MPC Münchmeyer Peterson — Slower project progress and asset write-offs

MPC reported €42.7m revenues in FY18, slightly above the revised guidance of €40–42m, but also c 10% below FY17 results. As management services income remained broadly stable at €36.3m (0.4% y-o-y decline), the decrease in sales is due to a significant drop in fees from transaction services of around 41% y-o-y to €6.1m. The company has recognized a sizeable write-down on financial assets related to an oil rig project at €9.6m, as well as €7.6m on related receivables. These were associated with two indirect investments in a deep-sea exploration platform from the company’s legacy business. Consequently, reported EBT stood at - €16.7m (vs a positive €17.4m in FY17). The company has also reported EBT adjusted for this one-off item at €0.6m, which was broadly in line with management guidance (slightly positive earnings).

Both FY18 and FY17 figures have been also influenced by other non-recurring items, which (together with the above-mentioned oil rig write-down) amounted to a negative €8.4m and positive €17.2m, respectively:

After factoring in the above, our calculations yield an adjusted EBT stands of a negative €8.3m in FY18 vs positive €0.1m in FY17. The decline was related to the slowdown in transaction services income, as well as the result of associates carried at equity being €2.7m lower than in the prior year due to losses from the disposal of retail business investments and lower earnings from MPC Global Maritime Opportunities (€0.3m loss vs €1.5m profit last year). However, it was partially offset by an €0.6m increase in income from equity co-investments.

The company has experienced some project delays, especially with respect to a high-volume infrastructure project in North America. Moreover, progress in securing new micro living assets was below company expectations. On the positive side, it is important to note that MPC recorded a c 30% increase in technical and commercial ship management income, due to the expansion in managed fleet of MPC Container Ships, as well as third-party accounts managed by Ahrenkiel and Contchart.

MPC plans to acquire €0.5–0.8bn of new institutional assets in 2019, which is somewhat below the long-term target of €1.0bn pa. Nevertheless, it should result in a slight increase in revenues. Combined with lower expected distribution by subsidiaries, EBT is forecast to remain stable. Furthermore, management expects no further large write-downs similar to the one booked in FY18, given the now-improved balance sheet quality, which is almost entirely clear of former retail business area risks (now representing less than 5% of financial assets). The company also expects positive cash flow from operations in 2019, but this is dependent on the recognition of a certain amount of transaction fees.

MPC’s balance sheet remains healthy, as illustrated by the high equity ratio of 74.3% and stable cash balance at €28.6m at the end-December 2018 (vs €28.9m at end-2017). However, this was largely assisted by several capital measures, including MPC’s secondary public offering completed in March (€16.7m), capital increases at fully consolidated project companies (€5.8m), as well as proceeds from minority shareholders in conjunction with MPC’s co-investments (€2.6m). Operating cash flow was - €8.9m compared to - €1.3m in FY17, which reflects the lower transaction fees and the fact that MPC’s management fees do not cover its ongoing operating expenses yet. The company recognized net cash outflows from investing activities at €15.2m, with investments in financial assets (largely MPC’s co-investments) being broadly comparable with last year at €28.6m, asset disposals amounting to €10.1m (mainly the sale of a land plot in Lisbon and BLAAK16 office building) and €4.2m proceeds from reducing the share in consolidated companies.

As at end-2018, the company’s assets under management (AUM) fell to €4.3bn from €5.1bn as at end-2017, primarily as a result of disposals of retail legacy assets and revaluation effects. The decline was attributable to H218 developments, as AUM as at end-June 2018 stood at €5.2bn. The new business in this period brought €0.2bn in additional assets (€0.6bn in H118), which was offset by disposals amounting to €0.6bn (€0.5bn in H118). Moreover, revaluation and currency effects resulted in a decrease of €0.6bn in FY18, which includes, in particular, the impact of the oil rig write-down discussed earlier. Importantly, AUM in the real estate and infrastructure segments remained unchanged, amounting to €2.1bn and €0.3bn respectively.

As a consequence of the above, the AUM structure improved further as the company continues to refocus its business towards higher-yielding institutional business (now representing 60% of AUM vs 47% at end-2017). With the quality of the assets improving, the critical factor to enhance MPC’s profitability will be further AUM growth. On the back of cost reduction measures, the company expects the break-even point will now be reached below the previously estimated level of around €6.5bn in AUM.

The macroeconomic environment should remain positive for the shipping markets, as global trade volumes are expected to increase by a healthy 4.0% in 2019, according to the International Monetary Fund’s (IMF) estimate. However, this represents a downgrade from 4.8% forecast in June last year. Global economic growth is expected to continue into 2019 and reach 3.5% y-o-y (vs 3.7% in 2018), but there are first indications of a possible slowdown, as IMF expectations were downgraded from 3.7% in October and 3.9% in July 2018. This is the result of several potential risk factors, including further trade tensions between the US and China, the materialisation of a ‘hard’ Brexit scenario, a slowdown in the German economy, Italian fiscal policies, as well as the partial US government shutdown. Still, momentum is so far expected to hold up well in 2020, with global growth forecast at 3.6%.

Clarkson estimates global container turnover in 2018 at 4.6%, which is somewhat below earlier expectations presented in the Ernst Russ quarterly shipping market report for Q318 at 5.4%. This is also behind the increase in container fleet capacity in the first 11 months of 2018 at 5.9% (to 22.3m Twenty-Foot Equivalent Unit [TEU] as at December 2018). However, it must be noted that order books remain at historically low levels (around 12% of current total fleet), which suggests that the market should remain relatively balanced in the near term. This should be assisted by ship downtime, as ships are being equipped with scrubbers to comply with the IMO 2020 regulation. The bulker and tanker segment saw roughly comparable growth in supply and demand in 2018, respectively, with prospects for the latter outstripping the former (according to Ernst Russ). Interestingly, the transition to low-sulphur fuel oil (LSFO), coupled with a limited number of refineries delivering the fuel, may assist the demand for tankers. The direct impact of changes in charter rates on MPC’s top line is rather limited, as only fees related to commercial ship management, which represent c 25% of overall management fees in the shipping business, are tied to these rates.

The German residential real estate market continues to be supported by both macroeconomic and demographic factors, including the considerable housing deficit across major cities. In this context, MPC intends to accelerate its expansion in the micro-living segment in Germany, as it considers it an attractive niche with high development potential. Similarly, the German commercial market is characterised by a tight demand/supply balance translating into low vacancy rates and compressing yields, on which MPC aims to capitalise. In Q418, the average prime yield in the largest cities stood at 3.11% (vs 3.20% in Q318), with the lowest value of 2.90% recorded in Berlin, according to JLL.

MPC Capital may be considered a cyclical company that is still undergoing a business transition and as such suffered a substantial share price decline in 2018, exceeding the 18.3% decrease in the broad equity market illustrated by the DAX index. The negative market trend, combined with a profit warning issued in November, has cut the share price from €6.44 at the beginning of the year to €2.73 as at end-December and below €2.00 ytd. This effect was accompanied by a still subdued earnings outlook, as indicated by Refinitiv consensus.

We believe that a relevant peer group for MPC should contain local asset managers active in the shipping and/or real estate domain. MPC is trading at a considerable premium to the selected peers on P/E multiples for FY19e and FY20e.

Given that MPC’s earnings are largely dependent on the size of its AUM, it may also be instructive to examine the market cap/AUM ratios for MPC and its peers based on last reported asset figures. MPC’s market cap represents c 1.3% of its AUM, which is ahead of Ernst Russ (0.5%), but below the figures for Corestate Capital and Patrizia (2.8% and 4.5%, respectively). The company’s P/BV ratio, based on last reported equity, stands at 0.6x.