6

0.4

61.1

60.2

-1.4

119.6

105.0

-12.2

1.88

1.84

-2.3

0.12

0.12

0.0

2019e

12.6

12.4

-1.2

64.1

61.1

-4.5

108.3

92.4

-14.7

1.82

1.78

-2.3

0.12

0.12

0.0

Source: Edison Investment Research

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