Noratis — On a growth path

Noratis (DB: NUVA)

Last close As at 23/11/2024

19.85

0.05 (0.25%)

Market capitalisation

96m

More on this equity

Research: Real Estate

Noratis — On a growth path

Recent significant fund-raising and portfolio expansion by Noratis confirm the company’s ambition to benefit from favourable macro factors and the clear opportunity to develop real estate in non-core German cities. This follows a “very successful” 2017, with sales up by over 50% and adjusted PBT more than doubled, driven by the disposals of newly-enhanced (optimised) property blocks. Reinvestment was no less effective; the continued ability to buy at attractive yields led to a 25% increase in the asset base (c €100m). Positive 2018 guidance increases the prospect of a rise in an already generous dividend (7.3% yield 2018e).

Richard Finch

Written by

Richard Finch

Analyst, Consumer

Real Estate

Noratis

On a growth path

Real estate

Scale research report - Update

4 July 2018

Price

€21.80

Market cap

€78m

Share price graph

Share details

Code

NUVA

Listing

Deutsche Börse Scale

Shares in issue

3.6m

Net debt at March 2018

€68m*

*Before €15m (gross) from May 2018 rights issue

Business description

Noratis is a specialised asset developer, acquiring residential rental income producing assets in secondary locations with optimisation potential. Investing in the asset base and improving the tenant mix creates value, which Noratis exploits during well-structured asset sales, either through individual or block sales.

Bull

Strong experience operating in Germany’s non- core areas.

Focused investment and asset management approach to boost yields and asset values.

Established business concept and strong partner network across Germany.

Bear

Smaller company in a very competitive market.

Low interest rate environment may end.

Dependence on attractive portfolio opportunities

Analyst

Richard Finch

+44 (0)20 3077 5700

Recent significant fund-raising and portfolio expansion by Noratis confirm the company’s ambition to benefit from favourable macro factors and the clear opportunity to develop real estate in non-core German cities. This follows a “very successful” 2017, with sales up by over 50% and adjusted PBT more than doubled, driven by the disposals of newly-enhanced (optimised) property blocks. Reinvestment was no less effective; the continued ability to buy at attractive yields led to a 25% increase in the asset base (c €100m). Positive 2018 guidance increases the prospect of a rise in an already generous dividend (7.3% yield 2018e).

Scaling up in 2017

By any measure 2017 was a success for Noratis. June’s Scale listing apart (the IPO raised €17m), the sale of two blocks at Dormagen (530 units), its largest project to date, endorsed a key element of its business model, the disposal of value-enhanced properties. This was exceeded by a step-up in additions, hence a net buyer in the year (+186 units and stock book value of €99m vs €80m at December 2016). This was reflected in a sharp increase in PBT (€13.7m, adjusted for €1.5m IPO costs, up from €6.0m) thanks both to top-line buoyancy and good control of costs eg asset sales gross profit margin was 29% vs 24% and net interest was down by a quarter. In line with its policy of a c 50% payout, a dividend of €1.50 was declared.

Growth fuelled by latest capital increase

Management has newly reiterated 2018 guidance of a clear improvement in EBIT, buoyed by positive economic signs and unchanged strong demand for residential real estate. Increased proceeds from block sales are expected in the second half. Longer term, given the typical two-year lead time for investment projects, recent fund-raising (€15m from a three-for -10 rights issue at €22.50) should help Noratis deliver on its goal of net acquisitions in 2018. This target may already have been achieved by two recent deals that added >40% to the number of units at end 2017.

Valuation: Unduly cautious

Sitting between asset holder and developer makes for difficult comparison with listed peers but Noratis is at a notable discount to RCM Beteiligungs, which has a similar model (trailing P/E ratio of 20x). At under 8x prospective earnings, Noratis offers an attractive yield, backed by a positive outlook and dividend commitment.

Consensus estimates

Year
end

Revenue
(€m)

EBIT

(€m)

EPS**

(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

44.6

9.9

N/A

N/A

N/A

N/A

12/17

68.0

15.2*

3.0

1.5

7.3

6.9

12/18e

75.0

16.4

2.8

1.6

7.8

7.3

12/19e

82.0

17.4

3.0

1.7

7.3

7.8

Source: Noratis accounts, consensus estimates. Note: *After €1.5m IPO costs. **Based on 2.9m shares in 2017, 3.3m shares in 2018 and 3.6m shares in 2019.

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.

Review of 2017 results

The Noratis model of upgrading and selling assets allows financial periods to be regarded as either acquisition or disposal years. Exhibit 1 shows that 2017, unlike its predecessor, was clearly an acquisition year despite a step-change in sales proceeds. Year-end stock was up by c 20%, both in terms of units (1,194 vs 1,008 in 2017) and book value (€99m against €80m), which lays a strong base. A highlight was the purchase of 355 units at Ratzeburg/Mölln in H2. In turn, the two blocks at Dormagen, acquired in late 2015 and sold separately in 2017, accounted for the bulk of disposals (530 of 587 units sold). Rental income was broadly stable and in line with the company’s focus on acquiring largely occupied residential assets, which yield immediate income.

Exhibit 1: Revenue and year-end real estate stock

Source: Noratis accounts

Noratis’s financial performance in 2017 (see Exhibit 2) was similarly positive. The scale of the Dormagen disposal was of course the key driver (price not disclosed but c 90% of units sold by the company in the period). Importantly, it also contributed to an impressively higher gross margin for asset sales (29% vs 24%). The decline in rental income was due simply to lower stock at the start of the period after a ‘disposal’ year, while its gross profit held up.

Exhibit 2: Financial performance

Year end December (€m), HGB

H116

H216

FY16

H117

H217

FY17

Revenue

Asset sales

14.1

23.7

37.8

30.4

31.5

61.9

Change

99%

116%

33%

64%

Rental

3.4

3.3

6.7

2.7

3.4

6.1

Change

40%

(21%)

3%

(9%)

Total

17.5

27.1

44.6

33.1

34.9

68.0

Change (%)

87%

89%

29%

52%

Gross Profit

Asset sales

2.4

6.8

9.2

8.5

9.2

17.7

Margin

17%

29%

24%

28%

29%

29%

Rental

1.9

2.0

3.9

1.5

2.3

3.8

Total

4.3

8.8

13.1

10.1

11.5

21.5

EBIT

2.8

7.1

9.9

8.4

8.3

16.7

Net interest

(1.8)

(2.1)

(3.9)

(1.5)

(1.5)

(3.0)

Pre-tax profit – adjusted

1.0

5.0

6.0

6.9

6.8

13.7

Exceptional item (IPO costs)

-

-

-

(1.5)

-

(1.5)

Pre-tax profit – reported

1.0

5.0

6.0

5.4

6.8

12.2

Net profit

0.7

3.5

4.2

3.3

5.4

8.7

Source: Noratis accounts

Exhibit 3: Revenue and EBIT

Source: Noratis accounts

Progress at the gross profit level was matched at EBIT (see Exhibit 3) despite higher labour costs owing to expansion and bonuses and a doubling of other operating costs. This is after adjusting EBIT for €1.5m one-off IPO expenses. The improvement in profit was even more evident at the PBT line, thanks to lower net debt following the IPO; management guidance was slightly exceeded.

Noratis’s accounts are prepared under HGB standards, so assets are held at book value, unlike IFRS where it is common for assets to be shown at realisable market value. We point therefore to hidden reserves at Noratis, which management identifies as c €21m at end 2017, based on the valuation by an international RICS appraiser, ie fair value of €120m vs book value of €99m.

Stepping up in 2018

Recent active trading should underpin the company’s solid growth prospects. In addition to the sale of 99 units in Schwarzenbek (Hamburg), purchased in 2015, Noratis has soon delivered on the expansion it promised at its May fund-raising. Three portfolios, mainly in Celle (252 of 365 units), meet the company’s usual acquisition requirements ie older buildings (mainly from 1960s) with significant value potential on modernisation and reduction of 10% vacancy rate. This follows the purchase of 161 units in Frankfurt and Ratingen (Düsseldorf) – slightly newer properties but with particular scope for higher rent on expiry of social housing agreements. These deals represent in total a c 50% rise in post-Schwarzenbek stock, hence a substantial base for medium-term disposal at c 25% gross margin (2017 29%). Further expansion is on the cards, given recent management comment and market opportunity (c70% of apartments in Germany date from the 1920s to mid-80s).

For 2018, management’s guidance is for a clear improvement in EBIT. However, this is against an outturn, depressed by €1.5m IPO costs. On an adjusted basis, consensus forecasts of €16.4m compare with €16.7m for 2017. Given the expectation of higher asset sales, even on a demanding comparative, the EBIT forecast therefore appears cautious. However, it may be that the 2017 driver, Dormagen, was especially high margin (not disclosed).

Valuation

Sitting between asset holder and developer makes for a difficult comparison with listed peers but Noratis’s P/E ratio is at a notable discount to RCM Beteiligungs, which has a similar model (trailing 20x). However, its P/BV (2017) ratio is markedly higher at 2.7x, vs 1.4x for RCM Beteiligungs.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors.

Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

More on Noratis

View All

Latest from the Real Estate sector

View All Real Estate content

Research: Industrials

China Water Affairs Group Limited — FY18 exceeds forecasts

Better-than-expected growth in profitability in FY18, a higher than forecast DPS and a favourable market outlook are clearly positive for China Water Affairs (CWA). We forecast continuing growth over the next few years and have raised our valuation to HK$10 per share. At that price, CWA would trade on a forward-looking P/E multiple of 13.1x, a c 15% discount to our group of selected peers.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free