Strong delivery

RCM Beteiligungs 25 June 2019 Update
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RCM Beteiligungs

Strong delivery

Real estate

Scale research report - Update

25 June 2019

Price

€2.10

Market cap

€29m

Share price graph

Share details

Code

RCMN

Listing

Deutsche Börse Scale

Shares in issue

14.0m

Net bank debt at December 2018

€24.2m

Business description

RCM Beteiligungs is a property developer, acquiring rental income-producing assets in and around Dresden and investing in refurbishment with the aim of improving the tenant mix to enhance value. RCM also invests in financial assets. It is a large shareholder in KST Beteiligungs, a financial investor.

Bull

Low unemployment levels in Dresden.

Focus on a defined region leads to greater understanding of opportunities.

Established business concept and strong partner network in the region.

Bear

Small company, largely dependent on the development of the Dresden region.

Low interest rate environment may end.

Dependence on positive macro environment in the region and attractive sourcing potential.

Analyst

Richard Finch

+44 (0)20 3077 5700

A flying start to 2019 offers room for surprise as management’s guidance of an improvement in full-year PBT (€2.9m+) has already been secured in Q1 (€3.4m). The c €10m sale of a residential and commercial complex reiterated the success of RCM Beteiligungs’ asset development record and its focus on selected well-defined projects. Favourable macro factors and scope for efficiencies and asset appreciation support RCM’s positive outlook, evident in maintaining a dividend, raised by 50% last year. Solid finances (6x 2018 interest cover and an above industry-average equity ratio of 46%), boosted by Q1 disposal proceeds, allow significant reinvestment as well as further share buybacks (0.55m in May for €1m after 2018’s 0.7m capital reduction).

H218 consolidation

After 2018’s bumper start, H2’s absence of meaningful property disposals and sharply lower rental income as a result of asset sales led to a slight profit ‘miss’ (PBT €2.9m against €3m+ guidance). This reduction in rental volume may be regarded as temporary, ie dictated by the lure of high disposal prices, as RCM remains intent on growing recurrent revenues. Moreover, the transaction impact was again mitigated by enhanced rent per square metre (14% for the year) and much lower rental admin costs (down by half in H2). Although not disclosed for H2, the annual asset sale margin was 33%, which is well ahead of 2016 (20%+), if not a strong 2017 (40%). Corporate restructuring yielded expected tax efficiencies and thus a disproportionate rise in net profit (2018 up 62% vs PBT up 37%).

Another good year in prospect

FY19 has followed the pattern of last year with the inclusion of an unusually large disposal (a well-invested 8.900sqm development for c €10m), which was reported late last year but recognised in Q1. However, the transaction was even more profitable (would increase 2018 asset sale margin from 33% to 49%). Despite Q1 exceeding targeted full-year PBT (€3.4m vs €2.9m+), guidance is unchanged as any gain on last year will depend on transactions.

Valuation: Attractive

The 2018 P/E of under 12x is undemanding and likely to reduce visibly, given the strong Q1 performance, positive guidance and continued share buybacks. A P/BV (2018) ratio of 1.3x is also unchallenging as it compares with the book value of assets (RCM reports under HGB standards).

Historical financials

Year
end

Revenue
(€m)

PBT

(€m)

EPS

(€)

DPS
(€)

P/E

(x)

Yield
(%)

12/15

14.7

1.3

0.08

0.04

26.3

1.9

12/16

11.4

1.8

0.11

0.04

19.1

1.9

12/17

19.4

2.1

0.11

0.06

19.1

2.9

12/18

17.6

2.9

0.18*

0.06

11.7

2.9

Source: RCM Beteiligungs Note: Based on 14.0m shares (14.7m shares in 2015–17).

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.

Review of 2018 results

FY18 saw continued implementation of RCM’s strategic focus on investment in its Dresden core (now only one other location). As shown in Exhibit 1, this compares with a predominance of properties outside Dresden just four years ago. In 2018 more than 60% (c 15,000sqm) of disposals were from outside the Greater Dresden area, including the withdrawal from four locations. The sale of 10 properties in the period reduced year-end 2018 stock to c 17 properties (over 60 at end 2014) with a total space of 14,800sqm. Such a diminution in the portfolio reflects a reluctance to pay up in the face of sharp price rises as well as the goal of maximising disposal proceeds. In Q119 RCM acquired a +1,500sqm well-located property with significant rent increase potential as well as clear development opportunities, therefore overall 16,300sqm stock at April.

Exhibit 1: Streamlining of investment locations and properties

Source: RCM accounts

Such active streamlining with associated efficiencies again drove the company’s improved financial performance in 2018, although importantly the bulk of the aforementioned disposals, notably the c €11m development project sale (9,500sqm) in Q3, was not recognised in the accounts of the period, ie not until Q119. This is confirmed in Exhibit 2 with a y-o-y step-change in H1 revenue (€13.9m against €4.2m), even if total asset sales revenue is not disclosed. By contrast, H2 saw quieter, more normal transaction revenues (also not quantified).

Rental income is inevitably affected by transaction business. However, management is at pains to minimise the impact of rationalisation through efficiencies and enhanced unit returns. In 2018 a c 20% decline in rental revenue was curbed at the profit level to c 15% thanks to a near halving of admin costs from geographical focus and targeted enhancement of rent per square metre (up 14%).

Significant expenses such as labour costs, other operating expenses and net interest remained similar to 2017.

Exhibit 2: Analysis of revenue and profit

Year end December (€m)

H117

H217

FY17

H118

H218

FY18

Q119

Asset sales

2.2

13.0*

15.2

**

14.0

12.1***

Rental income

1.5

1.5

2.9

1.2

1.2

2.4

0.5

Change (%)

-6%

-18%

-21%

-19%

-30%

Other

0.5

0.8

1.3

1.2

0.2

Revenues

4.2

15.2

19.4

13.9

3.7

17.6

12.8

Change (%)

+71%

n/m

n/m

-9%

+5%

Pre-tax profit

0.70

1.39

2.09

2.40

0.46

2.86

3.45

Source: RCM Beteiligungs. Notes: *Including newly consolidated project company and associated impairment. **Including c €11m disposal in Q1. ***Including €9.8m transaction.

2019 optimism

As Q119 bumper returns were driven by recognition of a disposal package announced in the preceding quarter, it is understandable that guidance for 2019, introduced in March, was not repeated post-Q1. The relative vagueness of management’s PBT forecast (to exceed €2.9m) leaves scope for surprise, given the proportion of first-quarter profit delivery.

Management remains positive about the real estate market thanks to persistently low interest rates and the growing appeal of second-tier locations such as Dresden, which still offer attractive rental yield despite rising prices.

There should also be increasing benefits from restructuring its portfolio, ie fewer locations with a focus on its Dresden core and a higher average unit size.

Strong finances allow a resumption in property expansion (see small Q1 purchase) after a pause in 2017 and 2018, despite a continued commitment to investment in existing holdings to enhance value (c €2.5m spend last year). Meanwhile there was an encouraging reduction in net interest in Q1 from €0.3m to just €28K.

Valuation

RCM’s business model sits between that of an asset holder and that of a developer, making direct comparisons to listed companies somewhat difficult. Its P/E ratio is at a premium to Noratis, which has a similar model (trailing 8x). However, its P/BV (2018) ratio is lower at 1.3x, vs 1.5x for Noratis.


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General disclaimer and copyright

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. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally.

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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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.

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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

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United States of America

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Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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