Deutsche Beteiligungs Steady NAV growth in unquoted portfolio Half-year results Investment companies For the six months to 30 April 2014, Deutsche Beteiligungs (DBAG) reported a 6.7% ( 1.29) NAV total return (including Q2 dividends paid of 1.2). Its stake in the quoted Homag was the largest contributor, with the 18.3% rise in Homag s share price adding 10.2m ( 0.75 per share) to NAV. The value of unquoted investments increased by 7.7m ( 0.54 per share) during the half year, although in Q2 progress was slower. A 9.9m investment in Dahlback, Germany s fifth largest bakery chain, was agreed during the period and management reports a strong pipeline of potential transactions for the remainder of the year. Excluding any impact from Homag, guidance for current year NAV total return at least in line with an estimated 8% cost of equity remains unchanged. 24 June 2014 Price 21.26 Market cap 291m NAV* 280m NAV per share* 20.5 Premium to NAV 4% FY13 dividend yield 5.6% *Last published NAV as at 30 April 2014. Shares in issue 13.7m Free float 70% Code DBA As at 30/04/14 Total share return (%) Total NAV return (%) LPX Europe (%) DAX 30 Index (%) 1 year 11.8 10.2 18.8 21.3 3 years 15.9 23.6 29.6 27.8 5 years 157.3 62.6 165.1 101.3 9.5 years* 299.7 199.9 67.6 142.5 Source: Morningstar. Note: Cumulative total return performance data in euros as at last published NAV. *NAV figures restated under IFRS available from 30/10/2004. Primary exchange Deutsche Börse Secondary exchange Frankfurt Share price performance Strong pipeline of potential transactions The pace of follow-on and new investments in H114 ( 14.8m) is slower than in FY13 (total investments of 44.5m), but management is optimistic about future investment opportunities and notes that it has a number of potential transactions in the pipeline for the remainder of the year. Although DBAG s target mid-market segment of the MBO market remains stable, with seven MBOs transacted in January to May 2014 compared with eight in the same period a year earlier, management have screened c 10% more potential transaction opportunities during the past 12 months than during the preceding 12 months. FY14 management guidance maintained Despite the slowdown in Q2 valuation movements on the unquoted portfolio, management s guidance of a full year NAV total return, excluding any impact from Homag, of at least in line with cost of equity (estimated by DBAG at c 8%) remains unchanged. This implies value growth in the unquoted portfolio of c 18%, driven by cash flow generation and debt reduction in the underlying companies. As of 18 June, Homag s share price has risen a further 18% since 30 April (taking the gain to 40% since 30 October 2013). Adding this to the 8% guidance equates to overall NAV growth of c 16%. Valuation: Premium to peers has narrowed DBAG s share price, down c 2% in the last three months, trades at a 4% premium to the April NAV, although recent Homag gains bring the NAV in line with the share price, which compares with the LPX Europe Index discount at 10%, and the LPX Direct Index discount at 4%. In our view, DBAG s premium rating relative to peers can be explained by its stream of recurring asset management income. % 1m 3m 12m Abs 10.1 (1.2) 14.9 Rel (local) 6.2 (8.1) (8.8) 52-week high/low 22.67 18.00 Business description Deutsche Beteiligungs is a Germany-based listed private equity company focused on mid-sized companies in Germany and neighbouring Germanspeaking countries. Next event Q3 results 12 September 2014 Analysts Martyn King +44 (0)20 3077 5745 Gavin Wood +44 (0)20 3681 2503 financials@edisongroup.com Edison profile page Deutsche Beteiligungs is a research client of Edison Investment Research Limited
Exhibit 1: Company at a glance Investment objective and fund background DBAG and the co-investment funds that it manages and advises invest in private companies that are typically subsidiaries of corporate groups and mid-sized family-owned enterprises in Germany and neighbouring German-speaking countries. It focuses on growth-driven established businesses valued at between 50m and 250m. Recent news 13 June 2014 Interim results 27 March 2014 AGM 14 March 2014 Q1 results Forthcoming announcements/catalysts Capital structure Fund details AGM March 2015 FY13 total expense ratio 2.6% Group Deutsche Beteiligungs Full-year results January 2015 Net gearing Net cash Manager Team-managed Year end October Annual management fee N/A Address Boersenstrasse 1, Dividend March 2015 Performance fee N/A 60313 Frankfurt am Main, Germany Launch date December 1985 Company life Unlimited Phone +49 69 95787-01 Wind-up N/A Loan facilities N/A Website www.deutsche-beteiligung.de Portfolio split (as at 30 April 2014) Sector breakdown (as at 30 April 2014)* International fund investments 8.6m Growth financing (minority stakes) 17.3 m Management buyouts 167.4m Others Speciality 12% chemicals 4% Automotive suppliers 10% Consumer goods 2% Industrial services & logistics 11% Mechanical eng. & plant construction 61% NAV split by net debt/ebitda 2014 (as at 30 April 2014)* Geographic split of investments (as at 30 April 2014)* Between 2x and 3x 20% Between 1x and 2x 23% Greater than 3x 4% Less than 1x 53% Rest of world 2% Other European countries 7% Germany 91% Dividend history Share buyback history Dividened per share ( ) 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 0.3 2004 3.5 3.0 0.7 2005 2006 2007 Base DPS 0.4 2008 1.4 1.0 0.8 2009 2010 2011 Special DPS 1.2 1.2 2012 2013 m 40 30 20 10 0 2005 2006 2007 2008 2009 2010 2011 2012 2013 Source: DBAG, Edison Investment Research. Note: *Does not include parallel funds. Deutsche Beteiligungs 24 June 2014 2
Steady NAV growth For the six months to 30 April 2014, DBAG s NAV per share increased by 6.7% before dividends (Q2 +2.0%), representing an annualised rate of 13.8% which is modestly ahead of the 11.5% increase achieved in FY13 as well as the 9.5-year (since NAV first reported under IFRS) annualised total return of 12.3% (the arithmetic average over 10 years, quoted by the company, is 14.8%). DBAG s 9.5-year return compares favourably with the LPX Europe Index annualised total return of 5.6% and the DAX 30 Index annualised total return of 9.8% over the same period. The main components of the change in NAV during the six months are shown in Exhibit 2. Exhibit 2: DBAG s NAV per share increased to 20.45 during H114 NAV per share ( ) 21.0 20.5 20.0 19.5 19.0 18.5 18.0 0.08 (0.05) (0.03) 20.36 0.75 20.45 (1.20) 0.54 NAV at 31 Oct 2013 Dividend Result of valuation (unquoted) Result of valuation (Homag) Current income Other income/expenses Other comprehensive income Nav at 30 Apr 2014 Source: DBAG Reported IFRS net income for the six months to 30 April 2014 declined modestly to 18.1m, compared with 18.9m in the six months to 30 April 2013, and IFRS EPS declined to 1.32 from 1.39 in the comparative period. A lower contribution from realised and unrealised gains on the portfolio ( 18.8m versus 23.7m) was largely offset by lower net expenses ( 0.5m versus 3.8m), which benefited from a full sixmonth contribution from advisory fees on the DBAG Fund VI, for which DBAG raised 567m in late 2012 and that began its investment period in February 2013. The largest contributor to unrealised valuation movements was listed Homag (DBAG owns 20.1% and funds managed by DBAG own another 19.4%), which contributed 10.3m; its shares rose 18% from 17.78 to 21.03 during the six months to 30 April 2014. At 30 April 2014, Homag represented 34% of the investment portfolio and 24% of NAV. Fluctuations in the Homag share price can have a material impact on reported earnings on a quarterly basis; there was 1.47 price change in the 10 trading days immediately prior to and post the period end, which equates to a 4.6m effect on income. As of 18 June, Homag s price has increased a further 18%. Unrealised gains of 7.7m on the unlisted portfolio related mainly to improved earnings and repayment of debt across the portfolio companies, whereas increases in valuation multiples in line with listed peers had a relatively minor impact. Two of the seven new investments made during FY13 were revalued from cost to fair value during H114 as they had been held for more than one year. While the majority of portfolio companies have forecast higher revenues and earnings for the current year, uncertainties in end markets have led to orders and associated revenues being delayed for a number of companies. Of the 20 portfolio investments, five saw relatively minor negative valuation revisions totalling 1.3m in aggregate. 6.8m of the H1 unrealised gain of 7.7m was generated in Q1. The more muted development in Q2 is attributed to various macro-factors including the crisis in the Ukraine, BRIC currency and Deutsche Beteiligungs 24 June 2014 3
growth pressures. DBAG notes that quarterly fluctuations are not uncommon, and that overall portfolio companies are making good progress. The total expense ratio (TER) (personnel expenses and net other operating income/net assets) declined sharply to 0.3% during the six months, continuing the trend from the preceding financial year, which saw a decline from 5.3% to 2.6%. While operating expenses were modestly reduced, the decline primarily reflects higher fee income of 9.4m received compared with 7.3m in the prior year period. Although there may be some reduction in fee income later in the year, reflecting likely disposal-driven asset reductions in older funds, and some small fee reductions on the DBAG Expansion Capital Fund, management expects the TER to remain below its medium-term indication of 3% during the current year. High rate of investments forecast to continue During the six months to 30 April 2014, follow-on investments of 4.9m were made in existing portfolio companies and 9.9m was committed to a new investment in Dahlback (completed in May 2014). This is a slower rate of investment than achieved in FY13, which recorded seven new investments totalling 44.5m. However, DBAG management maintains its forecast for a high rate of investments to continue and reports that there are a number of potential transactions in the pipeline for the remainder of the year. Although DBAG s target mid-market segment of the MBO market remains stable, with seven MBOs transacted in January to May 2014 compared with eight in the same period a year earlier, management is seeing increased potential deal flow and has screened c 10% more transaction opportunities during the past 12 months than during the preceding 12 months. DBAG had 85m of its own financial resources available for investment at 30 April 2014 (in addition to c 600m available within the co-investment funds) of which 10m was allocated for investment in Dahlback on completion of the transaction in May 2014. Management s stated goal is to invest c 50m each year for the current and three subsequent financial years funded from current resources and realisations. This suggests that at least one realisation could be expected within a 12-month timeframe. DBAG s investment portfolio is relatively immature with eight of the 21 investee companies (including Dahlback) having been owned for less than two years, implying that realisations are likely to remain at a low rate in the near term. Principal cash outflows during the six months comprised the 16m dividend payment, 5m follow-on investments and 4m performancerelated payments. The main inflows were a 9m loan repayment from an investee company and a 2m distribution from disinvesting international fund holdings. Positive outlook for near-term value growth Although the increase in the unquoted portfolio NAV slowed considerably in the second quarter of the current financial year ( 0.52 of the 0.54 NAV per share contribution was in Q1), DBAG s management has maintained its guidance for FY14 NAV total return, excluding any impact from Homag, to be similar to DBAG s cost of equity (which it estimates to be c 8%). As well as potential underlying valuation increases, some contribution would be expected from the four companies that are scheduled to be revalued from cost to fair value as they will have been held for over one year by 31 October 2014. The implied value growth in the unquoted portfolio is c 18%, driven by cash flow generation and debt reduction in the underlying companies. Earnings growth trends during the six months to 30 April 2014 have varied across the portfolio companies due to uncertainty in the end markets of a number of companies in addition to some adverse currency movements. Homag s share price has continued to rise and is up 18% since 30 April 2014 (+40% since 30 October 2013), equivalent to an increase in NAV of 0.82 per share. Adding this to the 0.75 per share recorded in the first half of the financial year represents an additional return from Homag alone of close to 8% on the start of year NAV of 20.36. Adding this to management s 8% guidance Deutsche Beteiligungs 24 June 2014 4
excluding Homag equates to overall NAV growth of c 16%. We estimate that a 1 (c 4%) change in Homag s current share price has a 3.2m ( 0.23 per share) impact on DBAG s NAV, representing a 1.2% impact on NAV return in the current financial year. Valuation Exhibit 3: Peer comparison table As at 30 April 2014 Region Market cap Price TR Price TR Price TR Price TR NAV TR NAV TR NAV TR NAV TR Discount m 1 year 3 year 5 year 10 year 1 year 3 year 5 year 10 year (Ex par) Deutsche Beteiligungs AG Europe 217.9 7.6 5.3 134.4 329.2 (1.2) 3.4 39.4 255.7 3.1 3i Global 3,689.4 19.6 49.8 64.7 30.8 13.2 3.8 (1.5) 46.6 14.1 Altamir Europe 326.4 23.0 34.4 300.9 198.9 14.0 19.9 61.7 209.3 (27.8) Dunedin Enterprise UK 87.6 1.0 31.0 62.4 119.1 2.4 9.5 37.9 91.9 (22.6) Electra Private Equity UK 943.6 20.0 52.7 238.0 285.3 8.3 32.6 92.3 259.2 (8.2) GIMV NV Global 757.0 (3.1) (11.5) 14.3 156.4 (3.7) (10.5) 11.7 92.6 (7.1) HgCapital Trust UK 386.7 (7.3) (2.8) 44.1 273.1 (6.6) 9.7 40.9 262.4 (8.5) Promethean UK 4.5 (33.3) (56.6) (48.5) 35.7 (55.7) (75.8) (47.4) Simple average 3.4 12.8 101.3 199.0 7.8 1.6 25.8 174.0 (13.0) Weighted average 14.8 37.2 97.3 117.5 8.7 7.6 21.5 112.3 3.9 Source: Morningstar DBAG s business is differentiated, even among single manager listed private equity peers, by its regional and sector focus on the German Mittelstand, and by the significant component of recurring fee income generated from its management of co-invested funds for third-party investors. This makes a direct comparison with the listed private equity peer group more difficult, although we see both as primarily driven by NAV development over the long term. As noted above, DBAG has a 9.5-year (the period of comparable IFRS data) NAV total return of 12.3% pa, which compares favourably with its closest peers (Exhibit 3) and the LPX Europe Index (5.6%, includes all listed private equity companies in Europe) and the LPX Direct Index (5.7%, includes all listed private equity companies that invest directly). As with peers, the shares moved to a significant (though smaller, see Exhibit 4) discount to NAV during the global financial crisis, but recovered during 2009 and have subsequently traded at or around the NAV. Exhibit 4: DBAG s premium to peers has narrowed recently 60% 40% Premium / (Discount) (%) 20% 0% -20% -40% -60% -80% Oct/04 Mar/05 Aug/05 Jan/06 Jun/06 Nov/06 Apr/07 Sep/07 Feb/08 Jul/08 LPX Europe discount Dec/08 May/09 Oct/09 Mar/10 Aug/10 Jan/11 Jun/11 Nov/11 Apr/12 DBAG discount Sep/12 Feb/13 Jul/13 Dec/13 May/14 Source: Bloomberg, Morningstar The current premium to NAV of 4% is above the 12-month average (2% discount) and the threeyear average (6% discount). Having traded at a premium from the start of 2014, the shares moved to a 13% discount to NAV in mid-april before recovering steadily and moving back to a premium in mid-june. The P/NAV differential versus LPX Europe peers has generally narrowed since the global financial crisis and has narrowed substantially over the past 12 months as the LPX Europe average discount has narrowed steadily to c 10% from over 20%. Moreover, we believe the remaining premium to peers is easily explained by DBAG s stream of recurring asset management income. Deutsche Beteiligungs 24 June 2014 5
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Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE s express written consent. Frankfurt +49 (0)69 78 8076 960 Deutsche Schumannstrasse Beteiligungs 34b 24 280 June High Holborn 2014 245 Park Avenue, 39th Floor Level 25, Aurora Place Level 15, 171 Featherston St 6 60325 Frankfurt Germany London +44 (0)20 3077 5700 London, WC1V 7EE United Kingdom New York +1 646 653 7026 10167, New York US Sydney +61 (0)2 9258 1161 88 Phillip St, Sydney NSW 2000, Australia Wellington +64 (0)48 948 555 Wellington 6011 New Zealand