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Research: Financials
Having reported a bumper first quarter, RCM Beteiligungs has predictably met H118 expectations of €2.4m PBT, which alone exceeded full-year 2017 (€2.1m). Favourable macro factors and scope for efficiencies and asset development encourage continued confidence, even if this risks being tempered by a quiet Q2 (lower profit) and the lack of elaboration on post-Q1 guidance of €3m+ 2018 PBT. Sound finances (high interest cover and an above industry average equity ratio of 45% at June 2018) should allow a resumption in property expansion after a pause in 2017 and subsequent disposals.
RCM Beteiligungs |
Moving on
Real estate |
Scale research report - Update
21 August 2018 |
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Having reported a bumper first quarter, RCM Beteiligungs has predictably met H118 expectations of €2.4m PBT, which alone exceeded full-year 2017 (€2.1m). Favourable macro factors and scope for efficiencies and asset development encourage continued confidence, even if this risks being tempered by a quiet Q2 (lower profit) and the lack of elaboration on post-Q1 guidance of €3m+ 2018 PBT. Sound finances (high interest cover and an above industry average equity ratio of 45% at June 2018) should allow a resumption in property expansion after a pause in 2017 and subsequent disposals.
H118 – a tale of two quarters
The quarter to March was inevitably a hard act to follow – its €2.3m PBT largely reflected completion of a c €11m development project sale (12 properties or 7,700m²), which was reported late last year but recognised substantially (80%+) in the period, as well as a transaction which concluded earlier than expected. By contrast, Q218 saw 11% y-o-y decline in revenue, driven by lower rental income (-22%) from a greatly reduced portfolio (down in area by a quarter during 2017). Quarterly PBT fell by more than two-thirds y-o-y to under €0.1m despite the impact of rationalisation being curbed by efficiencies (rental admin costs almost halved) and enhanced unit returns.
In good shape
While a flying start to 2018 seemed to assure a profit “beat” by alone securing so much of management’s full-year target, subsequent consolidation and sharply lower rental income as a result of asset sales may invite caution. However, this may well be temporary as RCM appears well-placed to take advantage of investment opportunities in real estate and capital markets. There should also be increasing benefits from restructuring both its portfolio, eg fewer locations, a focus on its Dresden core and higher average unit size, and its corporate set-up, namely new profit transfer agreements.
Valuation: Time to deliver
FY17 P/E is 31x, ie at a premium, but given the strong H1 performance and positive management guidance, we are likely to see a visible reduction in the valuation in 2018. A P/BV (2017) ratio of 1.4x is undemanding as it compares with the book value of assets (RCM reports under HGB standards).
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Historical financials
Source: RCM Beteiligungs |
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 H118 results
Exhibit 1: Analysis of quarterly revenue and profit
Year end December (€m) |
Q117 |
Q217 |
H117 |
Q118 |
Q218 |
H118 |
Real estate – sales |
2.15 |
|||||
Change (%) |
-41% |
|||||
Real estate – rental income |
0.74 |
0.73 |
1.47 |
0.64 |
0.57 |
1.21 |
Change (%) |
flat |
-15% |
-8% |
-14% |
-22% |
-18% |
Financial income |
0.57 |
|||||
Change (%) |
+8% |
|||||
Revenues |
2.22 |
1.97 |
4.19 |
12.13 |
1.75 |
13.88 |
Change (%) |
-50% |
+45% |
-27% |
N/M |
-11% |
N/M |
Pre-tax profit |
0.39 |
0.31 |
0.70 |
2.33 |
0.07 |
2.40 |
Margin (%) |
17.6% |
15.7% |
16.7% |
19.2% |
4.0% |
17.3% |
Source: RCM Beteiligungs
The half to June 2018 was marked by opposing trends, ie an upward step change in asset sales, specifically in Q1, and a reduction in rental income as a function of higher transaction business (the portfolio was c 38,000m² at end 2017 against c 50,000m² a year earlier). While the breakdown of revenues is not disclosed other than with regard to rental income, the Q417 report of a c €11m development project sale, substantially recognised in this period, reasonably accounts for the major increase. Rental income (down 18% in the half) could not buck such disposals but the company remains committed to building the share of recurrent income as a key component of its business model.
In keeping with this financial discipline, RCM managed to limit the top-line rental impact with significantly lower admin costs (€0.27m against €0.17m y-o-y or 14% of rental income compared with 18% in H117 and 23% in 2014). Such operating efficiency is attributed to streamlining activities after the sale of residual assets away from the company’s core Dresden area. The 2017 acceleration in implementation of strategic focus saw a halving in the number of properties outside Dresden (from 19 to nine) with an even sharper reduction in locations (just four against 12 at the end of 2016). Indeed, over the last four years RCM has withdrawn from 75% of its investment locations, resulting in just four sites outside Dresden and three within (over 50% of the portfolio).
In the absence of a balance sheet at June 2018, we highlight a reported improvement in the equity ratio (45% vs 39% at end 2017) and a fall in bank debt from €31m to €27m over the same period.
Still set fair
The lack of elaboration on guidance for 2018, introduced last November, is arguably disappointing, given specific endorsement post-Q1. However, the relative vagueness of the PBT forecast (to exceed €3m) leaves scope for surprise, given the proportion of first-half 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.
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 8.5x). However, its P/BV (2017) ratio is markedly lower at 1.4x, vs 3.2x for Noratis.
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