Catella is a real estate focused investment bank and alternative asset manager operating in the Nordics and Western Europe.
I wrote about the stock some two years ago, asking whether the low valuation multiples at the time really signaled cheapness. The answer was “qualified” yes but with the 2017 full year figures out and the stock price hovering at the same level, the answer seems to be on more sure ground.
Last year reported earnings were 192 MSEK and adjusting for intangible write downs (50 MSEK) and after tax capital gains from investments (23 MSEK), core operating earnings about 218 MSEK:
With 1685 MSEK market cap, P/core operating earnings is 7,7x and assuming for net financial assets, EV/core operating earnings 5,2x:
Catella owns 50 % of “systematic macro” hedge fund IPM which earned about 180 MSEK in 2017.
In February, Catella bought additional 13 % stake in it which implies 13% x 180 MSEK=23 MSEK more earnings for the parent company’s shareholders. Adjusted for the “pro forma” additional IPM stake, the P/operating earnings is 7x.
Multiples are low given Catella’s revenue and profit growth in all segments in 2013-2017:
The growth in revenues and earnings is explained by good performance in KPIs, namely AUM and transaction volumes:
The mutual fund segment’s AUM has decreased quite significantly from 2015 peak which is partly explained by group of portfolio managers that left Catella, taking clients and their money with them. In 2017, the net outflows seem to have stabilized and turned back to small growth.
The corporate finance segment has been more or less stable, while rest of the segments, especially the hedge fund segment (IPM), the property fund segment and the wealth management segment, have been growing very fast.
Historically, I have worried about the fast growth because the normalized earnings power has been difficult to asses due to high performance fees affecting earnings.
For quite some time Catella has been telling in management reports their “fixed earnings” in the asset management segment, which I haven’t quite registered until recently.
It seems that historically the asset management segment’s earnings have been very dependent of performance fees (61 % of total segment earnings in 2015) but by 2017 it has dropped significantly (16 % of earnings):
The way I interpret the shift from the highly variable performance fee earnings to less variable fixed fee earnings is that Catella’s current earnings are more reflective of “steady state” earnings power than in the past and thus that the current low valuation multiples really imply cheap valuation.
For example, in 2015 Catella’s P/E was about the same as today (7x), but with the difference that about half of Group’s earnings and 67 % of asset management segment’s earnings were based on performance fees.
In 2015, without the performance fees “steady state” P/E was about double relative to the headline 7x P/E and thus that the low valuation multiple didn’t really imply cheap valuation.
If we adjust the 55 MSEK (43 MSEK after tax) performance earnings in 2017 from the operating earnings, Catella’s “steady state” P/E is still under 10x and EV/E under 7x, which seems quite low given Catella’s growth record:
Compare the multiples to EQ and Taaleri, comparable Nordic asset management and corporate finances houses, which have similar historical growth record but with 15-17x unadjusted earnings multiples:
Management and history
Catella’s main owner is Johan Claesson who seems to be somewhat contrarian value type investor with background in real estate.
Some of his key moves has been as follows:
In 2009, after having sold IT wholesale distribution business (in a company then called Scribona that would later change its name to Catella) and in middle of financial crisis, bought distressed wealth management and card acquiring bank and very distressed portfolio of residential mortgage backed securities with high discounts to book values.
Result: The credit card processing volumes have grown from 1 BSEK to 6 BSEK in 2013-2017 (I don’t have the earlier data) and the residential mortgage backed security portfolio has been success.
In 2010, bought Catella, which is now the core part of Catella’s mutual fund, property fund and corporate finance businesses. The business had 14 BSEK mutual fund AUM, 15 BSEK property fund AUM and 59 BSEK corporate finance transaction volumes at the time.
Result: The mutual fund AUM has more than doubled to 32 BSEK, property fund AUM more than tripled to 55 BSEK and the corporate finance has the same volumes (but with better sales the mix has which has shifted from basic real estate advisory to capital market transactions).
In 2011-12, in middle of the PIGS crisis, bought first 25 % stake in the systematic macro hedge fund IPM with implied 200 MSEK valuation.
Result: The company has been increasing its stake gradually to 63 % with last transaction implying 2000 MSEK valuation, or about 10x return for the original purchase price. The AUM has grown from 41 BSEK in 2013 to 77 BSEK today.
Earnings in 2017 was about 180 MSEK or almost the same as the original valuation for the whole company. The Company has opened offices in London and Hong Kong to distribute the funds internationally.
2013: Hires Knut Pedersen as new CEO who comes from Norweigian investment bank ABG Sundal Collier.
Result: Catella’s strategy is focused on building pan European alternative asset management platform and to utilize synergies between
1) the real estate focused corporate finance segment which has a local presence in every major western European city,
2) the property funds which has good position in Europe,
3) the wealth management and bank segment which can source funding for the corporate finance projects and property and mutual funds,
4) develop new wider offering of mutual fund products, including “uncorrelated” mutual funds,
The result is that the segment are now playing together and management seems to be happy with the results and progress.
Latest growth initiatives are
1) the recently opened sales offices to Hong Kong and London, to source international institutional investors for their European wide real estate fund offering/platform
The sales pitch, apparently, is that Catella has a local presence in all over Europe, unlike most property fund managers who have to outsource deal flow/management locally.
2) The company has started investing their own balance sheet through their new real estate project development business. Target is 20 %+ IRRs.
(There is one big project that has started recently, which explains significant part of the property fund segments earnings growth from 3 to 68 MSEK, implying that the project business can be lucrative source of earnings)
All in all, during Mr. Pedersen’s leadership Catella has grown significantly and seems more focused on utlizing its unique strenghts:
1) European wide real estate focused corporate finance and property fund platform
2) synergies between the segments
3) and as partly separate entity, well performing uncorrelated hedge funds
As a result, the group revenues have increased from 1,5 BSEK to 2,5 BSEK and operating profit from 0 to 419 MSEK and earnings profile shifted from performance fee based to fixed fee based.
Catella is a real estate focused investment bank and alternative asset manager operating in Nordics and western Europe.
It has unique position as its one of the few real estate focused investment banks and asset managers that has the local presence in every major European city. It can build complex deals, do capital market transactions and have own funding source through bank/wealth management segment.
It has management that has made excellent capital allocation decisions since the financial crisis. It has grown very fast in recent years and it has many growth initiatives that indicate that it might continue in the future.
It has low P/E multiple and the E is seems more robust than in many years due to high share of fixed fee based earnings.
The risk is that the growth initiatives fail or the cycle turns and transactions and AUM disappears with them. The AUM risk is somewhat mitigated by high share of uncorrelated and low duration credit fund based AUM.
On longer term perspective, the next down turn might be good opportunity to hustle for Mr. Johan Claesson and his lieutenants, if historical performance under last financial crisis is any indication of their future performance (the stock price would probably decline significantly anyhow).
Disclosure: Long Catella with 9 % position