Oekoworld — Normalised revenue and profitability level

Financials

ÖKOWORLD

Normalised revenue and profitability level

Diversified financials

Scale research report - Update

7 September 2018

Price	€17.15
Market cap*	€121m

*Market cap based on 7.06m total shares issued (after deduction of treasury shares); only 3.14m non-voting preference shares listed on the stock market.

Share price graph

Share details

Code	VVV3
Listing	Deutsche Börse Scale
Shares in issue (nonvoting preferred)			3.14m
Last reported net cash as at 30 June 2018		€11.5m

Business description

ÖKOWORLD Group’s business is focused on asset management, insurance brokerage and advisory services. It is one of Germany's pioneers in SRI and ethical-ecological investment advisory, with its nucleus reaching back to 1975. It preserved its successful core investment principles and reached AUM of €1.2bn as at end-June 2018.

Bull

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A strong brand with established distribution channels and constant AUM growth

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SRI investments have become mainstream with more companies following SRI rules.

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Proven track record and numerous awards.

Bear

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Despite long history, still relatively low AUM.

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Strong dependency on German market.

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Only preference shares available to investors.

Analyst

Milosz Papst

+44 (0) 20 3077 5700

financials@edisongroup.com

Edison profile page

ÖKOWORLD (ÖWAG) reported robust results for H118, recording €7.6m revenues and €2.1m net profit. Even though both measures declined y-o-y by 5.6% and 31.4%, respectively, it is important to note that last year’s figures were particularly strong due to high performance fees driven by favourable equity markets. Fund performance outpaced both the broader market and peers over the long term, but is currently recovering from the Q118 downturn. ÖWAG’s shares trade at a premium to the peer group on P/E and EV/EBITDA for FY18e, which, however, widens in FY19e due to earnings growth expectations below the peer-group average.

H118 results confirm long-term growth

The H118 results – €7.6m revenues and €2.1m net profit – exhibit a more normalised level compared with particularly strong performance in FY17, driven by high performance fees. This represents a healthy five-year revenue CAGR at c 10%, driven by both growth in assets under management (AUM) and the positive returns of flagship funds, which outperformed both the broader market and peers over the long term. As at end-June 2018, the company had around €1.2bn AUM (by our calculations) compared with €1.1bn at the end of FY17.

Regaining momentum after a weak Q118

All funds managed by ÖWAG’s 81% subsidiary Ökoworld LUX SA recorded negative returns in the Q118, followed by a slight rebound in the subsequent quarter. However, performance continued to improve beyond H118, with ytd return as at end-August 2018 for the flagship Ökoworld Ökovision Classic fund at 8.9% and favourable exposure to key long-term fundamental themes. Ökoworld Growing Markets 2.0 is still suffering from the recent overall retreat from emerging markets, but the fund managers remain confident in the current portfolio positioning.

Valuation: Still trading at a premium to peers

Following the 36% price rally since the beginning of the year, which was interrupted by a price correction in May, ÖWAG’s shares trade at a premium to the peer group on P/E and EV/EBITDA for FY18e of 28% and 37%, respectively. The premium widens in FY19e due to limited earnings growth expectations (9–10% per annum) as per Bloomberg consensus estimates (however, these are based on estimates from a single broker).

Consensus estimates

Year end	Revenue (€m)	PBT (€m)	EPS (€)	DPS (€)	P/E (x)	Yield (%)
12/16	9.2	5.2	0.60	0.51	30.6	2.8
12/17	15.8	9.7	1.02	0.59	18.0	3.2
12/18e	19.8	6.4	0.74	0.55	27.8	3.0
12/19e	20.9	7.0	0.81	0.56	25.8	3.1

Source: ÖKOWORLD AG accounts, Bloomberg consensus as at 4 September 2018. Note: Consensus is based on the estimates of a single analyst.

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Financials: Long-term growth nearing 10% pa

Following the robust performance in FY17 (driven considerably by high performance fees), the H118 results exhibit a more normalised revenue and profitability level. ÖWAG revenues declined 5.6% y-o-y in H118 vs H117, most likely due to the limited performance fees generated in H118 as the company’s funds did not materially surpass their respective high watermarks amid weak equity markets (in particular in Q118). Still, this represents a healthy five-year revenue CAGR at c 10%, driven by both AUM growth and the positive returns of ÖWAG’s flagship funds (ÖKOWORLD ÖKOVISION CLASSIC and ÖKOWORLD GROWING MARKETS 2.0), which outperformed both the broader market and ÖWAG’s peers over the long term (all of the funds under the Ökoworld umbrella are managed by Ökoworld LUX SA, an 81% subsidiary of ÖKOWORLD AG).

On the other hand, operating expenses recorded an increase of 13.1% y-o-y to €4.6m, with the most significant changes in costs of services (15.8% y-o-y) and other operating expenses (24.3% y-o-y). This illustrates the fact that the company’s revenues depend on both the AUM (through the management fee) and managed funds’ performance (through the performance fee), while the costs are connected solely with the overall business size, as measured by the AUM. In the analysed period, the company succeeded in maintaining its AUM growth; at 30 June 2018, it had around €1.2bn AUM (according to our calculations) compared with €1.1bn at the end of FY17.

This resulted in an EBIT and net income decline of c 25% and 31% y-o-y, respectively, and a margin compression of more than 10pp. Looking at the H118 results in the context of H116 numbers, however, ÖWAG recorded a two-year CAGR of 30.5% in EBIT, 28.7% in EBT and 14.1% in net profit, confirming the steady business improvement. This reflects the business growth over this period (AUM in H116 stood at around €0.8bn).

Exhibit 1: H118 results highlights

€000s	H118	H117	H116
Total revenue	7,604	8,059	3,950
Costs of services	(2,053)	(1,773)	(2166)
Personnel expenses	(1,444)	(1,413)	(847)
Other operating expenses	(1,057)	(850)	(691)
D&A	(88)	(68)	(67)
Income from related companies	0	0	1,560
EBIT	2,963	3,955	1,740
EBIT margin	39.0%	49.1%	44.0%
Other interest and similar income	2	6	44
Interest and similar expenses	(11)	(2)	(1)
EBT	2,954	3,959	1,782
EBT margin	38.8%	49.1%	45.1%
Income tax	(885)	(944)	(193)
effective tax rate	30.0%	23.9%	10.8%
Net profit for the period	2,069	3,015	1,589
Net income margin	27.2%	37.4%	40.2%

Source: ÖKOWORLD AG accounts

Post-market correction rebound

The booming market that enabled ÖWAG to post record results in FY17 has cooled down, leaving all its funds with negative returns in Q118, followed by a slight rebound in the subsequent quarter. The flagship fund, ÖKOWORLD ÖKOVISION CLASSIC, which holds 76.5% of all assets under management, recovered from a 3.4% loss in Q118 to post a 3.8% positive return for the first six months of the year and further improved to 8.9% ytd (as at end-August 2018). Consequently, the fund unit price exceeded the previous high watermark, creating some performance fee potential for ÖWAG. These positive results have been recorded despite the company’s more careful stock-picking approach, currently illustrated by the relatively high cash balance (18.6% of asset value as at end-June 2018, up 3.6pp vs end-2017), displaying a potential cash drag effect. The positive returns were driven by successful stock-picking, as the largest sector exposure of the fund – Demography and Medicine (representing 19.4% of assets on average in H118) – generated the highest return at 26.1% until the end of June 2018. This was further assisted by the beneficial exposure to the US dollar (38.7% of total assets at end-June 2018). The US dollar is one of the better-performing currencies ytd, appreciating against the euro by c 4%.

Similar positive results have been recorded by the third-largest fund, ÖKOWORLD ROCK’N’ROLL, which turned the -2.0% loss at the end of Q118 into a 4.3% profit in H118 and 9.4% ytd (as at end-August 2018), also exceeding its previous high watermark. It is the only mixed fund in ÖWAG’s portfolio, but with a significant exposure to equities exceeding 80% of assets as at end-June 2018. Even though the fund’s policy enables the use of derivatives, the fund hedges only shortterm equity risk. Out of the four security classes in which the fund is invested, three have been profitable, with the 12.8% return from shares and minor earnings in annuities and derivatives (only closed-end funds with a main focus on infrastructural projects posted a 4.9% loss).

Among the funds unable to rebound after the Q118 plunge is the ÖKOWORLD GROWING MARKETS 2.0 fund, which recorded a loss in excess of 10% on a ytd basis. The fund employs a different strategy than those previously described, as instead of focusing on the developed markets (for example, the EU emphasis in the case of ROCK’N’ROLL) and thus keeping an exposure to developed currencies, this fund invests in emerging countries. This implies a high exposure to currencies such as the Indian rupee, Brazilian real or South African rand. As a consequence, the fund suffered from the recent overall retreat from emerging markets, with both the MSCI Emerging Markets index and JP Morgan Emerging market currency index posting a visible decline (c -6% and -13% ytd, respectively). This is despite the relatively high exposure to Demography and Medicine themes (in line with ÖKOVISION CLASSIC). Importantly, the investment policy is based on a pure focus on stock-picking rather than pre-defined country/currency exposures and also does not hedge its FX positions (which in this case would have reduced some of the losses). However, the fund managers remain confident that the underlying portfolio holdings exhibit strong fundamentals driven by the long-term themes (millennials, China’s Five-Year Plan, etc).

Exhibit 2: Fund performance and AUM summary

Fund	Ytd return at end-Aug 2018 (%)	H118 return (%)	Q118 return (%)	2017 return (%)	AUM (€m) 30 June 2018	AUM (€m) 31 Dec 2017
Ökovision Classic	8.9	3.8	(3.4)	11.4	870.1	763.1
Growing Markets 2.0	(10.3)	(7.1)	(4.5)	24.8	149.1	155.3
Rock 'N' Roll	9.4	4.3	(1.9)	13.7	60.8	50.2
Klima	9.0	5.6	(1.1)	21.1	36.4	28.0
Water for Life	1.9	(1.0)	(4.7)	15.4	20.5	19.9

Source: ÖKOWORLD AG

Valuation

ÖWAG’s market cap is c €121m and its enterprise value (EV) stands at c €133m. The company had c €1.2bn in AUM at the end of June 2018 and achieved a return on equity of 36% in H118 (although this was somewhat inflated by non-recurring effects).

Selecting a peer group for the valuation purposes appears to be difficult, as the market lacks directly comparable business models. The asset management units are rarely listed, while the funds are listed and trade around NAV. Companies with both business structures might include:

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Patrizia Immobilien (real estate asset management in separate funds, asset structuring and advisory);

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MLP (an insurance broker and asset advisory, running its own fund group);

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IMPAX Asset Management (managing and advising on approximately £11.8bn, primarily for institutional clients); and

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AZIMUT asset management (specialised in asset management, the group offers financial advisory services for investors, primarily through its advisor networks).

Following the 36% price rally since the beginning of the year until May and the subsequent price correction, ÖWAG’s shares trade at a premium to the peer group on P/E and EV/EBITDA for FY18e of 28% and 37%, respectively. The premium widens in FY19e due to limited earnings growth expectations (9–10% per annum) as per Bloomberg consensus estimates. However, ÖWAG’s earnings growth may differ significantly from current market consensus, given that it is largely driven by performance fees based on the high-watermark approach. Moreover, Bloomberg consensus is currently based only on estimates of a single analyst. Importantly, a potential negative factor to take into account in a peer comparison is that ÖWAG’s listed shares are non-voting preference shares, while the non-listed voting stock is in the hands of management and selected employees.

Exhibit 3: Peer group comparison

	Market cap	P/E (x)			EV/EBITDA (x)			Dividend yield (%)
	(€m)	2018e	2019e	2020e	2018e	2019e	2020e	2018e	2019e	2020e
MLP	605.7	17.3	15.6	14.2	20.5	18.7	17.2	3.9%	4.3%	4.8%
Patrizia Immobilien	1,680.80	22.9	17.1	15.9	16.6	12.9	11.8	2.0%	2.7%	3.1%
IMPAX	284.3	19.3	18.3	17.3	N/A	N/A	N/A	1.8%	2.2%	2.3%
AZIMUT	1,942.50	13.2	11.1	10.5	6.6	5.8	6	7.9%	8.8%	9.2%
Peer group average		18.2	15.5	14.5	14.5	12.5	11.7	3.9%	4.5%	4.8%
Ökoworld	121.1	23.2	21.2	19.3	20.0	18.3	16.7	3.5%	3.5%	3.5%
Premium to peer group		27.6%	36.3%	33.2%	37.4%	46.5%	43.6%	-10.8%	-22.1%	-27.7%

Source: ÖKOWORLD AG accounts, Bloomberg. Note: ÖWAG consensus is based on the estimates of a single analyst.

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