DeA Capital — Update 22 November 2015

Financials

DeA Capital

Transformation progress

Q315 results

Investment companies

23 November 2015

Price	€1.47
Market cap	€451m

Net cash (€m) at 30 Sept 2015		123.2

Shares in issue	266.2m* *Excluding treasury shares
Free float	25.9%
Code	DEA

Primary exchange	BIT
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	1.4	7.5	(7.4)
Rel (local)	1.4	8.3	(21.2)

52-week high/low

€1.94

€1.25

Business description

DeA Capital, a De Agostini group company, is one of Italy’s leading players in alternative investments. It is active in private equity investments and asset management. As of 30 September 2015, it had an investment portfolio of €491m and €10.3bn of assets under management.

Next event

FY15 results

March 2016

Analyst

Peter Thorne

+44 (0)20 3077 5765

financials@edisongroup.com

Edison profile page

DeA Capital is a research client of Edison Investment Research Limited

DeA Capital’s NAV per share at 30 September 2015 was €2.17, little changed from €2.18 at 30 June 2015. The company has made progress on its path to reposition itself as an alternative asset manager rather than a private equity investor in Q315. It received the cash from the part-disposal of its stake in Migros and made an application to Borsa Italiana to list a REIT. DeA Capital is cash-positive, yields just below 7% according to our dividend estimate and is trading at a discount of around 30% to our estimate of its sum-of-the-parts of €2.10 per share.

Year end	AUM (€bn)	Fees from AAM (€m)	NAV/share (€)	DPS (€)	P/NAV (x)	Yield (%)
12/13	10.51	76.4	2.30	0.00	0.65	N/A
12/14	10.46	66.0	2.41	0.30	0.62	20.4
12/15e	10.80	65.2	2.21	0.10	0.66	6.8
12/16e	11.31	64.5	2.17	0.10	0.68	6.8

Note: NAV is stated NAV, including goodwill.

Migros part-disposal completed

In July 2015, DeA Capital received €107.7m from the disposal of half of its holding in Migros, which also gave it a capital gain of €46.3m. The transaction was included in DeA Capital’s Q2 results but the cash was not received until Q3. The cash was used to pay down debt. As a result of the transaction, private equity investments accounted for 59% of its investment portfolio at end September 2015, down from 69% at end December 2014. Its Migros stake now accounts for 15% of its investment portfolio compared with 33% at the end of December 2014. DeA Capital intends to reduce the proportion of its investment portfolio invested in private equity further in future years by disposal, but in the meantime will focus on increasing the value of its remaining private equity investments.

Application for REIT listing made

DeA Capital is seeking to reposition itself as an alternative asset manager of real estate and private equity assets. A big step to further the development of its real estate business was the September application to Borsa Italiana to list a REIT of up to €500m. The REIT is expected to list between the end of 2015 and the beginning of 2016 and is targeted towards an international investor base. DeA Capital believes there is a large potential international market for high-yielding Italian real estate funds.

Valuation: Good yield and discount to SOTP

We estimate that DeA Capital is currently yielding just below 7% and is trading at a discount of c 30% to our estimate of its SOTP valuation. In our valuation, we have included the asset management activities at our estimate of their fair value using peer comparison rather than the equity value used in the company accounts. We anticipate that further progress in lowering the size of its private equity portfolio will reduce the discount to our SOTP calculation.

Q315 NAV

DeA Capital’s NAV per share at end September 2015 was €2.17, little changed from the end of June 2015 figure of €2.18. The following exhibit shows its components and the change since the end of June. The main change in the NAV calculation is that the €107.7m sale proceeds from the part disposal of the holding in Migros were used in the quarter to pay down debt ,so the group now reports a net cash position (holding company) of €83.9m compared with debts of €37.1m at the end of the previous quarter. DeA Capital is seeking to reduce its holdings in private equity investments as market opportunities allow and return the proceeds to shareholders or alternatively invest them in expanding its alternative asset management activities.

Exhibit 1: Evolution of reported NAV in Q315

NAV	30 June 2015		30 September 2015
	Stake	Value (€m)	Stake	Value (€m)
Sale proceeds* from Migros part disposal		107.7
Migros investment	6.8%	89.2	6.8%	72.6
Migros		196.9		72.6
Other PE direct investments	N/M	11.6	N/M	11.7
PE funds	N/M	219.6	N/M	204.4
Private Equity		428.1		288.7
IDeA Capital Funds SGR	100%	47.5	100%	49.3
IDeA Fimit SGR	64.3%	142.2	64.3%	144.2
Innovation RE	97.0%	7.8	97.0%	9.2
Alternative Asset Management		197.5		202.7
Total investment portfolio		625.6		491.4
Other net assets/liabilities		(8.0)		(0.6)
Net financial (debt)/cash		(37.1)		83.9^
NAV		580.5		575.9
Shares outstanding (excluding treasury stock)		266.2		264.9
NAV per share		2.18		2.17

Source: DeA Capital, Edison Investment Research. Note: *Received in Q315.^Net cash in holding company of €83.9 with an additional €32.3m held in the alternative asset management companies and €7m by the private equity investment companies make up the consolidated group net financial position of €123.2m.

Alternative asset management

DeA Capital’s alternative asset management activities encompass real estate funds (managed by IDeA FIMIT, AuM €8.6bn at end Q315), private equity funds and fund of funds (managed by IDeA Capital Funds, AuM €1.7bn at end Q315) and project and property management services (IRE/IRE advisory services). DeA Capital seeks to expand its alternative asset management activities by repositioning its private equity funds along thematic lines as it believes that these will have more appeal outside Italy. It will replace its liquidating real estate funds, whose mandates require them to be liquidated after a pre-determined period, by new funds in a REIT and in the reserved funds segments, which do not have fixed lives. Key figures for Q315 are given in the following exhibit.

IDeA Capital Funds increased AuM in Q315 to €1.7bn, from €1.6bn at end H115, as a result of the second closing of its Taste of Italy fund (AuM €140m at end Q315 from €86m at end H115). Fees earned from the sale of this fund resulted in a rise in fees for this unit to 128bp in the quarter, from 98bp in H1, and an uptick in profitability in Q3. We anticipate the fee level to return to around 100bp in Q415 and in 2016.

IDeA Fimit saw its AuMs fall to €8.6bn at the end of Q3 from €9.0bn at the end of H115. As expected, there was some liquidation of its funds in line with their limited life mandates. Fee levels in the quarter at 56bp were broadly in line with H115. Net profits in Q3 were boosted by investment gains and the non-recurrence of exceptional service costs in Q215.On 22 September, IDeA Real Estate, a REIT, submitted a listing application to Borsa Italiana. It is anticipated that the listing will take place between the end of 2015 and the beginning of 2016 and will raise up to €500m of equity with borrowing potentially increasing the assets managed to €1bn in the REIT.

IRE/IRE advisory net profits in Q315 were boosted by lower service and personnel costs that were exceptionally high in H115.

We have fine-tuned our 2015 forecasts for the alternative asset management segment in the light of the Q3 results and now expect adjusted net profits of €14.7m, from €13.3m previously.

Exhibit 2: Alternative asset management – key figures

	H114	H214	H115	Q315	H215e	2014	2015e	2016e
AuMs (€bn) – end period
IDeA Capital Funds	1.4	1.5	1.6	1.7	1.7	1.5	1.7	1.80
IDeA FIMIT	9.0	9.0	9.0	8.6	8.5	9.0	8.5	9.40
	10.4	10.5	10.6	10.3	10.2	10.5	10.2	11.20
AuMs (€bn) – average
IDeA Capital Funds	1.4	1.4	1.5	1.6	1.7	1.4	1.6	1.8
IDeA FIMIT	9.1	9.0	9.0	8.8	8.7	9.1	8.8	9.0
	10.5	10.4	10.5	10.4	10.3	10.5	10.4	10.7
Management fees/AuM bp
IDeA Capital Funds	96	108	98	128	115	102	106	100
IDeA FIMIT	62	58	55	56	55	60	56	55
Management and service fees (€m)
IDeA Capital Funds	6.7	7.8	7.6	5.2	9.5	14.5	17.1	17.5
IDeA FIMIT	28.1	26.0	24.8	12.4	23.9	54.1	48.7	49.2
IRE/ IRE advisory	10.1	10.6	9.5	4.9	9.5	20.7	19.0	16.5
	44.9	44.3	41.9	22.5	42.9	89.3	84.8	83.2
Adjusted* net profits (€m)
IDeA Capital Funds	1.9	1.7	2.0	2.1	3.1	3.6	5.1	4.6
IDeA FIMIT	8.9	7.9	5.6	3.1	5.7	16.8	11.4	10.8
IRE/IRE advisory	1.7	1.7	0.9	1.3	1.4	3.4	2.3	1.2
	12.5	11.4	8.5	6.5	10.3	23.9	18.8	16.6
Minorities	(3.2)	(2.9)	(2.0)	(1.1)	(2.1)	(6.1)	(4.1)	(3.9)
Adjusted net profit (€m)	9.3	8.5	6.5	5.4	8.2	17.8	14.7	12.7

Net profit/management and service fees bp
IDeA Capital Funds	28%	22%	26%	40%	33%	25%	30%	26%
IDeA FIMIT	32%	31%	23%	25%	24%	31%	23%	22%
IRE/IRE advisory	17%	16%	9%	27%	15%	17%	12%	15%

Source: Compiled by Edison Investment Research from DeA Capital segmental analysis. Note: *Adjusted for intangible amortisation, impairments and provisions.

Forecast revisions

We have revised our 2015 forecasts, as shown in the following exhibit. We have increased our net profit expectation for FY15 mainly because of lower tax charges – the Migros gain did not incur a tax charge and DeA Capital has utilised tax losses in the quarter. Our 2016 profit forecasts are unchanged.

We anticipate that DeA Capital will pay a dividend of €0.1 per share for 2015, payable in 2016. For 2014 it paid a special large dividend of €0.3 per share as the company had surplus capital and it wished to reward shareholders. A €0.1 per share dividend will amount to around €27m per year, which is likely to be more than the asset management businesses will earn in the next few years. However, private equity gains/revaluations could be used and the company has the option to pay the dividend from reserves, which amounted to €181m at end September 2015.

Exhibit 3: Changes to estimates

	Net profit (€000s)*			NAV (€)			Dividend (€)
	Old	New	Change (%)	Old	New	Change (%)	Old	New	Change (%)
2015e	63,472	75,489	19	2.21	2.21	0	0.1	0.1	0
2016e	12,663	12,663	0	2.18	2.17	0	0.1	0.1	0

Source: Edison Investment Research. Note: *Excluding minority interests.

Valuation

Our preferred valuation measure for DeA Capital is a sum-of-the-parts (SOTP), which we show in the exhibit below. Most of DeA Capital private equity investments are valued at fair value in its accounts. DeA Capital values its alternative asset management subsidiaries at their equity value. We have replaced the equity value of these companies with our estimate of their fair value, which we have calculated as our estimate of their 2015 earnings multiplied by a P/E ratio of 12.4x, the latter being an average multiple of US, UK and Italian asset managers less 12% to account for the early stage of development of the DeA Capital asset management activities. With a forecast of adjusted profits of €14.7m in 2015 for DeA Capital’s asset management businesses, we now value them at €182.2m. This is higher than our previous valuation of €159.6m on 24 September 2015 due to a rise in earnings expectations for DeA Capital’s asset management activities and a slightly higher P/E multiple of 12.4 vs 12.1 previously. The net result is a SOTP of €2.10 per share, from €2.02 previously.

Exhibit 4: Sum-of-the-parts

	30 September 2015
	Value (€m)	Valuation method
Migros	72.6	Market prices
Other PE direct investments	11.7	Net equity
PE Funds	204.4	Fair value
Private Equity	288.7
Alternative Asset Management	182.3	Edison valuation of asset management at 12.4x 2015e earnings
	471.0
Other net assets/liabilities	0.6
Net financial (debt)/cash	83.9
Sum-of-the-parts	555.5
Shares outstanding end Q315	264.9
SOTP per share (€)	2.10

Source: DeA Capital, Edison Investment Research

Exhibit 5: Financial summary

	€000s	2012	2013	2014	2015e	2016e
Year-end 31 December		IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Alternative Asset Management fees		82,004	76,356	66,045	65,231	64,525
Income (loss) from equity investments		(18,442)	6,586	(1,673)	59	100
Other investment income/expense		(7,884)	(24,617)	(56,149)	73,588	3,500
Income from services		10,863	16,329	18,667	18,237	16,500
Other income		1,658	4,032	509	3,162	0
Revenue		68,199	78,686	27,399	160,277	84,625
Cost of Sales		(64,623)	(56,212)	(71,857)	(63,139)	(61,669)
Gross Profit		3,576	22,474	(44,458)	97,138	22,956
EBITDA		3,576	22,474	(44,458)	97,138	22,956
Operating Profit (before amort. and except.)		3,035	21,574	(45,240)	96,479	22,297
Intangible Amortisation		(16,106)	(72,384)	(15,318)	(5,441)	(5,341)
Exceptionals		0	0	0	0	0
Other		0	0	0	0	0
Operating Profit		(13,071)	(50,810)	(60,558)	91,038	16,956
Net Interest		(6,759)	(438)	2,905	4,223	500
Profit Before Tax (norm)		(3,724)	21,136	(42,335)	100,702	22,797
Profit Before Tax (FRS 3)		(19,830)	(51,248)	(57,653)	95,261	17,456
Tax		1,621	(4,381)	1,720	(1,986)	(2,793)
Profit After Tax (norm)		(2,103)	16,755	(40,615)	98,715	20,004
Profit After Tax (FRS 3)		(18,209)	(55,629)	(55,933)	93,275	14,663
Minoriy interests		(8,068)	24,499	(1,668)	(17,786)	(2,000)
Net income (FRS 3)		(26,277)	(31,130)	(57,601)	75,489	12,663

Average Number of Shares Outstanding (m)		277.5	274.0	274.7	268.3	264.9
EPS - normalised		(3.7)	15.1	(15.4)	30.2	6.8
EPS - normalised and fully diluted		(3.7)	15.1	(15.4)	30.2	6.8
EPS - (IFRS)		(9.5)	(11.4)	(21.0)	28.1	4.8
Dividend per share (€)		0.0	0.0	0.3	0.1	0.1

Gross Margin (%)		5.2	28.6	-162.3	60.6	27.1
EBITDA Margin (%)		5.2	28.6	-162.3	60.6	27.1
Operating Margin (before GW and except.) (%)		4.5	27.4	-165.1	60.2	26.3

BALANCE SHEET
Fixed Assets		1,060,645	971,549	786,141	637,108	621,108
Intangible Assets		314,883	244,778	229,711	224,538	218,538
Tangible Assets		58,669	73,336	39,988	41,834	41,834
Investments		687,093	653,435	516,442	370,736	360,736
Current Assets		66,884	81,018	117,585	158,723	162,396
Stocks		0	0	0	0	0
Debtors		27,537	44,406	53,389	40,161	40,161
Cash		29,156	26,396	55,583	114,235	117,908
Other		10,191	10,216	8,613	4,327	4,327
Current Liabilities		(94,621)	(72,338)	(36,193)	(32,368)	(32,368)
Creditors		(49,532)	(32,920)	(35,833)	(32,008)	(32,008)
Short term borrowings		(45,089)	(39,418)	(360)	(360)	(360)
Long Term Liabilities		(173,461)	(173,670)	(40,911)	(24,633)	(24,633)
Long term borrowings		(142,802)	(150,198)	(5,201)	(1,201)	(1,201)
Other long term liabilities		(30,659)	(23,472)	(35,710)	(23,432)	(23,432)
Net Assets		859,447	806,559	826,622	738,830	726,503
Minorities		(136,309)	(177,070)	(173,109)	(154,686)	(151,186)
Shareholders' equity		723,138	629,489	653,513	584,144	575,317
Year-end number of shares m		274.6	274.0	271.6	264.9	264.9
NAV per share		2.63	2.30	2.41	2.21	2.17

CASH FLOW
Operating Cash Flow		(23,752)	(49,664)	188,419	179,836	35,663
Acquisitions/disposals		(1,049)	(4,519)	(1,476)	159	0
Financing		14,657	55,917	(151,805)	(16,094)	0
Dividends		(6,290)	(5,643)	(5,951)	(105,152)	(31,990)
Cash flow		(16,434)	(3,909)	29,187	58,749	3,673
Other items		(1,174)	1,149	0	(97)	0
Opening net debt/(cash)		117,167	158,735	163,220	(50,022)	(112,674)
Movement in debt		23,960	1,725	(184,055)	(4,000)	0
Closing net debt/(cash)		158,735	163,220	(50,022)	(112,674)	(116,347)

Source: DeA Capital, Edison Investment Research

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