MPC Capital — Portfolio reorientation on track

MPC Capital (DB: MPC)

Last close As at 02/03/2024

3.38

0.16 (4.97%)

Market capitalisation

119m

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Research: Financials

MPC Capital — Portfolio reorientation on track

MPC Capital expanded its assets under management in FY19 to €4.5bn from €4.3bn in FY18, with the largely inorganic growth in institutional business offsetting the legacy retail business decline. Consequently, the share of higher-margin institutional business is now nearing 80% (vs 60% at end-December 2018). The improved quality of the portfolio resulted in a 9.6% y o y increase in revenues to €46.8m, as well as lower impairments compared to 2018. According to management, the recurring income will not be sufficient to fully offset the decline in retail operations in FY20, and therefore it expects a marginal decline in sales. However, thanks to cost-cutting measures launched in 2019, the pre-tax profit is expected to improve further.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Financials

MPC Capital

Portfolio reorientation on track

Financial services

Scale research report - Update

3 March 2020

Price

€1.64

Market cap

€55m

Share price graph

Share details

Code

MPC

Listing

Deutsche Börse Scale

Shares in issue

33.5m

Last reported net cash at end-2019

€11.5m

Business description

MPC Capital is an independent asset and investment manager for real assets in the shipping, real estate and infrastructure sectors. It initiates, structures, finances and manages real assets, targeted at institutional investors. It is a subsidiary of MPC Group (c 48% shareholding), founded in 1994 and listed in 2000. AUM as at end-December 2019 was 4.5bn.

Bull

Strong demand for real asset investments.

Increased share of recurring revenues with margin growth potential.

Scalable operating platform.

Bear

Strong competition for assets and investors from large incumbents.

Interest rate rises and/or economic weakness may slow investment in real assets.

Regulatory risks, particularly legacy products.

Analyst

Milosz Papst

+44 (0) 20 3077 5700

MPC Capital expanded its assets under management in FY19 to €4.5bn from €4.3bn in FY18, with the largely inorganic growth in institutional business offsetting the legacy retail business decline. Consequently, the share of higher-margin institutional business is now nearing 80% (vs 60% at end-December 2018). The improved quality of the portfolio resulted in a 9.6% yoy increase in revenues to €46.8m, as well as lower impairments compared to 2018. According to management, the recurring income will not be sufficient to fully offset the decline in retail operations in FY20, and therefore it expects a marginal decline in sales. However, thanks to cost-cutting measures launched in 2019, the pre-tax profit is expected to improve further.

PBT driven by recurring fees, exits and one-offs

In FY19 MPC reported a net loss amounting to €0.3m and positive PBT of €0.9m, materially outperforming FY18 figures, which were burdened by significant write-downs on financial assets. Despite growth in management fees, MPC is still yet to break even at the operating profit level, posting a €3.8m loss in FY19 vs €3.2m in FY18, which amounted to €5.8m and €9.6m, respectively, once adjusted for non-recurring items. These items mainly comprised gains from disposals from the real estate portfolio, as well as net effects of reversals of write-downs and provisions.

Participating in shipping market consolidation

As the anticipated reversal in the interest rate policy has not yet materialised, real assets in established markets remained an attractive investment for risk averse capital. Ongoing consolidation in the shipping market helped MPC conclude equity investments in Harper Petersen and Albis Shipping & Transport, which should visibly assist FY20 figures. On the other hand, it remains to be seen what impact the coronavirus outbreak will have on global trade.

Valuation: Diminishing premium to peers

MPC is trading at significant premium to its peers based on consensus FY20e P/E multiples; the premium changes into discount by FY21e along with the expected improvement in operating profit. Its current market cap stands at c 1.2% of its AUM at end-December 2019 and translates into a P/BV ratio of 0.6x.

Consensus estimates

Year
end

Revenue
(€m)

PBT

(€m)

EPS

(€)

DPS
(€)

P/E

(x)

Yield
(%)

12/18

42.7

(16.7)

(0.57)

0.00

N/A

N/A

12/19

46.8

0.9

(0.01)

0.00

N/A

N/A

12/20e

47.2

4.7

0.8

0.00

20.5

N/A

12/21e

49.6

6.3

0.19

0.00

8.6

N/A

Source: MPC Capital, Refinitiv consensus as at 28 February 2020. Note: Consensus is based on two analyst estimates (Baader and Warburg).

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.

FY19 results: Higher recurring management fees

In FY19 MPC Capital managed to attract €1.2bn of new assets under management (AUM), which is above the targeted €0.5–1.0bn range of new assets onboarded annually, although it is worth noting that this growth was mainly inorganic. The overall portfolio AUM at end-December 2019 reached €4.5bn, against €4.3bn in 2018, as the asset additions have been partially offset by negative currency effects (€0.2bn) and disposals (€0.8bn). With the majority of sales related to the legacy retail business (€0.6bn), its share in the portfolio decreased to just 22% at the end of FY19 (vs 40% in FY18). This results in the company’s shift towards the higher margins seen in the institutional business (c 70–120bp vs 40–60bp in retail), with targeted portfolio margin exceeding 100bp.

Exhibit 1: FY19 results highlights

€000s

FY19

FY18

y-o-y change

Management services

39,211

36,348

7.9%

Transaction services

5,347

6,146

-13.0%

Other

2,288

233

N/M

Revenue

46,846

42,727

9.6%

Other operating income

9,730

12,547

-22.5%

Cost of materials/purchased services

(2,207)

(3,465)

-36.3%

Personnel expenses

(28,838)

(28,592)

0.9%

Depreciation & amortisation

(2,238)

(1,781)

25.7%

Other operating expenses

(27,111)

(24,643)

10.0%

Operating profit

(3,818)

(3,208)

19.0%

Income from equity investments

7,020

2,302

205.0%

Other interest & similar income

2,412

1,398

72.5%

Write-downs on financial assets

(1,431)

(15,515)

-90.8%

Interest & similar expenses

(862)

(774)

11.4%

Share of profit of associates

(2,471)

(875)

182.4%

Pre-tax profit

850

(16,671)

N/M

Taxes on income

(1,109)

(1,993)

-44.4%

Result after tax

(259)

(18,673)

-98.6%

Source: MPC Capital, Edison Investment Research

With a revamped portfolio, MPC reported a 9.6% improvement in sales to €46.8m in FY19, driven by a 7.9% y-o-y increase in management services revenues to €39.2m (mostly on the back of commercial and technical ship management) and a one-off income from its shipping unit related to scrubbers installation (classified as ‘other’). While transaction fees picked up in H219, this was offset by the c 34% y-o-y decline in H119. Consequently, the annual total fees of €5.3m fell short of both management expectations and the previous year’s level (€6.1m). This was, however, more than offset by disposal gains from MPC’s (co-)investments, which resulted in over €7.0m income from equity investments generated mainly in H119 on the back of sales of TRANSIT and BMG’s portfolios (see our previous update note for details). The BMG portfolio disposal (together with some disposals in the real estate segment) has also contributed to MPC’s other operating income in FY19.

The higher quality of the company’s portfolio is also illustrated by a significant decline in write-downs on financial assets, which stood at €1.4m in FY19, after reaching €15.5m in the previous year (which was however mostly driven by one oil rig asset write-off). On the other hand, other operating income was also down (-22.5% y-o-y) due to lower reversal of write-downs on receivables, which fell from €5.7m in FY18 to just €2.4m in FY19. However, this figure is still slightly ahead of new impairments recorded (€2.6m in FY19), which translates into a net positive effect. It is also worth noting that even though the personnel expenses remained broadly stable in FY19 vs FY18, there was a one-off negative effect of creating provisions for personnel cutbacks following the decision to focus on institutional investors. In FY19, MPC booked €3.3m as other personnel expenses within other operating costs (vs €1.3m in FY18).

Even though the MPC business is gaining momentum, it is yet to break even at the operating profit level, posting a €3.8m loss in FY19 against €3.2m in FY18. This is before income from equity investments and write-downs on financial assets. If we further exclude the impact of one-off events, comprising income from assets disposals, other personnel expenses, reversals of write-downs and provisions, as well as foreign exchange differences, we arrive at an adjusted operating loss of €5.8m in FY19 vs a loss of €9.6m in FY18. As for the reported pre-tax profit, while being affected by non-recurring events, it reached a slightly positive €0.9m (in line with company guidance) against a loss of €16.7m in 2018.

Management expects further improvement in pre-tax profit in the coming year, driven by cost-cutting measures launched in 2019 (related in particular to personnel expenses and legal & advisory fees) rather than further revenue expansion. Despite continued development of the more profitable institutional business, MPC estimates it is unlikely to fully offset the decline in retail operations, and therefore expects a marginal decline in sales.

Sector developments and outlook

Global economic development in 2019 was dominated by trade frictions, mainly between the US and China, which resulted in gradual, but steady deterioration of trade growth forecasts. In April 2019, the World Trade Organization expected growth of c 2.6% in 2019 and has subsequently cut it to just 1.2% in its latest release six months later. This would constitute the lowest figure since the global financial crisis in 2009. The projected increase in global trade in 2020 is now 2.7%, down from 3.0% previously. This could be further negatively affected by the coronavirus outbreak. On the other hand, investor interest in real assets remains high, assisted by the low interest rate environment, which may help MPC further expand its business.

Shipping segment

With ongoing portfolio reorientation towards institutional business, the shipping segment became the largest part of the company’s operations with €2.2bn AUM as at end-December 2019 (€1.5bn in 2018) with an 86% share of institutional clients. The expansion was supported by broadening the range of services, as MPC entered the business of technical management for tankers through Ahrenkiel Steamship and concluded equity investments as part of market consolidation. In September 2019, MPC and Bremen-based shipping company Zeaborn pooled their assets from container ship chartering and commercial management to form one of the largest players globally. The new entity formed from Contchart (provided by MPC) and Harper Petersen (Zeaborn) will operate under the brand of the latter and manage more than 160 vessels with a total capacity of almost 500k TEU.

The strategic expansion within commercial ship management continued with the acquisition of a 50% stake in Albis Shipping & Transport, operating a commercial platform for tankers, which complements MPC’s technical tankers manager, Ahrenkiel Tankers. MPC management expects that this transaction, among others, would help it benefit from changes in the shipping industry triggered by IMO 2020 regulations. According to Ernst Russ’s Shipping Market Comment for Q120, as prices of bunker (fuel oil used aboard vessels) increase, operators are expected to adopt ‘slow steaming’ (operating transoceanic cargo ships significantly below their maximum speed) to maximise their profits, which should boost time charter rates.

As both acquisitions were concluded in the last quarter of 2019, they had a limited impact on FY19 results. While the full benefit of the acquisitions will be felt in FY20, it is not clear to what extent it will offset the challenging external business environment,, especially in the context of the coronavirus outbreak, given that China accounts for c 40% of global seaborne trade. The Baltic Dry Index has already fallen to its lowest level since 2016, with potential to continue to decline as the virus spreads across countries.

Real estate segment

High volume disposals (as discussed earlier) resulted in a decline in real estate AUM by c €0.4bn to €1.7bn as at end-December 2019, with the share of institutional business in the segment at 75%. With respect to portfolio additions, it acquired a residential property development project in Hamburg with 160 rental units and 13,000sqm of rental space in early 2019. As a result of the negotiations concluded in mid-January 2020, the project has already been sold. Meanwhile, after entering the Dutch healthcare real estate segment in H119, MPC aims at further expansion of the portfolio.

Infrastructure segment

The second half of 2019 was relatively quiet in terms of investment activity in the infrastructure segment, therefore its AUM remained stable in the period, amounting to €0.3bn – equal to FY18 and H119 figures. The key decision made in the period was to scale back MPC’s involvement in a high-volume infrastructure project in North America, as the probability of realising it declined further in the course of the year. However, the groundwork for future development laid by initiating several projects in H119 turned into positive post balance sheet date developments. In January 2020, MPC Caribbean Clean Energy Fund issued 10 million shares in a capital increase to expand its equity base to c US$22m and secure funding for additional renewable energy projects in Caribbean. In February 2020, MPC Capital signed agreements with Salvadoran bank Banco Agricola to finance construction of San Isidro Fotovoltaica, a 6.5MWp solar power project in El Salvador.

Valuation

As no consensus data is available for MPC’s closest peer Ernst Russ, we have not included it in the peer group, which comprises local real asset managers. Based on Refinitiv data, MPC is trading at a diminishing premium to peers on P/E and EV/EBITDA multiples, which reverts into discount for FY22e. As the company’s earnings may vary in the upcoming years, according to consensus data there is no visible trend in the valuation based on P/E multiple.

With MPC’s earnings being highly dependent on AUM size, it is also worth looking at the market cap to AUM ratio, which currently sits at c 1.2%, ahead of Ernst Russ (1.0%), but below the figures for Corestate Capital and Patrizia (3.1% and 4.6%, respectively). The company’s P/BV ratio based on last reported equity stands at 0.6x.

Exhibit 2: Peer group comparison

Market cap

P/E (x)

EV/EBITDA (x)

(€m)

2020e

2021e

2022e

2020e

2021e

2022e

Corestate Capital

853

5.9

5.7

5.3

3.9

3.7

3.5

Patrizia

1,927

21.5

20.0

20.7

12.5

12.2

12.0

VIB Vermogen

825

12.4

11.9

N/A

16.5

15.5

N/A

TLG Immobilien

2,887

14.0

15.0

13.2

22.9

21.7

N/A

Peer group average

13.5

13.2

13.1

13.9

13.3

7.7

MPC Capital

55

20.5

8.6

11.7

N/A

18.1

7.5

Premium/(discount) to peer group

52%

(34%)

(11%)

N/A

36%

(3%)

Source: Refinitiv consensus as at 28 February 2020. Note: Please note that consensus is based on two analysts estimates (Baader and Warburg).

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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

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