Helma Eigenheimbau — Extensive pipeline key to overcoming the crisis

The coronavirus pandemic has affected Helma’s order inflow, with H120 net new order intake of just €115.5m, down 17.8% from €140.6m in H119. The largest decline was in the residential development segment (Helma Wohnungsbau), with only €40.2m in net new orders against €64.6m in H119. With the construction services segment also reporting a year-on-year decline in net new order intake from €63.4m in H119 to €51.4m in H120, the almost twofold improvement within Helma’s holiday property sector (€23.9m versus €12.6m) could not fully offset the difference.

Nevertheless, with a strong order book position of €202.7m at end 2019, Helma managed to weather the initial impact of COVID-19 and report a slight year-on-year improvement in sales in H120, reaching €114.2m against €110.3m in H119. Importantly, the revenue stream structure changed, with the residential development segment’s share falling to just 36% in H120, against almost 51% in H119. The 26.7% y-o-y decline in sales in this area has been fully offset by the 16.1% expansion in construction services and a more than doubling of transaction volumes in the holiday property development segment. It is likely that this increase was driven by customers seeing the attractiveness of purchasing a holiday home in the context of current and potential future lockdowns and self-isolation requirements.

COVID-19 materially affected the demand for housing and transaction activity, in contrast to the supply side of the market, such that the company reported only limited coronavirus-driven disruptions to the construction process. The headcount as at 30 June 2020 reached 337 employees, against 315 12 months earlier (322 as at 31 December 2019).

We assume that the lower income from the property development segment, which offers the highest margins, had a negative impact on group profitability, with Helma reporting a 16.3% y-o-y decline in EBIT (adjusted for disposal of capitalised interests) to €7.1m in H120 against €8.5m in H119. The corresponding margin fell year-on-year by almost 1.5pp to just 6.2%.

Helma’s net debt expanded to €194.4m at 30 June 2020, from €174.9m at 31 December 2019 and €165.0m at 30 June 2019 (a 17.8% increase over the last 12 months). At the same time, its average annual interest rate as at end-June 2020 stood at c 2.21%, down from 2.26% at end-2019. Post balance sheet date, in August 2020, Helma Wohnungsbau issued a €27.5m promissory note (guaranteed by Helma Eigenheimbau), to repay two promissory notes taken out in 2015 and 2016 and maturing in 2020 and 2021. We note that the new issue holds 2.9% interest on the €13.0m tranche and 3.1% interest on the €14.5m tranche, while the €11.5m promissory note issued in 2019 paid only a 2.5% coupon. Along with increasing indebtedness, Helma was able to expand its equity to €113.1m from €108.6m at the start of the year, and therefore retained a healthy equity ratio of 28.1%, against 28.6% at 31 December 2019. The promissory note covenants require equity of at least €21m and an equity ratio of at least 15.0%.

In H120 Helma’s EBT and net income fell to €6.6m and €4.5m, respectively, from €7.5m and €5.2m in H119. Due to the coronavirus pandemic outbreak, the original guidance for 2020, assuming €26m pre-tax profit, was withdrawn in April and replaced with a broad assumption of positive results for the year. In its H120 report, management now provides 2020 guidance for PBT in the range of €14m to €17m. Even though the reported figure for first six months of the year sits at 47% of the lower bound and current Refinitiv consensus implies a PBT of €12.5m in FY20, we still consider the forecast to be achievable. Historically, Helma reports stronger results in the second half of the year, which could be further helped by a loosening of the government restrictions put in place in H120 to limit the pandemic spread. The company could also benefit from its relatively good order book of €199.8m at end-June 2020 (€197.4m at end-June 2019), unless the pandemic triggers another lockdown. We also believe that the available Refinitiv consensus has not fully captured Helma’s H120 results release yet.

Management refrains from providing any guidance for 2021 at this point, given the continuing uncertainties regarding the extent and economic impact of the coronavirus pandemic; it expects to provide 2021 guidance once the full 2020 results are published. It does not, however, expect any long-term impact on its business model, and aims to return to the growth path in the medium term, and continues to aim for annual revenue of well over €300m over this period.

In the mid to longer term, Helma’s earnings prospects should be bolstered by its extensive landbank, which management estimates to have revenue potential of almost €1.7bn. This is spread between the residential property segment (€1.1bn) and holiday property segment (€0.6bn) and has increased from €1.5bn as at end-December 2019 (€1.0bn residential, €0.5bn holiday). It is worth noting that the improvement is attributable to the growing number of potential units (4,050 at end-June 2020 against 3,475 at end-December 2020), rather than visibly higher pricing. This includes acquisition of land in the middle of the Sauerland-Rothaargebirge nature park at the Sorpesee (Lake Sorpe) in February 2020, enabling construction of c 350 holiday homes and apartments, per Helma’s estimates.

On the brink of the COVID-19 based economic crisis, the German residential property sector was perceived by investors as a safe haven, reflected in it accounting for the largest share (35%) of total real estate investment volume in H120 according to JLL. In 2019 the sector ranked second, behind office, with just 24% share. The total transaction volume in the housing segment over the first six months of 2020 amounted to €14.7bn, with €4bn of this in Q2, when government restrictions were most severe.

With persistent high demand in the German real estate sector, the supply side also fared well in the early months of the pandemic, with April being the only month to record a year-on-year decline (0.7%) in construction output, according to Eurostat. Once the restrictions were loosened, the figures for May and June were higher by 1.2% and 1.4% y-o-y, respectively. Furthermore, even though the building permission granting process was moderately extended, according to Helma, the number of residential building permits granted in H120 remained robust.

We continue to compare Helma against a peer group including two domestic, residential real estate developers (Instone and Consus) and three European ones (Bonava, Taylor Wimpey and Barratt Developments). However, it is worth noting that both British peers have a net cash position, which results in lower EV/EBITDA multiples. Consequently, Helma trades at premiums of 71%, 46% and 35% to the group averages for 2020e, 2021e and 2022e, respectively. Based on the P/E multiples, which do not account for Helma’s relatively high leverage level and that of its domestic peers, the company’s shares trade on a diminishing premium to peers for 2020e and 2021e figures. On the back of the superior earnings potential (implied by the Refinitiv consensus data), compared to Helma’s peers, the premium reverts to a slight discount based on the 2022e consensus data.

With a relatively strong equity structure and persistent positive earnings stream in recent years, Helma maintained its dividend policy (payout ratio range of 25% to 50% of the net profits generated by the parent company according to the accounting standards of the German Commercial Code) with the latest annual distribution amounting to €1.85 per share, paid on 8 July 2020. This constitutes an attractive historical yield of c 5.3%. Refinitiv consensus data forecasts DPS of c €1.03 from 2020 earnings, €1.38 from 2021 and €1.80 from 2022.

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