The quarterly figures came in below Redeye’s estimates on both the top line and EBIT. In relative terms, Corporate Finance was the stronger segment in the quarter, with Investment Management (IM) being hurt by one-offs and low variable fees.

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 SEK158.8bn, +6.4% q/q - However, the SEK9.5bn increase against last quarter is mainly a result of the acquisition of Aquila Asset Management. Adjusting for the acquisition and negative currency effects, the development is roughly flat q/q. Inflows to IM were quite low in the quarter, but outflows were also immaterial.

Property Funds (PF) declined by -2.6% q/q and now account for 70% of total AUM. Considering that q/q FX impact for the whole AUM was SEK -4.0bn, we assess that a significant part of the underlying decline was caused by currency fluctuations. As such, we believe this is solid in the current market.

AUM for Asset Management (AM) increased by 36.2% q/q and now represents 30% of AUM. The acquisition of Aquila generated an inflow of SEK15.5bn to Asset Management and is thus the main reason for the strong performance in the quarter. On the conference call, management highlighted that the previously announced advisory mandate for Transport for London (TfL) had translated into an undisclosed increase in AUM, indicating that the collaboration now includes asset management as well.

As we have previously mentioned, we think AM will be a more important growth driver than it has been in recent years due to the uncertain macro environment. 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. Management also noted in the quarter that they had started to see a market shift, where active rather than passive management of assets is becoming favored by investors, something that hasn’t been the case for a while. This development should favor Catella given its model of local experts.

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 more volatile 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. In this quarter, the acquisition of Aquila is clearly visible through the large jump in AUM.

Revenue generation (revenue/AUM) was 0.17% in the quarter, and 0.80% over the past twelve months (LTM). In the chart below, we can see that the revenue generation in the quarter is the lowest for a third going back to 2016. The LTM trend has also been down over the past few quarters. The underlying reason for the weak revenue generation is, unsurprisingly, the low variable fees. However, no revenues from Aquila were recognized for Catella in Q3, whereas full AUM was. This means that the acquisition increased AUM while not affecting revenues, thus negatively impacting revenue/AUM.

Catella is paid through fixed fees, transaction fees, and performance fees. The former is very sticky and is unlikely to change much from quarter to quarter. The latter two are however highly dependent on the price levels and transaction volumes in the market. In an environment where transaction volumes are on par with the global financial crisis of 2008, these flexible components can’t be expected to keep up. We will comment on the division between fixed and variable fees later in this update.

Looking into the next quarter, as well as 2024, we believe that revenue generation will continue to be quite low. In the conference call, management said that most of its funds only generate performance fees once they surpass their previous highs, their so-called high-water marks. As long as the real estate market remains weak, performance fees will therefore continue to be at low levels (because the current returns are weak) in the short to medium term.

However, it should be noted that this only is the case for already existing funds. As the company starts new funds, for example, the retail-oriented fund under the umbrella of Aquila, these funds will still be able to generate performance fees going forward. As new investments can be made at low valuations and high yields, this bodes well for future performance fees in these areas.

Revenue was SEK263m, down from SEK313m last year, corresponding to a -16% y/y decline. As can be seen in the chart below, this is the result of lower performance and transaction fees, whereas fixed fees continued to be solid. The fixed management fees grew by 14% y/y (compared to 11.5% y/y AUM growth) and remained flat against last quarter. It is worth noting that the revenue and operating profit from Aquila are not included in these figures, although the acquisition’s impact on AUM is. Consequently, growth of fixed revenues is even more impressive. A true comparison will be seen after the Q4 report when Aquila’s contribution is included.

We believe that the fixed fees make up the foundation of IM, and this foundation continues to show impressive resilience. The fact that the company manages to keep the net change in AUM at approximately zero (adjusting for acquisitions and currency effects) is strong in the current climate.

EBIT came in at SEK26m, corresponding to an EBIT margin of 10%. The EBIT margin is highly dependent on revenue generation, and considering that revenue generation was weak during the quarter, the EBIT margin should also be lower. Nevertheless, we had expected an EBIT of SEK59m, meaning that actual figures came in 56% lower than our estimates.

The deviation is only partially explained by the lower revenue generation, the company also stated that cost reductions had been initiated in the quarter, which will be visible starting in early 2024. The cost reductions resulted in some temporary restructuring costs. Going forward, management says that these cost reductions will have a meaningful impact on the cost base, although it will not fully offset the drop in variable revenue.

The cost reductions mainly stem from lower consulting spending and workforce reduction in areas where the company does not see the possibility of immediate revenue generation. The previously communicated EBIT guideline (minimum EBIT of SEK30m/quarter or SEK200m in a "bad year") still holds, but will be somewhat higher with the inclusion of Aquila. Management also commented that EBIT would be around those levels when adjusting for the quarter’s one-time costs, indicating that the one-off restructuring costs were approximately SEK4m for IM in Q3.

The margin trend is clear over the long term. Since 2015, the EBIT margin for IM has gone from 11% to around 20% in the last twelve months. There is however a notable drop over the past three quarters, where this quarter was all the way down at 10%. As mentioned, however, this is partly a result of one-offs, and partly a result of an incredibly challenging market environment.

The underlying reasons behind the long-term 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.

The current employee count is more uncertain than usual, as the decrease in the number of employees from the cost reductions will be visible only from the next quarter, and the acquisition of Aquila added some 18-20 people to the staff. Over the long run, we believe that Catella’s scalable business platform will continue to drive this measure higher.

Looking into the next quarters, we expect variable compensation to remain low. On the other hand, management said in the conference call that the cost reduction measures will have a meaningful impact on costs, and this should compensate partly for the loss of variable fees. Thus, we estimate that the EBIT margin in the next quarters will be around 15-20%, most likely failing to reach the high levels seen during 2022.

Revenue was SEK93m, a y/y decline of 11%. This was above our estimates of SEK76m. EBIT landed at SEK-6m, compared to last year’s level of SEK6m and our estimated SEK-18m. We consider the EBIT margin of -6% to be okay given the low transaction levels in the market.

The transaction volumes currently seen on the European market are the lowest since the global financial crisis, and the decrease from the peak is actually even greater than it was in 2008. The transaction volumes are now down 83% over seven quarters, against a decrease of 81% over seven quarters in 2009.

A clear majority of sales and profits usually come in Q2 and Q4, and Q3 is thus a relatively quiet period in general. However, this year is far from usual, and management finds it exceptionally difficult to forecast Q4 this year. It is stated that investors’ usual concern for exiting investment before year-end is not likely to be the determinant factor for increased transaction volumes. Instead, the driver will be whether buyers’ and sellers’ expectations are able to converge at all.

There was some activity in the quarter, and the company mentioned that it had carried out some transactions in the Finnish market, where it now holds a strong position. Nevertheless, the outlook remains highly uncertain, and management reiterates that they find it very difficult to foresee when the market will return to a more normal level of activity.

No divestments were announced in the quarter, as a direct result of the sluggish market. We reiterate that Catella’s strong financial position is a significant advantage for Principal Investments in the face of market uncertainty. The company can wait for the right buyer and the right price before divesting assets, and it can make opportunistic investments when they arise. We judge Infrahubs Jönköping and Kaktus to be closest to a divestment.

The Jönköping project was kept on the company’s balance while other parts of the Infrahubs partnership were divested in July 2023. As the project is fully completed and a tenant is already in place, we believe that a divestment of this project should be possible even in a slow transaction market. Management stated that divestments during the remainder of 2023 are unlikely, although discussions with a potential buyer of the Jönköping project have been going well. Taking transactions across the finish line takes longer than usual, but management still seems confident in its commentary on the project.

Management stated that the development with tenants of the commercial space has continued and that the project is not far from being fully let. Making sure that all tenants are signed for the commercial project is important before putting it on the market. In today’s climate, an asset is more likely to be sold at a good price if all unnecessary uncertainty is removed before selling it. As a reminder, Catella has previously said that it has discussions with a potential buyer that just awaits the commercial spaces to be fully let.

When asked about whether Kaktus will have to be sold before the company can move on to make new, larger investments, management said it was not that great of an issue. The strategy in the business area is to take on smaller projects, ideally with a ticket size between SEK20m to SEK50m per investment. These smaller investments, which can often take the form of co-investments, can work as a tool for building relationships and opening up attractive asset management mandates. Nevertheless, the divestment of Kaktus will free up a big chunk of liquidity, and the company can not make a “big push” before the project is sold.

In Balder’s most recent conference call, Erik Selin stated the real estate prices (apartments) in Copenhagen have increased by about 8% y/y. This is good news for Kaktus indeed, but we do not make any changes to our estimates based on the information. We reiterate our conservative view of SEK150m in pre-tax profit to take height for the prevailing market uncertainty.

In essence, we believe Kaktus is likely to be quite close to a divestment. Potential delays are likely to be a result of trying to get as good a price as possible, rather than not being able to sell the project.

Below is a summary of what we know and estimate from the different projects. Regarding the timing of profit realization, we reiterate that both Kaktus and Jönköping are likely to be sold during H1 2024.

In our estimates, we base the profit before tax on the “Weighted investment throughout the 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”.

Based on management commentary we do not believe that Barcelona logistics will be sold during Q4 2023, and instead push that into H1 2024. As a result, we forecast no material profit in Principal Investments during the remainder of 2023.

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 an 11x 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 H1 2024. 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 SEK 150m.

When calculating Catella’s net cash position we take cash minus interest-bearing debt. 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 DCF valuation, which supports our SOTP valuation.

Our SOTP valuation indicates a fair value for our base case of SEK51 per share.

In our DCF model, for our base case, we use a total EBIT margin of 20% in 2026-2028, and a terminal EBIT margin of 20%. The annual growth rate (CAGR) between 2026 and 2028 is 7%, and the terminal growth rate is 2% from 2028. We use a WACC of 11%, resulting in a fair value of SEK60 per share, although we prefer the SOTP approach.

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