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Deutsche Grundstücksauktionen — Well-positioned

Deutsche Grundstücksauktionen (DB: DGR)

Last close As at 20/12/2024

24.80

▲ 0.20 (0.81%)

Market capitalisation

40m

More on this equity

Research: Real Estate

Deutsche Grundstücksauktionen — Well-positioned

Deutsche Grundstücksauktionen (DGA) has improved even on an ‘outstanding’ H117 comparative, with the highest first-half gross turnover and net commission for more than a decade and net profit up c 60% in H118. While the driver (a record lot sale of €15m, almost a quarter of total gross turnover) was arguably exceptional, the offer of further high-value lots is not wishful thinking, given DGA’s good relationship with the Federal Bundesanstalt and excellent publicity as a reference sale. Indications of positive imminent Q3 auctions support guidance of a stable second half and thus forecasts of a bumper dividend (prospective 5.2% yield).

Richard Finch

Written by

Richard Finch

Analyst, Consumer

Real Estate

Deutsche Grundstücksauktionen

Well-positioned

Real estate

Scale research report - Update

18 September 2018

Price

€17.20

Market cap

€28m

Share price graph

Share details

Code

DGR

Listing

Deutsche Börse Scale

Shares in issue

1.6m

Net cash at June 2018

€4.2m

Business description

Deutsche Grundstücksauktionen is market leader in the auctioning of properties in Germany. The company was founded in Berlin in 1984.

Bull

■

Sustained demand for property thanks to favourable economic and interest rate outlook.

■

Clear market leader with experienced management and wide client base.

■

Sound finances, allowing generous, unbroken dividend record.

Bear

■

Macroeconomic uncertainties; rising interest rates would diminish yield appeal of property.

■

Intensely competitive.

■

Potential supply shortage as a result of excess demand and unrealistic seller expectations.

Analyst

Richard Finch

+44 (0)20 3077 5700

Deutsche Grundstücksauktionen (DGA) has improved even on an ‘outstanding’ H117 comparative, with the highest first-half gross turnover and net commission for more than a decade and net profit up c 60% in H118. While the driver (a record lot sale of €15m, almost a quarter of total gross turnover) was arguably exceptional, the offer of further high-value lots is not wishful thinking, given DGA’s good relationship with the Federal Bundesanstalt and excellent publicity as a reference sale. Indications of positive imminent Q3 auctions support guidance of a stable second half and thus forecasts of a bumper dividend (prospective 5.2% yield).

H1 step-change…again

DGA has shown that H117 (a trebling of profit on 40% higher auction proceeds) was not an impossible act to follow. In the half to June, gross turnover rose by 12% at an almost maintained net commission rate (9.5%), which is impressive, given the mix of lots sold (average sales price up 20%). By contrast, the comparative’s net commission rate fell sharply from 11.4% in H116 also in the face of marked price appreciation. Profit conversion was strong, eg up c 60% at the net level and EBITDA margin 22% vs 16% y-o-y. Thanks to the bumper disposal the parent company, which bears central costs, was unusually profitable but was substantially offset by a virtual elimination of the subsidiaries’ contribution as their gross turnover fell by a quarter, mainly owing to price rather than volume. Regional and quarterly volatility, if acute in the period, is characteristic of DGA and, happily, performances tend, as here, to compensate for each other. Finances remained robust.

Holding firm

Management has reaffirmed positive fundamentals for the business, notably interest rates, disposable income and employment. These are evident in favourable signs for its imminent Q3 auctions, where confirmed deliveries and high demand underpin its confidence about matching the €31m proceeds of Q316, ie c 25% up y-o-y. Guidance of maintained gross turnover and net commission in H218 therefore appears reasonable and fairly reflected in consensus forecasts, shown below.

Valuation: High-yielding

While a flying start to the year may have raised ambitious investor expectations, a substantially higher 2018 dividend remains very much on the cards. A prospective yield of 5.2% is well ahead of that of the small-cap market (no direct listed peer).

Consensus estimates

Year
end

Net commission
(€m)

Net profit
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

10.6

1.17

0.73

0.72

23.6

4.2

12/17

11.2

1.22

0.76

0.77

22.6

4.5

12/18e

11.7

1.51

0.94

0.95

18.3

5.5

12/19e

11.5

1.45

0.91

0.90

18.9

5.2

Source: Company accounts, consensus estimates

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 H118 results

The financial statements are in accordance with HGB. DGA, the parent company, is influenced to a considerable extent by the results of its fully owned subsidiaries, but is not obliged to present consolidated accounts and management reports. As a result of profit transfer agreements with its five subsidiaries, the total result of the group is therefore shown in the statements of the parent company.

Consequently, for the sake of clarity we show (shaded below) both gross turnover (auction sale proceeds) and net commission at the group level, as these drive the transferred profits. They are also regarded by management as key indicators. However, they are, of course, only proxies for the subsidiaries’ revenue, which is not disclosed, so accurate top-line analysis is not possible.

Exhibit 1: Analysis of revenue and profit

€m, HGB

H117

H217

FY17

H118

Group:

Turnover from auction sales

57.10

59.50

116.60

63.80

Change (%)

+40%

Flat

+16%

+12%

Net commission

5.49

5.67

11.16

6.07

Rate (%)

9.6%

9.5%

9.6%

9.5%

Change (%)

+18%

-5%

+5%

+11%

Revenue + other operating income

2.39

2.35

4.74

3.44

EBITDA

0.90

1.04

1.94

1.33

Margin

16.4%

18.3%

17.4%

21.9%

Parent company profit

(0.11)

0.20

0.09

1.14

Profit from subsidiaries

0.94

0.76

1.70

0.12

Pre-tax profit

0.83

0.98

1.81

1.26

Net profit

0.56

0.66

1.22

0.89

Source: DGA accounts

The half to June comfortably surpassed a comparative, which was a success by any measure. As shown in Exhibit 1, a double-digit percentage rise in turnover from auction sales (impressive in itself) was all but maintained in terms of net commission (up 11%). This is creditable as a 20% higher average lot sales price (€79,000) would drive significantly lower as well as potentially negotiable rates. The impact at the bottom line was yet more marked with EBITDA up by almost a half and net profit up even more sharply (c 60%).

While this composite view is indeed satisfactory, it is worth considering the contribution of the commercial property in Berlin-Marzahn, whose €15.2m auction proceeds in Q1 were a record for the company and singly accounted for the H1 gains, ie overall gross turnover c 15% lower for the half, if excluded. While the scale of this transaction (more than twice that of the previous record €7m in Q417) may be regarded as exceptional, DGA’s very ability to generate such a deal is testimony to its good long-term relationship (exclusive contract until 2020) with the Bundesanstalt, which looks to sell assets no longer required by the federal government and its companies. Similarly, DGA’s ability to execute endorses the use of the auction channel for such substantial items and serves as a reference sale in the valuable Berlin market. Admittedly infrequent, such high-value items should thus arguably be viewed as an inherent part of DGA’s business, if not necessarily assumed in forecasts (their occurrence is effectively a bonus).

We highlight also the disparity in geographical performances in H1. Buoyed by its premium lot, Berlin, in the guise of DGA’s parent company, comfortably more than made up for a shortfall in the regions and in the online business (see Exhibit 1). In particular, Sáchsische, second in size to the parent company, is usually resilient but in the period a 33% decline in gross turnover resulted in a move into loss. Management attributes this simply to a temporary supply of below-trend, low-ticket items (average sales price down by a third). The disclosure of performance by individual auction house (and indeed by quarter) risks misleading short-term extrapolation. DGA’s record shows innate volatility at that level tends to even out over time.

H2 reassurance

Management confidence about imminent Q3 auctions (20 and 21 September) spurs its H2 guidance of a maintained y-o-y outturn at the top line. Current high demand for real estate in Germany, an increase in lot deliveries (by early September) and a known auction catalogue point in its view to a likely repeat of Q316’s €31m gross turnover, which would be a c 25% rise on a relatively subdued Q317. This would be welcome after the 13% y-o-y reduction in Q2 and further evidence of DGA’s ability to adjust to short-term volatility. Q4 auctions are traditionally less significant than those of Q3, but last year’s (gross turnover up by 15%) was boosted by another high-value lot (€7m) in the Berlin area. Q3 auction sales will be announced in early October.

Balance sheet and cash flow

Finances remain sound with €4.2m net cash at June 2018. Surplus cash (the company has no debt) allows profit to be distributed almost entirely by way of dividend. Management is justifiably proud of its dividend record and well aware of investor demand for attractive dividend yield at a time of low interest rates.

Valuation

With no direct peer listed on the Frankfurt Stock Exchange, we look at the iShares MSCI Germany Small-Cap ETF, which seeks to track the investment results of an index composed of small-cap German equities. This shows a historical P/E ratio of 14.4x (DGA 23x) and 12-month trailing yield of 2% (DGA 4.5%). As noted above, the history of a sustained and attractive dividend should lend support to the shares.

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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

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NSW 2000, Australia

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