RCM Beteiligungs — Realising value through disposals

RCM Beteiligungs (DB: RCM)

Last close As at 24/06/2024

2.10

0.00 (0.00%)

Market capitalisation

28m

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Research: Financials

RCM Beteiligungs — Realising value through disposals

RCM continues to pursue its broadened investment mandate including both residential and commercial properties, focusing on the greater Dresden area. FY19 results were again marked by a high level of property disposals, translating into c €18.5m in revenues. Further realisations were closed in 2020, leading to reduced leverage (53% equity ratio at group level at end March 2020) and improved liquidity. Management proposed a dividend of €0.06 per share (c 3% yield), in line with the previous year.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Financials

RCM Beteiligungs

Realising value through disposals

Real estate

Scale research report - Update

7 May 2020

Price

€2.02

Market cap

€27m

Share price graph

Share details

Code

RCMN

Listing

Deutsche Börse Scale

Shares in issue at end-2019

13.1m

Last reported net debt at end-2019

€19.5m

Business description

RCM Beteiligungs is a property developer, acquiring rental income-producing assets in and around Dresden and investing in refurbishment with the aim of improving the tenant mix to enhance value. RCM also invests in financial assets. It is a large shareholder in KST Beteiligungs, a financial investor.

Bull

Low unemployment levels in Dresden.

Focus on a defined region leads to greater understanding of opportunities.

Established business concept and strong partner network in the region.

Bear

Small company, largely dependent on development of the Dresden region.

Low interest rate environment may end.

Dependence on positive macro environment in the region and attractive sourcing potential.

Analyst

Milosz Papst

+44 (0)20 3077 5700

RCM continues to pursue its broadened investment mandate including both residential and commercial properties, focusing on the greater Dresden area. FY19 results were again marked by a high level of property disposals, translating into c €18.5m in revenues. Further realisations were closed in 2020, leading to reduced leverage (53% equity ratio at group level at end March 2020) and improved liquidity. Management proposed a dividend of €0.06 per share (c 3% yield), in line with the previous year.

FY19 earnings up on higher property sales

RCM’s pre-tax profit was €4.35m (up 52% y-o-y), bolstered by higher revenue from property disposals (€18.48m vs €14.02m in FY18), largely assisted by the closure of deals agreed in FY18. Deals agreed in FY19 mostly related to smaller properties, allowing RCM to focus on larger projects and thus reducing its asset management workload. The company also benefited from the cost optimisation measures introduced in recent years, although FY19 operating expenses were also marked by some one-off charges. In Q120, somewhat lower disposal activity and risk provisions translated into a pre-tax profit of €2.15m (vs €3.45m in Q119). RCM deployed some of its proceeds into new properties (€7m in FY19 and a further €2.3m was spent on a production, warehouse and office complex in January 2020), while the remaining funds were invested in fixed income securities.

FY20 guidance realisation dependent on COVID-19

Back in early March, management guided to FY20 financial results similar to FY19. So far, COVID-19 has not translated into reduced rental revenues (based on April data), but the company is open to discussions with its tenants, which potentially may result in at least a temporary decline in rental income. The recent capital markets downturn affected RCM’s securities portfolio (with the creation of a risk provision in Q120 of €751k). Following recent higher disposal activity, RCM’s focus will now be on expanding its portfolio, seeking to exploit opportunities in the current distressed environment.

Valuation: Offering a dividend yield of c 3%

While a 2019 P/E of 9.4x (when adjusted for treasury shares/buyback) seems undemanding, RCM’s prospective multiples will depend on the extent of the COVID-19 impact. Its 2019 P/BV ratio of c 2.0x does not account for hidden reserves (as RCM reports under HGB standards).

Historical financials

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

11.4

1.8

0.11

0.04

18.4

2.0

12/17

19.4

2.1

0.11

0.06

18.4

3.0

12/18

17.6

2.9

0.18

0.06

11.2

3.0

12/19

21.1

4.4

0.19*

0.06

10.6*

3.0

Source: Company accounts, Edison Investment Research; Note: *Based on 14.0m shares (not adjusted for treasury shares and buyback post reporting date).

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 assisted by profitable property disposals

RCM’s pre-tax profit increased by 52% y-o-y to €4.35m, while its net income was up to €3.61m from €2.55m in FY18 (or €2.64m vs €1.72m when adjusted for minorities). Group revenue increased by 20% to €21.12m on the back of €18.48m from property disposals (€14.02m in FY18), predominantly (€17.87m) from deals already agreed in FY18. Having said that, the company’s transactional activity this year has also benefited from the favourable demand/supply balance in the German property markets, with the disposal of 11 properties agreed in the period. These were mostly smaller assets (with average floorspace slightly above 500sqm) and the transactions will be reflected in FY20 results (they have already been closed). Consequently, RCM’s shift towards larger properties (enhancing asset management efficiency) in the greater Dresden area has been largely completed. Management has highlighted that it was able to realise a profit margin ahead of expectations on the transactions concluded in FY19 and also on deals finalised in FY20.

Some of the disposal proceeds (€7m) have already been invested in new properties in FY19. A further €2.3m was invested in January 2020 in a production, warehouse and office complex with usable space of c 5,700sqm for c €2.3m. This property currently generates rental income of around €250k pa (partially restoring rental income lost due to last year’s asset disposals) and, according to the company, has further development potential. Moreover, management highlighted that the property will have a positive impact on RCM’s cost income ratio of its property portfolio.

As expected by management, RCM’s higher transaction activity led to a decline in rental income to €1.66m from €2.37m in FY18. However, this was offset by net positive financial income of €0.25m (vs -€0.56m in FY18), as part of the proceeds from property disposals were invested in fixed income securities (including high-yield bonds).

Moreover, RCM’s operating expenses reflect the cost optimisation and efficiency measures it has introduced in recent years, although this was distorted by some non-recurring items. Personnel expenses went up by 12% y-o-y to €1.9m, but this includes a one-off €267k effect at one of RCM’s subsidiaries related to one development project (which was however coupled with additional income). While other operating expenses increased by 26.6% y-o-y to €2.4m, this was mostly due to a €0.52m risk provision related to the redesign of one of RCM’s property projects. After adjusting for this and expenses associated with financial transactions (coupled with corresponding higher other operating income), other operating expenses declined by c 15% to €1.28m. Costs related to RCM’s rental activities declined by c 30% y-o-y to €190k in FY19, in line with the fall in rental revenue.

As a consequence of the disposals completed in FY19, RCM’s net debt went down to €19.5m from €24.2m at end 2018 and its equity ratio increased to c 50.4% from 45.9% at end 2018. At the same time, however, we note that 63% of RCM’s debt at end 2019 was due within a year. Management recommended a dividend payout of €0.06 per share (in line with the prior year), while RCM continues to execute its buyback programme (c 76.3k shares repurchased in 2020 ytd).

Exhibit 1: RCM’s FY19 results highlights

€000s unless otherwise stated

2019

2018

Change y-o-y

Total revenue, of which

21,120

17,595

20.0%

Rental revenue

1,660

2,370

-30.0%

Property disposal

18,477

14,023

31.8%

Other revenue

983

1,202

-18.2%

Change in inventories of property available for sale

(12,100)

(10,523)

15.0%

Other own work capitalized

53

83

-36.1%

Total performance

9,073

7,155

26.8%

Other operating income

1,102

1,092

0.9%

Costs of goods and services, of which:

(653)

(834)

-21.7%

Costs related to rental business

(190)

(270)

-29.5%

Cost of property sold

(144)

(91)

59.1%

Other costs of goods and services

(319)

(474)

-32.7%

Personnel expenses

(1,919)

(1,713)

12.0%

Depreciation and amortization

(1,122)

(363)

209.0%

Other operating expense

(2,419)

(1,911)

26.6%

Income from associates

52

60

-13.1%

Income from other securities and loans

975

657

48.4%

Other interest and similar income

56

68

-16.9%

Write-downs on financial assets and securities

(11)

(64)

-82.4%

Interest and similar expenses

(778)

(1,283)

-39.4%

Pre-tax profit

4,354

2,862

52.1%

Income taxes

(741)

(303)

144.3%

Other taxes

(3)

(4)

-24.7%

Net income

3,610

2,554

41.3%

Source: RCM accounts

Q120 results: No rental income drag from COVID-19 yet

The company has already provided some details of its Q120 results, posting a pre-tax profit of €2.15m (vs €3.45m in Q119), which was again mostly driven by property disposals. Q120 revenue stood at €9.37m vs €12.77m in Q119, including €8.43m from property sales (Q119: €12.09m) and €0.38m rental revenue (Q119: €0.45m). The debt reduction translated into net positive financial income of €45k (vs -€28k in Q119).

So far, RCM has not experienced any decline in visible rental revenue as a result of COVID-19, with April warm rents (ie including all costs recharged to tenants) at 97% of the budgeted value. Having said that, the company acknowledges that this may change in subsequent months and is ready to seek constructive solutions together with its tenants. Meanwhile, the recent market sell-off weighed on RCM’s securities portfolio, translating into risk provisioning of €751k (vs €89k in Q119). At the same time, management emphasised that the current environment also creates new buying opportunities.

Following higher disposal activity in recent years, RCM’s management plans to focus more on new project acquisitions (both residential and commercial) in the near term, in particular in the greater Dresden area. Its equity ratio at group level improved further to 53% at end March 2020 (and to c 66–74% for its key subsidiaries). Management highlighted that dividends from subsidiaries are expected in the second half of the year due to postponed AGMs.

Valuation

RCM’s business model sits between that of an asset holder and a developer, making direct comparisons to listed companies somewhat difficult. Its FY19 P/E ratio (9.4x) is at a premium to Noratis (8.0x), which has a similar model. Similarly, its FY19 P/BV ratio is higher at 2.0x vs 1.3x for Noratis.

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