Deutsche Grundstücksauktionen — Continued solid turnover

Deutsche Grundstücksauktionen (DB: DGR)

Last close As at 20/06/2024

24.80

0.20 (0.81%)

Market capitalisation

40m

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Research: Real Estate

Deutsche Grundstücksauktionen — Continued solid turnover

Deutsche Grundstücksauktionen (DGA) posted robust H119 results (albeit somewhat below the strong H118 levels), despite lower transaction volumes in the broader German real estate market. We believe that buoyant investment demand, fuelled by the persistent low interest rate environment, which limits the selection of attractive investment alternatives, should support future performance. DGA continues with its generous dividend policy and recently paid a dividend of €1.00 per share.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Real Estate

Deutsche Grundstücksauktionen

Continued solid turnover

Real estate

Scale research report - Update

13 September 2019

Price

€16.80

Market cap

€27m

Share price graph

Share details

Code

DGR

Listing

Deutsche Börse Scale

Shares in issue

1.6m

Last reported net cash at end-June 2019

€2.4m

Business description

Deutsche Grundstücksauktionen is market leader in the auctioning of properties in Germany. The company was founded in Berlin in 1984.

Bull

Sustained demand for property, thanks to favourable interest rate outlook.

Clear market leader with experienced management and wide client base.

Sound finances, allowing generous, unbroken dividend record.

Bear

Macroeconomic uncertainties; rising interest rates would diminish appeal of property yield.

Intensely competitive.

Potential supply shortage as a result of excess demand and unrealistic seller expectations.

Analyst

Milosz Papst

+44 (0) 20 3077 5700

Deutsche Grundstücksauktionen (DGA) posted robust H119 results (albeit somewhat below the strong H118 levels), despite lower transaction volumes in the broader German real estate market. We believe that buoyant investment demand, fuelled by the persistent low interest rate environment, which limits the selection of attractive investment alternatives, should support future performance. DGA continues with its generous dividend policy and recently paid a dividend of €1.00 per share.

High comparative base

DGA’s net commission income declined 6.7% y-o-y to €5.66m in H119 on the back of the lower value of sold properties (down by 16.4% y-o-y to €53.3m). However, this is mainly due to a large transaction of €15.2m completed in Q118. In Q219 alone, the company’s net commission income improved 17% y-o-y to c €3.1m. We acknowledge the solid net commission rate of 10.6% in H119, which is ahead of H118 at 9.5% and DGA’s five-year average of 10.1%. As a result of a slightly higher tax charge, DGA reported a decline in net income of €8.6% y-o-y to €0.81m (or c €0.51 per share).

Guidance confirmed despite lower new admissions

DGA’s management reiterated its FY19 guidance with respect to the turnover of sold properties of €109m, in line with its five-year average. This is despite the expected drop in orders from the Institute for Federal Real Estate and Bodenverwertungs- und verwaltungs (BVVG) in H219. The acquired admission volume across the DGA group for Q319 is €23.7m, which is some 10% below last year. However, management still believes that it may be able to achieve Q318 results, partially on the back of a stronger brokerage business. Moreover, DGA expects that the Institute for Federal Real Estate and BVVG are likely to launch a new tender offer covering 2020 and beyond.

Valuation: An interesting dividend play

Based on FY18 EPS of €1.00, DGA’s shares currently trade on a P/E ratio of 16.8x. DGA has been a regular dividend payer over the last 20 years, with its last payout of €1.00 per share representing a dividend yield of c 6.0%. This is well ahead of the German small-cap market (no direct listed peer).

Historical financials

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/15

10.3

1.13

0.71

0.70

23.7

4.2

12/16

10.6

1.17

0.73

0.72

23.0

4.3

12/17

11.2

1.22

0.76

0.77

22.1

4.6

12/18

12.0

1.59

1.00

1.00

16.8

6.0

Source: Company accounts

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.

H119 results: Holding up quite well

DGA and its subsidiaries were able to sell 790 properties worth €53.3m during auctions in H119, which represents a 16.4% y-o-y decline from €63.8m generated on 802 properties in H118. The decrease in value does not come as a surprise and mostly resulted from a high comparative base associated with a large one-off €15.2m transaction completed in Q118 (related to a commercial property in Berlin-Marzahn). Excluding this deal, DGA’s turnover was c 11% ahead of its five-year average (calculated on first-half results in each year). This was largely driven by the higher unit price per property, as the number of sold properties declined from a five-year average of 889 units. We believe this may be at least partially associated with the overall lower supply of properties currently available for sale in Germany. In total, the company sold 84.6% of the properties offered at its auctions in H119, slightly below the H118 level of 85.7% and a five-year average of 85.5% (see Exhibit 1).

The above transaction volume includes 106 properties worth €3.6m sold on behalf of the German Institute for Federal Real Estate (visibly below the €21.5m in H118), as well as properties valued at €1.4m sold on behalf of BVVG compared with €1.6m in H118. In total, the value of properties DGA sold on behalf of the German government and associated public institutions (referred to as institutional clients) stood at €6.8m (vs €24m in H118).

DGA’s adjusted net commission income reached €5.7m and was down only 6.7% y-o-y, as the company was able to achieve a healthy net commission rate of 10.6%, which was ahead of 9.5% in H118 and above the five-year average of 10.1% (see Exhibit 2). In Q119 alone, net commission income was down c 26% to €2.5m due to the above-mentioned large deal last year but increased 17% y-o-y in Q219 to c €3.1m. During Q219, the parent company saw a mild decline in property volumes and commission revenue, while three of its subsidiaries (responsible for Northern Germany, Western Germany and Saxony) recorded a considerable increase in the value of sold properties and in turn commission income. Plettner & Brecht Immobilien (DGA’s property broker and auction house in Berlin) saw auctions at last year’s level but experienced a decline in the brokerage business. We understand that this is at least partially associated with ongoing regulatory headwinds in Germany’s capital city (discussed below). Meanwhile, DGA’s internet auction business recorded one of its best quarters historically, both in terms of property volumes and commission revenue. Having said that, it remains a relatively small contributor to group results.

Exhibit 1: DGA’s auction sales

Exhibit 2: DGA’s net commission income and rate

Source: Deutsche Grundstücksauktionen

Source: Deutsche Grundstücksauktionen

Exhibit 1: DGA’s auction sales

Source: Deutsche Grundstücksauktionen

Exhibit 2: DGA’s net commission income and rate

Source: Deutsche Grundstücksauktionen

DGA’s figures may reflect the broader market trend, with a 12% y-o-y decline in transaction volumes in the German real estate market in H119 to c €32.2bn (according to JLL). However, we note that transactions concluded through auctions similar to those run by DGA represent a minor part of the overall real estate investment market in Germany. Moreover, the broader market decline is from a high comparative base, as last year was strong for the German residential investment market. Based on JLL data, we estimate that H119 volumes are still c 3% ahead of the five-year average. Furthermore, the lower transactional activity may be at least partially explained by the insufficient supply of properties for sale (with demand holding up well).

We note that DGA’s financial statements are in accordance with German accounting standards (HGB). DGA, the parent company, is influenced to a considerable extent by the results of its five fully owned subsidiaries, but is not obliged to present consolidated accounts and management reports. As a result of profit transfer agreements, the group’s total result is therefore shown in the statements of the parent company. Consequently, for the sake of clarity we show (shaded below) both gross turnover (auction sale proceeds) and net commission at group level, as these drive the transferred profits. They are also regarded by management as key indicators. However, they are, of course, only proxies for the subsidiaries’ revenue, which is not disclosed, so accurate top-line analysis is not possible.

Exhibit 3: H119 results highlights

H119

H118

Change
y-o-y

FY18

FY17

Change
y-o-y

Turnover from auction sales

53.30

63.80

-16.4%

123.92

116.60

6.3%

Net commission

5.66

6.07

-6.7%

12.00

11.16

7.5%

Net commission rate

10.6%

9.5%

111bp

9.7%

9.6%

11bp

Revenue + other operating income

2.05

3.44

-40.4%

6.27

4.74

32.1%

Material costs

(0.06)

(0.07)

-24.6%

(0.17)

(0.18)

-1.7%

Labour costs

(0.92)

(1.02)

-9.5%

(2.01)

(1.95)

3.2%

Other operating costs

(0.97)

(1.14)

-14.6%

(2.22)

(2.38)

-6.7%

Depreciation / interest etc.

(0.09)

(0.07)

24.4%

(0.18)

(0.13)

34.9%

Parent company profit

0.01

1.14

N/M

1.68

0.11

N/M

Profit /losses from subsidiaries, of which:

1.18

0.12

N/M

0.67

1.70

-60.4%

Sächsische Grundstücksauktionen

0.47

(0.06)

N/M

0.02

0.90

-97.8%

Norddeutsche Grundstücksauktionen

0.19

(0.03)

N/M

0.25

0.25

-2.0%

Plettner & Brecht Immobilien

(0.03)

0.01

N/M

0.05

0.08

-35.5%

Deutsche Internet Immobilien Auktionen

0.07

0.09

N/M

0.15

0.21

-28.5%

Westdeutsche Grundstücksauktionen

0.48

0.12

N/M

0.21

0.26

-19.8%

Pre-tax profit

1.20

1.26

-5.1%

2.36

1.81

30.3%

Income and other taxes

(0.39)

(0.37)

3.0%

(0.76)

(0.59)

28.4%

Net profit

0.81

0.89

-8.6%

1.59

1.22

31.2%

Source: Deutsche Grundstücksauktionen

Transaction volume guidance for FY19 maintained

Net commission income in H119 was ahead of management expectations, which bodes well for H219. Having said that, the acquired admission volume across the DGA group for Q319 stands at €23.7m and is lower by around 10% compared to last year (€26.4m). Management anticipates a decline in orders from the Institute for Federal Real Estate and BVVG in the second half of the year, but expects a new tender offer covering 2020 and beyond to be organised in 2019. However, we understand that visibility on this is limited at the moment. Nevertheless, DGA believes that the guided sales volume from institutional clients of €15m is achievable. Overall, management believes it may be able to repeat the Q318 results, partly because of expected stronger activity in the brokerage business. Hence, it has also confirmed its guidance for FY19 transaction volumes of €109m (in line with the five-year average).

Continued solid demand for German properties, a healthy letting market and the ECB’s accommodative policy suggest that a hard landing scenario in the property market is relatively unlikely, especially in the near term. That said, the attractiveness of investments in residential properties in Germany is somewhat impaired by discussions around regulatory caps on rental growth and expropriation (including for instance the current rental cap trial in Berlin).

Valuation

With no direct peers listed on the Frankfurt Stock Exchange, we look at the iShares MSCI Germany Small-Cap ETF, which seeks to track the performance of an index composed of small-cap German equities. This shows a P/E ratio of 13.2x based on the last reported financial year (DGA at 16.8x) and 12-month trailing yield of 3.12% at end-July 2019 (vs the current DGA yield of 6.0%). As noted above, the history of a sustained and attractive dividend should be supportive of the shares.

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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

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

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.

Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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 research department of Edison 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.

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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

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.

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.

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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

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

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

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