Commissioned research Financials Sweden 20 November 2017 DDM Holding Impressions from DDM s 2017 CMD Clear message of continued growth ambitions On 15 November, DDM hosted a capital markets day focusing on the company s growth ambitions in the EUR 170bn market opportunity for non performing loans (NPLs) in Southern, Central and Eastern Europe (SCEE). The event also shed further light on DDM s strategy, the large transaction in Greece and included a presentation of principal owner Aldridge EDC Specialty Finance. The opportunity in Greece Shortly after its Q3 report, DDM announced a new partnership and co investment from a global investment manager into its Greek NPL portfolio. The transaction reduced DDM s initial investment to EUR 35m from EUR 50m and results in a rebalancing of the portfolio, with Greece now representing 32% of carrying value. It also underpins the asset quality and acts as a validation of DDM s underwriting. What s next? The EUR 120m portfolio investment target for 2017 was reiterated during the event, which suggests there is another EUR 39m in investments to be closed in the near term. The company sees potential to enter additional countries in the focus region. We will closely monitor the time of the closings and the composition of these portfolios, as well as collections in the new portfolios, which we view as important for building confidence in the business model. Key data Key data Country Switzerland Bloomberg DDM SS Reuters DDM.ST Share price SEK 56.0 Free float 41% Market cap (m) SEK 759 Website www.ddm-group.ch Next report date 28 February 2017 Absolute and relative performance 65 55 45 35 25 nov 2016 mar 2017 jul 2017 nov 2017 OMX Stockholm PI Source: Thomson Reuters DDM -1M -6M -12M YTD Absolute 9% 55% 78% 77% Relative 11% 56% 65% 69% DDM also reiterated its ambition to list its share on Nasdaq Stockholm OMX s main market in 2018. It will continue to strengthen its management team, issue new financing and work towards lowering its funding costs and diversifying its funding structure. We leave our estimates unchanged following the event. Summary table - key figures EURm 2014 2015 2016 2017E 2018E 2019E Total revenue 15 28 34 40 86 96 - growth n.a. 87% 24% 15% 117% 12% EBIT 0 10 10 14 38 43 - margin -0.5% 36.2% 28.8% 34.9% 44.7% 44.7% EPS -1.32 0.26 0.65 0.18 1.69 1.86 - growth n.m. n.m. 149% -72% 845% 10% DPS 0.00 0.00 0.00 0.00 0.00 0.00 P/E n.a. 10.5 6.0 31.4 3.3 3.0 EV/EBIT n.a. 5.3 6.5 13.6 5.1 4.8 EV/Sales 3.7 1.9 1.9 4.7 2.3 2.1 RoE n.a. 24.3% 37.0% 8.9% 50.7% 36.4% Div. yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% FCF yield -38.1% -28.7% 20.6% -122.3% -13.4% -9.9% ND/Cash EBITDA 2.9 1.5 1.0 3.1 1.5 1.4 Source: Company data and Nordea Market Marketing material commissioned by DDM Holding 1
Impressions from DDM s CMD Last week, we attended DDM s 2017 capital markets day. Overall, we thought it was an informative event and we note that although management was pleased with its performance in 2017, it is clear that the company is aiming for more. The portfolio investment target of EUR 120m was reiterated, which implies another EUR ~40m in investments in the near term. It also aims to enter additional countries in its target region, which could include investments in the Baltics, Bulgaria and Serbia, which the company has commented as potential new markets to enter. CMD shed light on future investment opportunities, partnership in Greece and the new principal owner On Wednesday 15 November, DDM hosted a well attended capital markets event in Stockholm. The event shed further light on DDM s strategy, development, underlying market, portfolio investments and funding. It included presentations by chairman of the board Kent Hansson, new CEO Andreas Tuczka and CFO Fredrik Olsson. There was also an introduction of the company s principal owner, Aldridge EDC Specialty Finance. The main points from the event were the strong pipeline of investment opportunities, more clarity on the recently announced partnership in Greece and an ambition to simplify the group structure in preparation for a listing on the Nasdaq Stockholm main list. Overall, we gained a solid impression of senior management. DDM: Gross ERC development, 2014-Q3 2017 300 250 255 200 EURm 150 100 60 72 80 87 50 0 2014 2015 2016 Q2 2017 Q3 2017 Gross ERC Current and potential markets represent EUR 170bn market opportunity Where to acquire a delicate question DDM s target market for acquisitions is Southern, Central and Eastern Europe and today the company has investments in nine different markets. Combined, these represent a EUR 130bn market opportunity or about 12% of the total European market for NPLs. During the CMD, the company communicated that it sees the Baltics, Bulgaria and Serbia as new potential markets. Adding these markets on top of those where DDM has already invested suggests a EUR 170bn market opportunity. We believe there will be ongoing pressure on banks to divest NPL portfolios, which leaves plenty of room for DDM to grow over the coming years, despite the strong acquisition pace in 2017. This year DDM has proven that it can capture the market opportunities, which is evident by the 3x growth in ERC in Q3 2017 compared with year end 2016. Marketing material commissioned by DDM Holding 2
Region characterised by higher IRR levels and less competition for portfolio investments Transaction in Greece provides access to the largest market in the region, with over EUR 100bn in NPLs Greek market is still largely untapped New partnership reduces concentration risk and acts as validation of DDM s underwriting Generally speaking, DDM s target region is characterised as less mature than the general European market, resulting in higher IRR levels and fewer competitors. Attractive transactions are often smaller in size and more complex. DDM focuses on acquiring portfolios of EUR 5 50m from financial institutions. Apart from that, the company has the ability to cherry pick across the whole spectrum and act opportunistically in terms of type, assets, deal structure and collateral. As all collections are outsourced, it can also acquire portfolios where it sees a fit and does not need to commit to a specific country or to build up an infrastructure. DDM is also viewed as a trusted partner and preferred buyer by large selling banks, proven by the sizeable number of off market deals and repeat sales, such as the EUR 12m portfolio acquired in the Czech Republic in September this year. The Greek opportunity The large transaction in Greece this summer marked a milestone in the history of DDM. Not only was it the single largest acquisition in DDM s history, it also gave the company a platform into the largest NPL market in the region with over EUR 100bn in NPLs. Greece has the highest NPL ratio in Europe and distressed loans represents about 46% of the major Greek banks total loan portfolios. This is a cause of concern for the Greek government as well as other European parties. The market is also still more or less untapped with few transactions so far, although there is considerable interest in entering the market due to its size. DDM also states that the legal framework is developing, allowing for more efficient collections in the future. On a sector level, the NPL ratio for financial debt is 60%, non financial corporate debt is about 52% and household debt is about 45%. In August 2017, DDM gained first mover advantage in the market by acquiring the EUR 1.3bn portfolio from Attica Bank, Greece fifth largest bank. DDM s investment commitment was about EUR 50m and the transactions more than doubled the company s ERC at the time. On 6 November, it announced that it is bringing in US based investment manager Ellington Management Group LLC as a co investor in the portfolio. DDM s initial investment was reduced to EUR 35m following the partnership, which rebalances the portfolio and reduces the concentration risk. Greece now represents 32% of the carrying value of the portfolios. Another benefit is that a thorough due diligence process by an external party could validate and underpin DDM s underwriting of the portfolio. DDM: Distressed assets by country (profroma Q3 2017) Slovenia 11% Romania 6% Hungary 6% Greece 33% Czech Republic 18% Croatia 26% Marketing material commissioned by DDM Holding 3
New principal owner facilitated the investment in Greece Management team has been strengthened DDM intends to continue working actively with funding Corporate governance The event also included an introduction of the new principal owner of DDM (since April 2017), Aldridge EDC Specialty Finance (AEDC), which holds about 49% of the total outstanding shares in the company. AEDC is run by Erik Fällström, former co founder of Hoist Finance, and Andreas H Tuczka, former partner at Lone Star Europe. The investment group is focused on purchasing businesses and assets in the financial service sector in Europe and Central and Eastern Europe, and it introduced DDM to the Greek transaction. It also bridged EUR 20m to complete the transaction and introduced DDM to Ellington. To continue to support its growth ambitions, DDM has expanded its management team during autumn. In September, Andreas Tuczka took up the position as the new CEO, while former CEO Gustav Hultgren was appointed a position focusing on the important Greek market after the recent investment. Furthermore, Mikael Nachemson, former CEO of Bure Equity, Custos and E. Öhman Jr, has been proposed as a new member of the board of directors, to be elected at an extraordinary general meeting. The next step DDM has issued guidance for a further strengthening and broadening of the management team to support its anticipated growth. While we estimate operational costs to rise in 2018, we estimate earnings growth to outpace the increase in costs. The company also intends to remain active on the funding side and aims to issue additional financing and work towards lower funding costs, which could be achieved by a combination of new equity and debt to support growth ambitions. Another milestone in 2018 could be a change of listing to the Nasdaq Stockholm main list, which could increase transparency and improve liquidity in the share. DDM: Senior secured bond yield development 20% 18% 15% 13% 13% 13% 10% 10% 9% 8% 5% 0% Q1 2016 Q2 2016 Q3 2016 Q4 2016 Q1 2017 Q2 2017 Q3 2017 Bond yield, % (rhs) Investment target implies further large transactions in the near term The key point from the event was the confident message from management that growth will continue in 2018. The company is on track to deliver on its 2017 guidance and the portfolio investment goal of EUR 120m still stands even though its share in Greece has been reduced. Year to date portfolio investments now amount to EUR 81m, which implies another EUR ~40m in investments will be made in the near term. Management communicated that it intends to enter additional countries in the focus region, as indicated by the addition of the Baltics, Bulgaria and Serbia as potential markets. Marketing material commissioned by DDM Holding 4
DDM: Portfolio acquisitions 90 80 70 60 EURm 50 40 30 20 10 0 4 17 7 11 4 20 20 31 34 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 YTD Portfolio acquisitions 81 CMD has not triggered any changes to our estimates Overall, the CMD has not triggered any changes to our current estimates but we will closely monitor the collections in the coming quarter and keep a close eye on upcoming portfolio investments. Factors affecting estimates include the actual timing of investments, the size of investments and the type of portfolios being acquired. Marketing material commissioned by DDM Holding 5
Reported numbers and forecasts Income statement EURm 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E Net revenue 15 28 34 40 86 96 103 107 109 110 Revenue growth n.a. 87% 24% 15% 117% 12% 8% 3% 2% 1% Cash EBITDA 10 22 29 36 81 91 97 100 102 102 Depreciation, impairments and amortisa -10-12 -19-22 -43-48 -52-53 -54-55 EBIT -0 10 10 14 38 43 46 47 47 47 of which associates 0 0 0 0 0 0 0 0 0 0 Associates excl. from EBIT 0 0 0 0 0 0 0 0 0 0 Net financials -7-8 -5-11 -13-15 -16-16 -17-17 Pre-Tax Profit -7 2 5 3 25 28 30 31 30 30 Reported taxes 0-0 0-0 -3-3 -3-3 -3-3 Net profit from cont. operations -7 2 5 2 23 25 27 27 27 27 Discontinued operations 0 0 0 0 0 0 0 0 0 0 Minority interest 0 0 0 0 0 0 0 0 0 0 Net profit to equity -7 2 5 2 23 25 27 27 27 27 EPS -1.32 0.26 0.65 0.18 1.69 1.86 2.01 2.03 2.01 1.97 DPS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 of which ordinary 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 of which extraordinary 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Profit margin in percent Cash EBITDA 67.6% 78.9% 85.6% 89.9% 94.7% 94.7% 94.4% 93.9% 93.3% 92.6% EBIT -0.5% 36.2% 28.8% 34.9% 44.7% 44.7% 44.4% 43.9% 43.3% 42.6% Performance metrics CAGR last 5 years Net revenue n.a. n.a. n.a. n.a. 55.5% 36.6% 31.8% 28.1% 6.1% 3.6% Cash EBITDA n.a. n.a. n.a. n.a. 69.2% 43.0% 35.1% 29.6% 5.7% 3.1% EBIT n.a. n.a. n.a. n.a. n.a. 43.9% 46.9% 35.8% 5.3% 2.4% EPS n.a. n.a. n.a. n.a. n.a. 63.5% 32.6% 83.5% 4.4% 1.4% DPS 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Average EBIT margin n.a. n.a. n.a. n.a. 35.6% 40.6% 42.0% 43.5% 44.2% 43.8% Average Cash EBITDA margin n.a. n.a. n.a. n.a. 88.1% 91.4% 93.2% 94.0% 94.2% 93.8% Valuation ratios EURm 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E P/E n.a. 10.5 6.0 31.4 3.3 3.0 2.8 2.8 2.8 2.9 EV/Cash EBITDA 5.5 2.4 2.2 5.3 2.4 2.3 2.1 2.1 2.1 2.2 EV/EBIT n.a. 5.3 6.5 13.6 5.1 4.8 4.6 4.5 4.6 4.8 Valuation ratios/reported earnings P/E n.a. 10.5 6.0 31.4 3.3 3.0 2.8 2.8 2.8 2.9 EV/Sales 3.7 1.9 1.9 4.7 2.3 2.1 2.0 2.0 2.0 2.0 EV/Cash EBITDA 5.5 2.4 2.2 5.3 2.4 2.3 2.1 2.1 2.1 2.2 EV/EBIT n.a. 5.3 6.5 13.6 5.1 4.8 4.6 4.5 4.6 4.8 Dividend yield (ord.) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% FCF yield -38.1% -28.7% 20.6% -122.3% -13.4% -9.9% -4.9% -5.0% -6.1% -8.2% Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Marketing material commissioned by DDM Holding 6
Balance sheet EURm 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E Intangible assets 5 6 6 6 6 6 6 6 6 6 of which R&D 0 0 0 0 0 0 0 0 0 0 of which other intangibles 2 2 2 2 2 2 2 2 2 2 of which goodwill 3 4 4 4 4 4 4 4 4 4 Tangible assets 34 41 44 142 179 213 245 276 308 342 Shares associates 0 1 1 1 1 1 1 1 1 1 Interest bearing assets 0 0 0 0 0 0 0 0 0 0 Deferred tax assets 0 0 1 0 0 0 0 0 0 0 Other non-int. bearing assets 0 0 0 0 0 0 0 0 0 0 Other non-current assets 0 0 1 0 0 0 0 0 0 0 Total non-current assets 40 47 53 149 186 219 251 283 315 348 Inventory 0 0 0 0 0 0 0 0 0 0 Accounts receivable 4 4 2 2 4 5 5 5 5 5 Other current assets 1 0 1 1 3 3 3 3 4 4 Cash and bank 9 3 11 20 30 42 49 53 54 54 Total current assets 14 8 13 23 37 50 57 62 63 63 Assets held for sale 0 0 0 0 0 0 0 0 0 0 Total assets 54 55 66 172 223 270 308 344 378 411 Shareholders equity 7 8 21 34 57 82 109 137 164 191 of which preferred stock 0 0 0 0 0 0 0 0 0 0 of which Equity of hyb. debt 0 0 0 0 0 0 0 0 0 0 Minority interest 0 0 0 0 0 0 0 0 0 0 Total Equity 7 8 21 34 57 82 109 137 164 191 Deferred tax 0 0 0 0 0 0 0 0 0 0 Long term int. bearing debt 37 30 31 123 143 163 173 181 187 193 Pension provisions 0 1 0 0 0 0 0 0 0 0 Other long-term provisions 0 0 0 0 0 0 0 0 0 0 Other long-term liabilities 0 0 0 0 0 0 0 0 0 0 Convertible debt 0 0 0 0 0 0 0 0 0 0 Shareholder debt 0 0 0 0 0 0 0 0 0 0 Hybrid debt 0 0 0 0 0 0 0 0 0 0 Total non-curr. liabilities 37 31 32 123 143 163 173 181 187 193 Short-term provisions 0 0 0 0 0 0 0 0 0 0 Accounts payable 5 6 2 2 4 4 5 5 5 5 Other current liabilities 4 4 4 5 10 12 13 13 13 13 Short term interest bearing debt 0 7 8 8 8 8 8 8 8 8 Total current liabilities 9 16 14 15 23 24 25 26 26 27 Liab.for assets held for sale 0 0 0 0 0 0 0 0 0 0 Total liabilities and equity 54 55 66 172 223 270 308 344 378 411 Balance sheet and debt metrics Net debt 28 33 29 111 121 129 133 136 141 147 Working capital -4-5 -3-3 -7-8 -9-9 -9-9 Invested capital 35 42 50 145 178 211 242 273 305 338 Capital employed 44 39 52 157 200 245 283 318 351 384 ROE n.a. 24.3% 37.0% 8.9% 50.7% 36.4% 28.5% 22.3% 18.2% 15.1% ROIC -5.2% 26.1% 21.4% 13.3% 21.9% 20.2% 18.5% 16.6% 14.9% 13.3% Net debt/cash EBITDA 2.9 1.5 1.0 3.1 1.5 1.4 1.4 1.4 1.4 1.4 Interest coverage -0.0 1.7 1.5 1.2 3.0 2.9 2.9 2.9 2.8 2.7 Equity ratio 13.0% 15.0% 31.0% 19.7% 25.5% 30.4% 35.5% 39.7% 43.4% 46.4% Net gearing 406.1% 403.1% 139.9% 328.6% 213.7% 157.1% 121.4% 99.8% 86.0% 77.3% Marketing material commissioned by DDM Holding 7
Cash flow statement EURm 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E Cash EBITDA 10 22 29 36 81 91 97 100 102 102 Paid taxes 0 0 0 0-3 -3-3 -3-3 -3 Net financials -8-8 -5-11 -13-15 -16-16 -17-17 Change in Provisions 0 1 0 0 0 0 0 0 0 0 Change in other LT non-ib 0 0-3 3 0 0 0 0 0 0 Cash flow to/from associates 0 0 0 0 0 0 0 0 0 0 Dividends paid to minorities 0 0 0 0 0 0 0 0 0 0 Other adj. to reconcile to cash flow 1-17 -1 0 0 0 0 0 0 0 Funds from operations (FFO) 4-3 20 26 66 73 79 81 82 82 Change in NWC 2 0 0 0 4 1 1 0 0 0 Cash flow from op. (CFO) 6-3 20 27 70 74 79 81 82 82 Capital Expenditure -16-3 -22-120 -80-82 -83-85 -87-88 Free Cash Flow before A&D -10-6 -2-93 -10-8 -4-4 -5-6 Proceeds from sale of assets 0 0 9 0 0 0 0 0 0 0 Acquisitions 0 0 0 0 0 0 0 0 0 0 Free cash flow -10-6 7-93 -10-8 -4-4 -5-6 Dividends paid 0 0 0 0 0 0 0 0 0 0 Equity issues / buybacks 13 0 6 11 0 0 0 0 0 0 Net change in debt -8 0 0 92 20 20 10 8 6 6 Other financing adjustments 0 0 0 0 0 0 0 0 0 0 Other non-cash adjustments 0 0-7 0 0 0 0 0 0 0 Change in cash -5-6 7 10 10 12 6 4 1 0 Cash flow metrics Capex/D&A 1.6 0.3 1.1 5.5 1.9 1.7 1.6 1.6 1.6 1.6 Capex/Sales 1.1 0.1 0.7 3.0 0.9 0.9 0.8 0.8 0.8 0.8 Key information Share price year end (current) 3.65 2.73 3.88 5.62 5.62 5.62 5.62 5.62 5.62 5.62 Market cap 26 19 35 76 76 76 76 76 76 76 Enterprise value 54 53 64 187 198 205 209 213 217 224 Diluted no. of shares, year-end (m) 7.1 7.1 9.0 13.6 13.6 13.6 13.6 13.6 13.6 13.6 Marketing material commissioned by DDM Holding 8
Disclaimer Nordea Markets is the commercial name for Nordea s international capital markets operation. The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the current views of Nordea Markets as of the date of this document and are subject to change without notice. This notice is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgement of the recipient. The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision The document has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination. Nordea Bank AB (publ), Company registration number/vat number 516406 0120/SE663000019501. The board is domiciled in Stockholm, Sweden. Conflict of interest Readers of this document should note that Nordea Markets has received remuneration from the company mentioned in this document for the production of the marketing material. The remuneration is predetermined and is not dependent on the content. It is important to note that past performance is not indicative of future results. Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction. This document may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Markets. Completion date: 20 November 2017, 07:44 CET