Total revenue was SEK 367m, +3% y/y, and just above our estimates of SEK358m. Investment Management (IM) and Corporate Finance were in line with our topline estimates, whereas revenues from Principal Investments exceeded our estimates. The deviation originates from Catella now collecting running rental fees from its completed properties that have not yet been sold. Total EBIT was SEK -2m, compared to SEK111m last year and our estimates of SEK31m. The deviation comes from weaker profitability from IM (13% EBIT margin vs. est. 20%) and Corporate Finance (-25% EBIT margin vs. est. -4%).

Overall, we think Catella continues to perform decently in a very tough environment, though we were disappointed by the poor profitability in Corporate Finance. Also, the outlook for Principal Investments was not positive, and something we think many short-term investors will dislike. However, we still view it as a sign of strength that Catella has such financial stability that it can afford to postpone certain divestments.

As we always emphasize, Investment Management (previously Property Investment Management, or “PIM”) is where we see the most value. Hence, we put most of our focus there.

AUM was SEK140.6bn, a sequential standstill from last quarter. In Q1, however, Catella sold its French asset Catella Hospitality Europe SAS because of too low profitability, which affected AUM negatively by SEK2.0bn.

Property Funds (PF) grew by 0.7% q/q in SEK, but declined sequentially in EUR. Catella states that it has SEK10bn in committed capital at the end of Q1, indicating that it will be able to grow AUM slightly in 2023. However, the company is also open about the environment for property funds is challenging and that it does not expect any significant capital inflow during 2023. PF now accounts for 76% of the total AUM.

AUM for Asset Management (AM) decreased sequentially by 2.3%, or by SEK0.8bn in real terms. The divested asset with an AUM of SEK2.0m originated from AM, implying a healthy underlying growth of +3.2% q/q.

Catella expects AM to be the main driver of AUM for the remainder of 2023. The reason is that APAM and Catella WPP (previously Warsaw Property Partners) are experts in distressed assets. Catella reports that the UK market is moving fast, meaning that there is much activity for Catella’s UK asset, APAM. In the conference call, Catella also stated that it is satisfied with its remaining platforms in AM, indicating that no more similar divestments are likely in the near future.

In the diagram below, we can see the long AUM trend of IM, which over the years, has been strong. Especially, PF (both private and public) has been growing very steadily. However, AM, on the other hand, has historically been less steady as significant mandates are awarded and divested. Q4’18 included a boost for AM through the acquisition of APAM in UK, whereas Q1’21 was negatively affected by the selling of CAM France.

Expressed in EUR rather than in SEK, AUM has started to decline since the peak in Q3 2022. However, Catella states it experiences limited capital outflows and calls for outflow. A couple of reasons why is that the funds have long notice periods and penalty fees for quick exits. If investors bring up cautiousness for their holdings, Catella presents them with alternative solutions. Even in more challenging times, we believe the AUM from property funds will prove resilient. As said, we expect AM’s AUM growth to be boosted by the more challenging market environment.

Revenue generation (revenue/AUM) was 0.18%, landing right on the historical average for Q1.

For the last twelve months (LTM), revenue generation (full-year revenue divided by AUM per end of the last reported quarter) is at 1.02%. Looking at the below chart, we see that this is in the higher end of the historical range.

See below for an overview of IM's revenue development per revenue type. Note how the fixed fee is growing steadily, while variable fees are correlated to transaction volumes (high in Q2 and Q4), and performance fees mainly come in Q2.

Looking into the next quarters, we expect substantial y/y declines. Partly, Catella is up against very tough comps with Q2 historically high, Q3 decent, and Q4 historically high since after performance fees were moved from Q4 to Q2.

In Q2, Catella receives performance fees from its two largest public funds, Catella European Residential (CER) and Catella Wohen Europa (Wohnen EU). CER finishes its financial year on 30 April, while Wohnen EU finishes on 30 June.

With only one month remaining of CER's financial year, it has a YTD return of 8.1%. Last year, it returned 10.6%. This fund receives 25% of the performance above 6.0%. Hence, last year’s 10.6% will likely imply more than double this year’s performance fee. Last year, we estimated EUR16.8m in performance fees for Catella from CER, equivalent to cSEK174m.

Similarly, we estimated Wohnen EU's performance fee to EUR4.0m (cSEK43m) last year. This year, it looks like no performance fee for this fund will be charged. Last year, according to our calculations, these two funds gave performance fees of SEK217m. In Q2 last year, Catella reported total performance fees of SEK204, so we assume our calculations are slightly high.

Assuming a 0.1% return for CER in April (similar to the Jan-Mar performance) makes CER reach 8.2% return for its financial year. With an average AUM of EUR1,496m in the last 12 months, we estimate a performance fee of EUR7.9m, or SEK88m. As our model appears to be boosting the figure by c5%, we assume performance fees of SEK84m this year. Assuming a relatively slow transaction quarter in Q2, we estimate variable fees of SEK40m, and fixed fees of SEK222m. We estimate IM revenues of SEK346m in Q2, compared to SEK471m in Q2 last year, equivalent to -27% y/y.

EBIT came in at SEK31m, corresponding to an EBIT margin of 12.4%. In the conference call, Catella stated that quarterly EBIT basically will not get any lower than SEK30m, simply because there were almost no variable fees in Q1. Management also commented that in a year in which market conditions are poor, an annual EBIT of SEK200m could be expected.

The margin trend is clear. Since 2015, the EBIT margin for IM has gone from 11% to 31% in the last twelve months. Note that this is considerably higher than all of our valuation scenarios, even our Bull Case. However, we believe the LTM EBIT will decline by much as the comps are getting harder.

The underlying reasons behind the margin expansion are 1) Catella has exited several low-margin mandates in 2021 which naturally leads to a higher margin profile being left, and 2) the effect of the scalable platform that Catella has built. Hence, Catella doesn’t need to employ new employees at the same pace that revenue is growing. In the quarter, IM increased its headcount from 287 to 298, temporarily hiding the scalability. The added people in the quarter primarily have roles in technical asset management and the new ESG team.

Looking into the next quarter, we expect performance fees to come down and costs somewhat increase, rendering an EBIT margin of 24%.

Revenue was SEK80m, -18% y/y, and just below our estimates of SEK83m. Q1 is seasonally the slowest quarter for the transaction market, but Catella states that the market was exceptionally weak this year. The transaction volumes on the European market declined by 67% y/y while the Nordic declined by 75%. Considering the very tough climate, we think Catella's topline performance was good.

EBIT was SEK -20m, corresponding to an EBIT margin of -25% (-22% last year). This was well below our estimates of SEK -3m. Last year, Catella divested its unprofitable advisory businesses in the Baltics and Germany, something we expected to make the Corporate Finance business more resilient in challenging markets.

In the conference call, we did not note anything special regarding the quarter's cost base. Hence, we assume that we underestimated the cost base in corporate finance.

As a reminder, a clear majority of sales and profits usually come in Q2 and Q4.

In the conference call, Catella stated that the pipeline of complex mandates is reasonable. However, the company reiterates that the timing continues to be uncertain.

In the quarter, Catella signed a selling agreement for Infrahubs Vaggeryd, resulting in a small profit of 'single-digit" profit in SEKm to be recognized in Q2. Other income was also boosted by SEK73m from a divestment of land from Barcelona Logistics.

Revenue was SEK46m, above our estimates of SEK25m, and originating from leases collected mainly from Infrahubs Norrköping (solar panels) and Kaktus (rental fees), leading to EBIT of SEK9m.

Catella states that due to the uncertain market with low activity and low prices of assets, it expects divestments of completed projects to be limited during 2023. We had previously estimated several projects, including Kaktus, to be divested in 2023.

Below is a summary of what we know and estimate from the different projects. Regarding the timing of profit realization, we move all projects we previously estimated for 2023 into 2024.

In our estimates, we base the profit before tax on the "Weighted investment throughout period". This is Catella’s part of the investment, which we assume to be linear from start to finish, but with a little more weight in the first half. Therefore, the investment we use for calculating profit equals 60% of “total investment for Catella”.

Catella has three legs to stand on: IM, Corporate Finance, and Principal Investments. Despite all of these being focused on properties, they are still widely different. Thus, we believe a sum-of-the-parts approach is the best way to value Catella.

IM has a solid track record, and the future also looks promising. Looking at peers and peer transactions, IM deserves a high EBIT multiple. Also, peers have been trading at multiples at above 20x, though we think this is too high. Currently, we use a 12x EBIT multiple which should take extra room for the uncertain macro conditions.

We estimate corporate finance to be rather flat, growing annually by a few percent. In our base case, we use a 5x EBIT multiple for a conservatively estimated normalized EBIT of SEK 60m.

This part has so far achieved great results in the exit of the Grand Central as a good example. We also see good promise in a possible exit of Kaktus in late H2 2023. Last, we like the increased focus on Principal Investments as we see this as both an AUM contributor to own property funds, as well as a cash generator with good IRR. However, as of now we choose to be conservative and value this part to book value. Then we add our estimated profit from Kaktus of just below cSEK250m. For our Bear Case, we are more conservative about Kaktus profit estimates.

When calculating Catella’s net cash position we take cash minus interest-bearing debt. On this, we add SEK 200m from the bank. Also, we estimate a working capital of SEK 150m needed for corporate finance, which we remove from our net cash.

Overhead costs are not included in our SOTP valuation. Our way of coping with these costs is to be cautious in our assumptions and our valuation multiples. Furthermore, the overhead costs are included in our supporting DCF valuation, which supports our SOTP valuation.

Our SOTP valuation indicates a fair value for our base case of SEK60 per share.

In our DCF model, for our base case, we use a total EBIT margin of 22% in 2026-2028, and terminal EBIT margin of 22%. Annual growth rate (CAGR) between 2026 and 2028 is 8%, and terminal growth rate of 2% from 2028. We use a WACC of 10.5%, resulting in a fair value of SEK60 per share.