Noratis — Strong pipeline

Noratis (DB: NUVA)

Last close As at 27/03/2024

19.85

0.05 (0.25%)

Market capitalisation

96m

More on this equity

Research: Real Estate

Noratis — Strong pipeline

Noratis remains firmly on a growth path. Accelerating development of its asset base (stock book value up by over half in H218 at €176m) has been followed by news that fundraising options for further expansion are under review. While this should underpin strong long-term prospects, a typical two-year lead time for asset value enhancement explains apparently measured guidance for 2019 (maintained EBIT on higher revenue). Timing was also a factor last year as H2 bias of high-margin asset sales drove a 30% rise in adjusted EBIT, more than making up for a first-half shortfall. A generous dividend policy is being maintained despite growth ambitions.

Richard Finch

Written by

Richard Finch

Analyst, Consumer

Real Estate

Noratis

Strong pipeline

Real estate

Scale research report - Update

14 May 2019

Price

€22.60

Market cap

€81m

Share price graph

Share details

Code

NUVA

Listing

Deutsche Börse Scale

Shares in issue

3.6m

Net debt at end December 2018

€141m

Business description

Noratis is a specialised asset developer, acquiring residential rental income-producing assets in secondary locations with optimisation potential. Investing in the asset base and improving the tenant mix creates value, which Noratis exploits during well-structured asset sales, either through individual or block sales.

Bull

Strong experience operating in Germany’s non- core areas.

Focused investment and asset management approach to boost yields and asset values.

Established business concept and strong partner network across Germany.

Bear

Smaller company in a very competitive market.

Low interest-rate environment may end.

Dependence on attractive portfolio opportunities.

Analyst

Richard Finch

+44 (0)20 3077 5700

Noratis remains firmly on a growth path. Accelerating development of its asset base (stock book value up by over half in H218 at €176m) has been followed by news that fundraising options for further expansion are under review. While this should underpin strong long-term prospects, a typical two-year lead time for asset value enhancement explains apparently measured guidance for 2019 (maintained EBIT on higher revenue). Timing was also a factor last year as H2 bias of high-margin asset sales drove a 30% rise in adjusted EBIT, more than making up for a first-half shortfall. A generous dividend policy is being maintained despite growth ambitions.

H218 delivers

As expected, the second half saw the majority of planned 2018 asset disposals (notably Frankfurt) and at a much superior y-o-y margin (gross profit 37% vs 29%). This was supplemented by a sharp increase in rental income as a result of higher levels of stock at the start of the period. Such buoyancy remedied H1 setbacks, driving a small rise in full-year adjusted EBIT and PBT (see Exhibit 2 on page 2) in line with guidance. This allowed a dividend of €1.30, given the company’s policy of a c 50% payout (the reduction on 2017’s €1.50 was due to the May 2018 capital increase).

Continuing to invest

Guidance is for EBIT and PBT to hold steady in 2019 on higher revenue as margins normalise from last year’s high. This may seem at odds with the recent step-change in the asset base (book value up over 75% in 2018), fuelling growth prospects, but the lead time for investment projects can be at least two years. Management has newly reiterated its intention to remain a net buyer and is considering funding options. Net debt more than doubled in 2018 to €141m.

Valuation: Long-term appeal

Sitting between asset holder and developer makes for difficult comparison with listed peers but Noratis is at a notable discount to RCM Beteiligungs, which has a similar model (trailing P/E ratio of 23x). At 9x prospective P/E and with a P/BV (2018) ratio of 1.6x, the company offers an attractive yield (almost 6% prospective), backed by a positive outlook and dividend commitment.

Consensus estimates

Year
end

Revenue
(€m)

EBIT

(€m)

EPS***

(€)

DPS
(€)

P/E

(x)

Yield
(%)

12/17

68.0

15.2*

3.0

1.5

7.5

6.6

12/18

56.1

15.6**

2.6

1.3

8.7

5.8

12/19e

73.4

16.3

2.5

1.3

9.0

5.8

12/20e

80.3

17.9

2.7

1.3

8.4

5.8

Source: Noratis accounts, Refinitiv. consensus estimates. Note: *After €1.5m IPO costs. **After €0.8m capital increase costs. ***Based on 2.9m shares in 2017 and 3.6m shares in 2018.

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

The Noratis model of upgrading and selling allows financial periods to be seen as either acquisition or disposal years. Exhibit 1 shows 2018 to have been markedly the former, predominantly because of investment (expansion was promised at its May fundraising) but also thanks to a reduction in sale proceeds. Year-end stock was up by over 75% in terms of book value (€176m against €99m) and by c 50% in terms of units (1791 against 1194), which lays a strong base. A highlight was the H1 purchase of three portfolios, mainly in Celle (252 of 365 units), which meet usual acquisition requirements, ie older buildings (mainly from 1960s) with significant value potential on modernisation and reduction of 10% vacancy rate. This followed the purchase of 161 units in Frankfurt and Ratingen – slightly newer properties but with scope for higher rent on expiry of social housing agreements. Q3 saw a mid-double digit €m block purchase in Frankfurt (363 residential and commercial units). In turn, 100 units in Frankfurt-Niederrad, a block in Schwarzenbek (99 units) and residual 48 units at Dormagen accounted for the bulk of disposals (overall 294 units sold).

Exhibit 1: Revenue and year-end real estate stock (€m)

Source: Noratis accounts

Noratis’s financial performance in 2018 (see Exhibit 2) reflected this trading pattern as 2017 asset sales, up by two-thirds and epitomised by the bumper Dormagen disposal, proved a hard act to follow. The impact of lower asset sale proceeds was at least mitigated by an impressively higher gross margin (36% vs 29%), hence broadly steady gross profit. Rental income was up by a third, endorsing the focus on acquiring largely occupied residential assets, which yield immediate income.

Exhibit 2: Financial performance

Year-end December (€m), HGB

H117

H217

FY17

H118

H218

FY18

Revenue

Asset sales

30.4

31.5

61.9

17.5

30.7

48.2

Change

+116%

+33%

+64%

-42%

-3%

-22%

Rental

2.7

3.4

6.1

3.3

4.6

7.98

Change

-21%

+3%

-9%

+27%

+35%

+30%

Total

33.1

34.9

68.0

20.8

35.3

56.1

Change

+89%

+29%

+52%

-37%

+1%

-18%

Gross profit

Asset sales

8.5

9.2

17.7

6.0

11.3

17.3

Margin

28%

29%

29%

34%

37%

36%

Rental

1.5

2.3

3.8

1.7

2.7

4.3

Total

10.1

11.5

21.5

7.7

14.0

21.7

EBIT

8.4

8.3

16.7

5.5

10.9

16.4

Net interest

(1.5)

(1.5)

(3.0)

(1.2)

(1.6)

(2.8)

Pre-tax profit – adjusted

6.9

6.8

13.7

4.3

9.3

13.6

Exceptional items*

(1.5)

-

(1.5)

(0.8)

-

(0.8)

Pre-tax profit – reported

5.4

6.8

12.2

3.5

9.3

12.8

Net profit

3.3

5.4

8.7

2.6

6.6

9.2

Source: Noratis accounts. Note: *Stock market costs (H117 IPO and H118 capital increase).

Exhibit 3: Revenue and EBIT (€m)

Source: Noratis accounts

Contrasting half-yearly performances apart (a matter of timing, as discussed), a flat outturn at the gross profit level was matched at EBIT (see Exhibit 3) as a near-doubling of labour costs owing to expansion and bonuses was offset by a 30% fall in other operating costs. This is after adjusting EBIT for one-off costs: €1.5m IPO expenses in 2017 and €0.8m capital increase costs in 2018. Net interest fell slightly for the year as acquisition payments were due only late in the period.

Such ambitious investment (notably Frankfurt Ginnheim) drove a doubling of net debt to €141m in 2018. However, the equity ratio at year end is unchanged (23%) on 2017. It represents 80% of the book value of land and buildings held for sale (€176.7m) at December 2018. The properties are shown fully in current assets as they are acquired with the aim of being sold after successful development. This gearing is exacerbated by Noratis’s accounts preparation under HGB standards. Unlike IFRS, HGB does not use mark-to-market valuations or annual impairments. This implies that all Noratis’s asset sales revenues are booked at the time of the disposal and are therefore cash earnings. On the balance sheet, this implies that hidden reserves are building due to optimisation and rent multiple expansions. In IFRS accounts, these value increases would be seen as profits and typically are then seen in equity. Based on the valuation by an international RICS appraiser, Noratis’s hidden reserves were c €21m at end 2017, ie asset value of €120m against book value of €99m.

30% of the net debt has a term to maturity of over five years. Management has recently stated that it is examining options for borrowing, including the issue of an unsecured bond.

Set fair

For 2019, guidance is for EBIT and PBT to hold at the high level of the last two years. However, this is against an outturn, depressed by €0.8m capital increase costs. On an adjusted basis, consensus EBIT forecasts of €16.2m compare with €16.4m in 2018. Given expectation of higher asset sales, even on a demanding H2 margin comparative, such a forecast may appear cautious.

Further out, Noratis has secured a substantial base for medium-term disposal at a likely high gross margin (2018 36%). Expansion is on the cards, given recent management comment and market opportunity (c 70% of apartments in Germany date from the 1920s to mid-80s) and continued positive conditions.

Valuation

Sitting between asset holder and developer makes for difficult comparison with listed peers but Noratis’s P/E ratio is at a notable discount to RCM Beteiligungs, which has a similar model (trailing 23x). However, its P/BV (2018) ratio is higher at 1.6x, against 1.3x (2017).

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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, 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 securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

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.

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd who holds an Australian Financial Services Licence (Number: 427484). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

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

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

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).

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.

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

More on Noratis

View All

Latest from the Real Estate sector

View All Real Estate content

Research: Consumer

Greggs — Robust trading performance – earnings upgrade

An unscheduled trading update confirming exceptional 11.1% like-for-like (l-f-l) sales growth in the first 19 weeks of FY19, and a fourth earnings upgrade in six months is testament to Greggs’ outstanding progress on the repositioning of the brand as a leading food-on-the go-format. We increase our FY19 and FY20 underlying PBT forecasts by 9%. The company is highly cash generative and likely to distribute part of the substantial cash balance (FY19e: £102.6m) with the H119 dividend.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free