29 April 2019
FIRST BERLIN
CR Capital Real Estate AG
Equity Research
CR Capital Real Estate AG
29
C
R
Germany / Real Estate
Primary exchange: Frankfurt
Bloomberg: CRZ GR
ISIN: DE000A0WMQ53
RATING | BUY | |||
Update | PRICE TARGET | € 40.00 | ||
Return Potential | 25.8% | |||
Risk Rating | High |
RESIDENTIAL PROJECT DEVELOPER HITTING ITS STRIDE
Preliminary reporting showed a strong rise in profitability with net income expected to reach €7.7m vs €5.8m in the prior year. CR Capital handed over ~100 terraced homes from phase I of its Leipzig project and started phase II (200 units) construction in H2/18. The strong 2018 performance suggests development activities in Leipzig have hit their stride after a sluggish start. In our view, the German residential property developer is well positioned to capitalise on an environment driven by short supply and urbanisation trends. We increase our price target to €40 (old: €28) on recalibrated profitability assumptions more reflective of current operations. Our rating remains Buy.
Earnings well ahead of forecasts Preliminary revenue of €23.2m is set to more than double (+123%) on an annualised basis owing to strong project development activities in Leipzig. We expect the company to have handed over some 100 flats from its Schkeuditz project last year. Net income is expected to top €7.7m for the full year. We trace the strong profitability to a business model that leverages a modular construction process, excellent procurement of building materials and contractor capacity, and low marketing costs. Our previous forecasts (note of 23 May 2017) did not fully capture these operational strengths, and we have recalibrated our estimates to better reflect the improving profitability of the project development operations.
Capitalising on operational strengths and market trends We like CR Capital
for its position in the affordable housing segment. The acute shortage of living space in Germany is now making international headlines. The bad optics of tenant's revolt in Berlin will ratchet up the pressure on politicians to better incentivise residential developers in the non-luxury segments. The company is on track to hand over the keys to 70+ units this year, and CR Capital has good options in its core regions to replenish the pipeline as current construction
phases in Leipzig are completed.(p.t.o.)
FINANCIAL HISTORY & PROJECTIONS
2015 | 2016 | 2017 | 2018E | 2019E | 2020E | |
Revenue (€ m) | 8.97 | 17.50 | 10.41 | 23.12 | 33.45 | 37.21 |
Y-o-y growth | -51.0% | 95.1% | -40.5% | 122.1% | 44.7% | 11.2% |
EBIT (€ m) | 2.72 | 2.38 | 3.99 | 8.91 | 12.68 | 14.21 |
EBIT margin | 30.3% | 13.6% | 38.4% | 38.5% | 37.9% | 38.2% |
Net income (€ m) | 1.69 | 2.17 | 5.77 | 7.65 | 11.00 | 12.01 |
EPS (diluted) (€) | 0.90 | 1.15 | 3.07 | 4.08 | 5.86 | 6.40 |
DPS (€) | 0.00 | 0.00 | 1.00 | 1.50 | 1.76 | 1.92 |
FCF (€m) | -1.33 | 10.57 | -10.19 | 9.21 | 6.50 | 7.89 |
Net gearing | 17.6% | -14.6% | 24.7% | -0.3% | -8.5% | -15.6% |
Liquid assets (€ m) | 1.95 | 5.44 | 1.98 | 3.10 | 9.63 | 13.98 |
RISKS
Risks include but are not limited to: increasing competition, the company's focus on the residential market in Berlin, and the loss of key personnel.
COMPANY PROFILE
CR Capital Real Estate AG is a property developer focused on the residential segment of the Berlin, Brandenburg, and Leipzig regions. The Berlin-based company specialises in the construction of affordable housing and is listed on the Open Market of the Frankfurt Stock Exchange.
MARKET DATA | As of 26 Apr 2019 | ||
Closing Price | € 31.80 | ||
Shares outstanding | 1.88m | ||
Market Capitalisation | € 59.72m | ||
52-week Range | € 19.80 / 34.00 | ||
Avg. Volume (12 Months) | 1,343 | ||
Multiples | 2017 | 2018E | 2019E |
P/E | 10.4 | 7.8 | 5.4 |
EV/Sales | 6.2 | 2.8 | 1.9 |
EV/EBIT | 16.1 | 7.2 | 5.1 |
Div. Yield | 3.1% | 4.7% | 5.5% |
STOCK OVERVIEW | |||
34.8 | 165 | ||
32.8 | 160 | ||
30.8 | 155 | ||
28.8 | 150 | ||
26.8 | |||
24.8 | 145 | ||
22.8 | 140 | ||
20.8 | 135 | ||
18.8 | 130 | ||
Apr-18Jun-18Aug-18 | Oct-18 | Dec-18Feb-19 | |
CR Capital Real Estate AG | DAXSubsector Real Estate | ||
COMPANY DATA | As of 30 Jun 2018 | ||
Liquid Assets | € 4.07m | ||
Current Assets | € 14.80m | ||
Intangible Assets | € 10.41m | ||
Total Assets | € 45.09m | ||
Current Liabilities | € 7.99m | ||
Shareholders' Equity | € 30.49m | ||
SHAREHOLDERS | |||
MPH Group | 61.0% | ||
Free Float | 39.0% |
Analyst: Ellis Acklin, Tel. +49 (0)30 - 80 93 96 83
29 April 2019 | CR Capital Real Estate AG | ||||||||
EXECUTIVE SUMMARY
Established property developer
Founded in 2008, CR Capital Real Estate (CRC) is a project developer focused on the German residential market. The company specialises in the construction of affordable housing predominantly in the Leipzig, Berlin, and the Berlin exurbs. Buyers are typically private individuals as well as yield-seeking investors. We estimate CRC presently controls a development pipeline worth ~€100m, which management aim to realise over the next three years. The company benefits from a strong in-house sales team, access to construction capacity and low costs using high-quality,pre-fabricated materials, and proven construction management.
A full project pipeline
CR Capital generally balances visibility and risk with a three year construction pipeline. The company handed over some 100 housing units from its Schkeuditz project in Leipzig in H2/18 and is on pace to deliver another 70+ units in 2019. We also expect CRC to break ground on several other projects in the Berlin area this year supporting our near term forecasts. The development pipeline includes a new project in the heart of Berlin's exurbs. The developer has some 60 homes planning permitted in the Berlin exurbs (24km northwest of Berlin in Brandenburg) to go alongside another 180 flats scheduled for construction in phase II of the Leipzig project.
Broad market themes fundamentally supportive We expect housing prices to continue their ascent in the coming years until: (1) supply substantially rises; (2) demand for housing abates; and (3) interest rates rise significantly. Apartment prices in Germany continue to climb, due to the persistent housing shortages recently estimated at some 1.9m residential units by the Hans Böckler Foundation. We see no evid ence that these factors are about to change. The German Economic Institute in Cologne says Germany needs to build some 380k new apartments p.a. just to keep up with demand the next two years. This environment should allow CR Capital to extract excellent value from its current projects and explore further development opportunities.
Metropolises are bursting at the seams
There is simply a paucity of undeveloped dirt in Germany's metropolitan hubs that support affordable housing economics. Construction is thus dominated by high priced luxury flats. As a result, urbanites are increasingly looking to the exurbs, where pricing is more accessible for lower income earners but proximity remains attractive. CRC focuses its activities on these growing communities and is currently developing projects located 30 minutes from Berlin's Alexanderplatz and Kurfürstendamm in additio n to its Leipzig development. These are affordable for young families and early career workers.
Raising price target on improved profitability
We arrive at a €40 price target (old: €28) based on a discounted cash flow model, which demonstrates CRC's ability to generate value from its construction pipeline. The main drivers for potential value generation are execution of the current pipeline (gross development value: ~€100m), and strong tailwinds in a residential market that is years away from closing the demand / supply gap. Plus, the company can diversify into the landlord business depending on market conditions. The company's affordable housing position is working and this could gain further political support. Investors will also surely welcome the proposed 50% dividend increase to €1.50 / share equal to an attractive 4.7% yield.
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29 April 2019 | CR Capital Real Estate AG | ||||||||
SWOT ANALYSIS
STRENGTHS
●Attractive market position CR Capital recently shifted its operational focus to the development of affordable housing. We believe this will position the company well between larger developers focused on inner city luxury projects.
●High margin structure CR Capital runs with low staffing and admin requirements. Financing expenditures are also tenable, thanks to cash recycling from completed projects. This setup allows revenues to filter quite cleanly to the bottom line.
●The right geographic exposure The Berlin-based developer has a long track in Berlin and more recently in Leipzig - two of Germany's strongest property markets. The German capital in particular suffers from an acute apartment supply shortage, whereas Leipzig is one of Germany's hottest cities.
WEAKNESSES
●Project delays Unforeseen stoppages are inherent to project development. The Leipzig project was slowed by unearthed archaeological findings in the early stages that halted development. Such instances often result in growth interruption or postponement of expected profits and stretch the balance sheet.
●Low transparency reporting Some investors have been critical of the company's reporting and lack of operational transparency. CRC reports on a half year basis according to IFRS. However, the information provides little operational insight beyond headline financial figures.
●Procurement bottlenecks Execution is heavily dependent on the ability to source materials and external contractor capacity. Long standing supply chains help offset these risks; however orchestrating these resources in the face of social pressure to build more flats could hamper operations as completion heats up.
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29 April 2019 | CR Capital Real Estate AG | ||||||||
OPPORTUNITIES
● Expansion beyond Leipzig and Berlin regions The geographic focus is presently small. The company could look at further Big 7 exurbs, if the current market environment persists forcing more urbanites to the outskirts.
●Forward-selling CR Capital has thus far made little use of forward selling mechanisms. Pre-sales could lock in revenues, facilitate quicker cash recycling, and help the company deliver projects on budget and on time, while providing greater visibility.
● Stronger move into the landlord business The 2017 acquisition of KENT signalled interest in keeping some of its flats on the balance sheet to allow CRC to capture attractive rental incomes and funds from operation (FFO). This could help smooth out some of the choppy cash flows associated with project development.
THREATS
● German landlords move into development Headlines of the tenant revolt and housing shortage in Berlin are increasing pressure on regulators and the big listed residential landlords. This may push them into increasing their development activities, which could encroach on the business of the much smaller CR Capital.
●The tailgating economy A faltering economy is the juggernaut looming in the rear view mirror of a residential property market entering the eleventh year of the cycle. A prolonged economic downturn could dampen demand, hurt housing prices in secondary locations, and negatively impact CR Capital's margins.
●Cost inflation The company bears some of the cost overrun risk. There is a particular shortage of contractor capacity, which could accelerate normal cost inflation and eat into company margins if the market boils over.
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29 April 2019 | CR Capital Real Estate AG | ||||||||
VALUATION
We use a DCF model to value CR Capital. We regard the company as a manufacturing operation for residential real estate and believe this approach is best suited to this business model. We expect the company to continue its growth trajectory in the mid term and forecast a two-year revenue CAGR of 27%. CRC features good cash generation, thanks to high operational scalability. We believe the gross margin should top 38% over the mid term, while the bottom line is also exceptionally strong, due to scalability and low tax expenses owing to the effect tax losses carried forward.
We assign a WACC of 9.3% based on our multifactor risk model which takes into account company specific risks such as (1) strength of management; (2) earnings quality; (3) transparency; (4) financial risk; (5) competitive position; (6) as well as company size and free float. The primary risk in our view is potential sourcing bottlenecks and the lack of transparency into operations making it difficult to track cash flows.
Our model discounts cash flows from 2028 for a total enterprise value of €82m, of which 53% stems from the explicit period. Our fair value of €75m corresponds to €40 / share based on a 1.9m basic share count after the reverse stock split in 2017.
All figures in € '000
Net sales
NOPLAT
(+) Depreciation & amortisation (-) Revaluation profits
Net operating cash flow (-)Capital expenditures
(-) Working capital Free cash flows (FCF)
PV of FCF's
PV of FCFs in explicit period (2018-2028E) | 43,319 |
PV of FCFs in terminal period | 38,349 |
Enterprise value (EV) | 81,668 |
Net cash / - net debt | -7,018 |
Investments / minority interests | 0 |
Shareholder value | 74,650 |
Fair value per share in EUR | 40.00 |
Cost of equity | 11.8% |
Pre-tax cost of debt | 5.0% |
Tax rate | 30.0% |
After-tax cost of debt | 3.5% |
Share of equity capital | 70.0% |
Share of debt capital | 30.0% |
WACC | 9.3% |
*for layout purposes the model shows only to 2025 but runs until 2028
WACC
WACC
2018E | 2019E | 2020E | 2021E | 2022E | 2023E | 2024E | 2025E | |
23,122 | 33,453 | 37,206 | 40,464 | 44,491 | 48,922 | 53,801 | 59,161 | |
6,236 | 8,876 | 9,945 | 10,431 | 11,043 | 11,401 | 11,613 | 12,043 | |
35 | 50 | 56 | 61 | 67 | 73 | 81 | 89 | |
-1,205 | -1,272 | -1,442 | -1,399 | -1,277 | -713 | -383 | -406 | |
5,065 | 7,655 | 8,558 | 9,093 | 9,833 | 10,761 | 11,311 | 11,726 | |
-332 | -327 | -815 | -438 | -464 | -536 | -638 | -748 | |
-481 | -3,228 | -2,775 | -2,474 | -2,861 | -3,278 | -3,734 | -4,278 | |
4,252 | 4,099 | 4,969 | 6,181 | 6,507 | 6,947 | 6,938 | 6,700 | |
4,252 | 3,859 | 4,281 | 4,873 | 4,695 | 4,587 | 4,193 | 3,705 | |
Terminal EBIT margin | ||||||||
23.1% | 24.1% | 25.1% | 26.1% | 27.1% | 28.1% | 29.1% | ||
6.3% | 51.00 | 57.00 | 62.00 | 68.00 | 73.00 | 79.00 | 84.00 | |
7.3% | 43.00 | 47.00 | 51.00 | 55.00 | 59.00 | 63.00 | 67.00 | |
8.3% | 37.00 | 40.00 | 43.00 | 46.00 | 49.00 | 52.00 | 56.00 | |
9.3% | 32.00 | 35.00 | 37.00 | 40.00 | 42.00 | 45.00 | 47.00 | |
10.3% | 29.00 | 31.00 | 33.00 | 35.00 | 37.00 | 39.00 | 41.00 | |
11.3% | 26.00 | 28.00 | 29.00 | 31.00 | 33.00 | 34.00 | 36.00 | |
12.3% | 24.00 | 25.00 | 27.00 | 28.00 | 29.00 | 31.00 | 32.00 | |
Terminal growth rate | ||||||||
0.5% | 1.0% | 1.5% | 2.0% | 2.5% | 3.0% | 3.5% | ||
6.3% | 56.00 | 59.00 | 63.00 | 68.00 | 74.00 | 82.00 | 93.00 | |
7.3% | 47.00 | 49.00 | 52.00 | 55.00 | 59.00 | 63.00 | 69.00 | |
8.3% | 41.00 | 42.00 | 44.00 | 46.00 | 49.00 | 51.00 | 55.00 | |
9.3% | 36.00 | 37.00 | 38.00 | 40.00 | 41.00 | 43.00 | 45.00 | |
10.3% | 32.00 | 33.00 | 34.00 | 35.00 | 36.00 | 37.00 | 39.00 | |
11.3% | 29.00 | 30.00 | 30.00 | 31.00 | 32.00 | 33.00 | 34.00 | |
12.3% | 26.00 | 27.00 | 27.00 | 28.00 | 29.00 | 29.00 | 30.00 |
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CR Capital Real Estate AG published this content on 29 April 2019 and is solely responsible for the information contained herein. Distributed by Public, unedited and unaltered, on 29 April 2019 11:57:13 UTC