Total income (excl. income from divestments in Principal Investments) was SEK463m, -26% y/y and -6% below our estimates of SEK491m. Total EBIT was SEK10m, corresponding to an EBIT margin of 2% (19% last year) and significantly below our estimates of SEK62m. Corporate Finance performed better than we expected, whereas Investment Management came in below forecasts. Still, it is worth remembering that Investment Management was positively affected by one-offs in the comparable period last year.

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

AUM landed at SEK152.4bn, -4,4% q/q. However, the total decline of SEK6bn was negatively affected by FX effects of cSEK5.5bn. Adjusted for currency fluctuations the AUM is relatively flat q/q. Considering the challenging market climate, we believe that the underlying AUM development is decent. We had anticipated SEK162bn, but this figure was not adjusted for the FX fluctuations in the quarter.

Property Funds (PF) declined by 4% q/q and now account for 70% of total AUM. This development is in line with the AUM development for the segment more broadly.

AUM for Asset Management (AM) declined by -5% q/q and now represents 30% of AUM. The segment took a large jump in AUM following the acquisition of Aquila last quarter, and the downturn this quarter is in line with the company-wide AUM development and the currency effects.

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. On this note, it was mentioned during the conference call that Catella had received a distressed asset management mandate in Benelux during the quarter, and more of this type of mandate was expected during the coming year.

More generally, management expects it to be difficult to raise capital during H1 2024, although outflows are also expected to be muted. Capital commitments to be realised have not really moved during the quarter.

In the diagram below, we can see the steady growth in IM. AM 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 the UK, whereas Q1’21 was negatively affected by the selling of CAM France. Last quarter, the acquisition of Aquila was clearly visible through the large jump in AUM.

Revenue generation (revenue/AUM) was 0.17% in the quarter, and 0,75% over the past twelve months (LTM). In the chart below, we can see that the revenue generation in the quarter is at the very low end of the scale for the past eight years. The LTM trend has also been down over the past few quarters, a reflection of the challenging macro environment. The underlying reason for the weak revenue generation is a combination of low variable fees and some FX headwinds.

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, and the remainder of 2024, we believe that revenue generation will continue to be quite low. Nevertheless, we are currently at the very low end of the historical range for revenue generation. The 0.7% level should constitute a solid floor given that this level can be reached almost entirely through fixed fees.

In previous conference calls, management has 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 in the short to medium term. However, it should be noted that this is only the case for already existing funds. As the company starts new funds, it will be able to generate performance fees also in the near term. New investments can currently be made at low valuations, which bodes well for future performance fees in these areas.

One example of this is the new fund that was started under the umbrella of Aquila during the quarter, where cEUR200m has currently been invested. These are opportunistic investments that have been made in a distressed market, providing an interesting set-up for revenue generation in the coming years.

Revenue was SEK256m, down from SEK318m last year, corresponding to a -35% y/y decline. Similar to Q3 2023, the variable compensation was almost entirely quiet in the fourth quarter. The fixed management fees declined by -7.2% y/y, against +8.8% y/y AUM growth over the same period. Although partially influenced by FX, we consider the discrepancy to be something to keep track of to ensure that it does not continue to widen.

EBIT came in at SEK19m, corresponding to an EBIT margin of 7%. The margin is highly correlated to 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 SEK67m, as Q4 is usually a stronger quarter with more activity as investors are trying to close deals before year-end. To put it frankly, the EBIT figure came in a whopping 72% below our estimates.

There are several factors influencing the weak EBIT during the quarter, including one-time costs for the savings program, FX effects, and the historically low degree of variable fees. Nevertheless, there is no question that this quarter was weak, and we are lowering our estimates of profitability for IM in 2024e. During the conference call, management was somewhat cautious about the previously communicated (soft) "guideline" of SEK200m in EBIT in a bad year. We are taking height for this in our new estimates, and set our EBIT estimates for IM to slightly below SEK200m for 2024e.

The cost reductions announced during the last quarter continued to incur some one-time costs, with a negative SEK3m effect in the fourth quarter. The savings run rate is said to be SEK10m for the upcoming year.

Between 2016 and 2022, there was a clear, positive trend in the development of the EBIT margin, going from negative in 2016 to over 30% during the later part of 2022. However, it is evident the macroeconomic climate has caught up with the company’s reported financials over the past year.

The underlying reasons behind the long-term margin expansion between 2016 and 2022 are derived from two primary factors: 1) Catella has exited several low-margin mandates since 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 and as revenues increase, the relatively fixed cost base works to improve margins. However, high operating leverage is a double-edged sword. As revenues have been declining over the past few quarters, EBIT margins have declined.

Since last quarter, the employee count has been more fluctuating than usual. The acquisition of Aquila and the initiated cost-reduction program worked simultaneously to influence the number of employees. In the fourth quarter, we once again saw a slight uptick in the AUM per employee, as the company reduced the employee count by c5% on a group level.

Looking into the next quarters, we expect variable compensation to remain low. Management said in the conference call that the cost reduction measures have been carried out to enable run-rate savings of SEK10m for 2024. The EBIT margin is likely to remain lower than the elevated levels seen during 2022, and we forecast 2024 to be relatively weak, in terms of profitability, especially the first half.

Revenue was SEK180m, a y/y decline of -5%. This was above our estimates of SEK133m. EBIT landed at SEK14m, compared to last year’s level of SEK11m and our estimated SEK11m. We consider the EBIT margin of 8%, and especially the elevated sales, to be impressive given that European transaction volumes are stated to be down c50% against the same quarter last year.

The performance in the segment should be seen in light of a market where transaction volumes in the European market remain at the lowest levels since the global financial crisis.

We will finetune our estimates for the segment and increase both sales and EBIT for 2024 slightly.

If we were to speculate, it might be the case that Catella has been able to counteract falling transaction volumes by conducting more complex, and opportunistic, transactions within distressed assets, where compensation might be higher as a share of volume.

Management expressed cautious optimism with regard to the outlook for the transaction market. Activity has picked up somewhat in the quarter, with more interest from investors. However, this interest has not generally been converted to actual transactions, and volumes remain low. Management hopes that buyers’ and sellers’ expectations will merge and that volumes will pick up somewhat during the latter part of 2024.

During the conference call, management provided some interesting information on Kaktus and the real estate market in Copenhagen more broadly.

First, Copenhagen has apparently been a bright light across Europe when it comes to real state valuations. Yields have held up well, especially for prime assets with a solid sustainability profile. Second, comparable transactions have been occurring recently, which have indicated strong valuations in relation to the rest of the European market. Yields have been in the range of 4%, which is where Catella hopes to close the Kaktus deal. Finally, Kaktus is considered to be a landmark asset, with a leading sustainability profile in a prime location.

Based on this, as well as management saying that all but one of the commercial leases are in place, we feel confident in increasing our estimated profit upon divestment of Kaktus, from SEK150m pre-tax to SEK225m. However, we do postpone the divestment from Q1 2024e to Q2 2024e.

During Q1 2024, Catella divested the last property from its Infrahubs partnership, Infrahubs Jönköping. According to the management, this project was divested with a slight positive effect on profit. Given that the project was started in an entirely different market climate, we think the divestment validifies the strength of the company’s balance sheet.

As for divestments during 2024, management said that they expected Kaktus and a few others to be divested. We believe that the "others" refer to Barcelona Logistics, Metz-Eurolog and Isoparc, which was shown separately in the table over Principal Investments for the first time. Given the current market climate, we do not incorporate any profit from the divestments other than Kaktus, although it should be noted that the company has been able to post impressive results in this segment historically. Under the valuation part of this update, we provide our calculation of "enterprise value", where we highlight the cheapness of Catella by treating assets related to Principal Investments as cash.

Note that with the conclusion of 2023, the valuation of IM is based on 2026e figures, instead of 2025e. This has a slight positive effect on our valuation, as we believe performance between 2025e and 2026e will generate more value than what is lost through the timing effects from discounting.

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 50m.

Despite Catella having generated solid profits from the projects that have historically been divested, we choose to conservatively value Principal Investments at book value and then add a SEK225m (SEK150m) profit before tax from the sale of Kaktus. To highlight how cheap Catella is when adjusting for the strong balance sheet, we calculate an "enterprise value", where project-related assets in Principal Investments are treated as 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 SEK53(54) per share.

In our DCF model, for our base case, we use a total EBIT margin of 20% in 2027e-2030e and a terminal EBIT margin of 18%. The annual growth rate (CAGR) between 2027e and 2030e is 3.4%, and the terminal growth rate is 2% from 2030e. We use a WACC of 11%, resulting in a fair value of SEK53 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 and assume that the normalised EBIT for Corporate Finance will be slightly lower than in our Base Case. It is worth noting that our Bear Case benefitted from the divestment of Infrahubs Jönköping, as it was sold at a slight profit to book value rather than at the 10% discount which we had estimated.

In our Bull Case, we assume that AUM CAGR for IM will be c8% until 2026e, 2pp higher than in our base case. Revenue generation is also estimated to be higher, which converts into higher EBIT margins due to the scalability of the platform. We also use a slightly higher EBIT multiple for IM, at 13 rather than 11.