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

Page 5/16

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Disclaimer

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