The quarterly figures came in in line with Redeye’s estimates on both top line and EBIT. Investment Management (IM) delivered stronger than we expected, while Corporate Finance was weaker than we expected.

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 landed at SEK149.3bn, +6.2% q/q – However, currency effects constituted SEK7.1bn of the SEK8.7bn q/q increase.

Property Funds (PF) grew by 7.5% q/q and now accounts for 77% of total AUM. The increase came partly from finished development projects, but mainly from FX. Catella states that it is playing defence right now, and is having daily dialogue with fund clients to make sure they feel confident in their placings. Catella is seeing a “very modest call for capital”, i.e., very few requests on withdrawals. Also, Catella's funds typically have a 12-months notice period which gives Catella time to negotiate with investors.

AUM for Asset management (AM) increased by 2.5% q/q. In the quarter, APAM was awarded a significant 12-months advisory mandate for Transport for London (TfL). Catella has chosen not to include this mandate in its AUM due to its short length, and because Catella does not want to create volatility in its reported AUM. However, the company stated that this contract could translate into growing actual AUM.

In the more unstable times we have entered, we think AM will be a more important growth driver than it has in recent years. The reason is that APAM and Catella WPP (previously Warsaw Property Partners) are experts in distressed assets. For PF, we expect slightly lower growth due to more cautious investors. This is something that we have already started to see for the public funds.

In the diagram below, we can see the strong and steady growth in IM. Especially, PF (both private and public) has been growing very steadily. AM, on the other hand, has historically been less steady as large 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.

Revenue generation (revenue/AUM) was 0.25%, landing in the middle of the historical average. Performance fees from CER was the main contributor.

For the last twelve months (LTM), revenue generation (full-year revenue divided by AUM per end of the last reported quarter) is at 0.89%. Looking at the above chart, we see that this is in the middle of the historical range.

Looking into next quarters, we expect revenue generation to be quite low. This stems from a lower transaction activity (Catella earns revenues each time it makes a transaction), and lower performance fees. Considering that the performance of at least the public funds have come down, we still expect rather weak revenues and profitability for IM next year. However, contribution from the asset-management side could surprise us on the upside.

Revenue was SEK370m, down by 21% from the stellar quarter last year. However, a 14% y/y increase in fixed management fees (compared to 10% y/y AUM growth) contributed positively.

EBIT came in at SEK111m, corresponding to an EBIT margin of 30%. EBIT margin is very dependent on revenue generation, considering that revenue generation was just slightly above normal (though in the seasonally strong Q2), the EBIT margin is impressive.

The margin trend is clear. Since 2015, the EBIT margin for IM has gone from 11% to 25% in the last twelve months. Note that this is above our Base Case for 2025 - when the operating leverage is likely to be even stronger than today.

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. As Catella has invested in some new personnel recently, AUM/employee has temporarily come down. However, a few years out, Catella is likely to continue improving this metric. See below:

Looking into the next quarter, we expect somewhat muted performance and transaction fees. Also, we believe the acquired Aquila Asset Management has a lower margin than the remaining IM. Thus, we estimate that the EBIT margin in the next quarter will be around 20%.

On 2 June, Catella announced that it had signed an agreement to acquire 60% of French company Aquila Asset Management SAS. The company consists of both asset management for professional investors and property funds for retail investors.

Catella already holds a strong position within Corporate Finance in France. Hence, we expect Catella's own Corporate Finance to source deals for mandates, attract buyers for divestments, and help with valuations.

The acquisition adds EUR1.4bn to Catella's AUM, equivalent to an addition of c10%. Catella stated that Aquila has "sound profit margins", which we think sounds like 15% EBIT margin. Assuming a somewhat lower revenue generation than that of IM (0.75% revenues/AUM), it will add around SEK120m in annual revenues and SEK18m in EBIT, of which SEK11m is attributable to Catella.

The price is EUR9.6m with an additional potential EUR1.0m if specific criteria are fulfilled - and will be paid by Catella’s own capital. Considering our assumptions, this equals a price of 10-11x EBIT - an attractive price if our assumptions are correct. The deal is expected to be closed in September.

In the conference call, Catella stated that it is continuously looking at new opportunities for M&A. Particularly, Catella highlighted acquiring a debt fund to be of extra high interest. However, management was clear about such assets are delicate and thorough analysis of the underlying assets is needed.

Revenue was SEK92m, a y/y decline of 38%. The profitability was also weak, with EBIT at SEK -22m. This reflected the historically low transaction activity on the European market - with the lowest transaction volumes since the financial crisis in 2008/2009.

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

Catella states that it expects some improvement for the transaction market in H2 2023 given the latent demand, though difficult to predict exactly when the improvement will occur.

The company was clear about having a potential buyer of Kaktus ready to sign a deal when all leasing contracts for the commercial spaces are in place.

Catella stated that is is cautiously positive about reaching an agreement with potential tenants of the commercial spaces of the building. Management stated in the conference call that while the discussion is positive, it has been a very drawn-out process, with the tenant being in-and-out. Catella states that it has a good prospect for a very big letting, as well as discussions with several others if the big one would not take the deal.

As such, perhaps not in Q3, but we think selling Kaktus in Q4 is far from impossible.

Management stated that the Kaktus project will make a profit - which implies a big chunk of liquidity when the deal is closed.

On 24 July, Catella announced that it ends its partnership with Infrahubs, and divests its remaining assets except for the project in Jönköping.

Per the end of Q2, Catella had two objects related to Infrahubs on its balance sheet: 1) Jönköping (SEK144m own investment), and 2) Others (SEK77m own investment).

The decision implied that Catella decided to divest its “Other” assets, in which Catella had invested SEK77m per Q1. The selling price is the sum invested to date (likely a bit higher than SEK77m), plus SEK12m in profit - to be booked in Q3.

The Jönköping project is however kept. The reason why was not mentioned, but considering that the project is fully completed and that a tenant is already in place, we believe this project is close to being sold. Hence, we believe Catella wants to take part of the profit realisation of this projects. Considering the state of the transaction market, where no one wants to buy assets that are not finished or fully let, but are glad to buy fully let assets, we think a divestment of Jönköping is imminent, perhaps already in Q3.

As such, Catella’s already strong balance sheet will be further strengthened. Considering the currently low share price, realisation of the value from property assets on the balance sheet will reveal the intrinsic value of Catella, we think.

Regarding the strategic signal, we think this reflects the cooling of the Swedish transaction market, implying that Catella sees better opportunities to deploy its capital elsewhere.

Below is a summary of what we know and estimate from the different projects. Regarding timing of profit realization, we only make minor changes to our estimates.

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”.

We do not make any changes to our estimated timing of selling to any of the projects. In total, we estimate profit after tax from Principal Investments to be SEK20m for 2023, and that the main profits come in 2024.

Catella's bond of SEK1245m has an interest rate of EURIBOR 3m + 4.75%, implying a running interest exceeding 8.5%. In the conference call, Catella was asked whether it would be interested to repurchase the bond considering the high return requirement needed to justify it. However, Catella stated that it thinks that the 4.75% spread is very good, and that it is happy with liquidity as it gives possibility for more co-investments across Europe or more M&A.

Regarding debt, Catella repaid SEK372m of loans to one of the external creditors of the Kaktus project. This is part of the reason to why Catella's amount of own capital invested in Kaktus increased from SEK226m to SEK714m in the quarter.

Catella has three legs to stand on: PIM, 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, PIM 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 2023 or early 2024. 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 above cSEK200m.

When calculating Catella’s net cash position we take cash minus interest-bearing debt. On this, 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 SEK61 per share.

In our DCF model, for our base case, we use a total EBIT margin of 20% in 2026-2028, and terminal EBIT margin of 20%. Annual growth rate (CAGR) between 2026 and 2028 is 7%, and terminal growth rate of 2% from 2034. We use a WACC of 10.5%, resulting in a Base Case of SEK65 per share, though we prefer using our SOTP valuation.

In our Bear Case, we assume that all projects in Principal Investments will be sold to a 10% discount to book value.