MPC Capital — Portfolio reorientation on track

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.

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.

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.

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.

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.

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.

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.