Deutsche Beteiligungs AG

XETRA:DBAN

Earnings Call Transcript 2021-Q1

[Thomas Franke]

Yes, good morning from my part, too. We are pleased about your interest in our company. Let's start right away. I'll hand over to Susanne Zeidler, the CFO of Deutsche Beteiligungs AG. Ms. Zeidler, please.

[Susanne Zeidler, CFO & Member of the Management Board]

Yes. Thank you, Thomas. Good morning, ladies and gentlemen. I'm pleased to be opening my presentation on an upbeat note. DBAG has experienced a good start into the new financial year in terms of the economic performance of our portfolio companies and of transaction activity alike. The majority of portfolio companies expect higher revenues and earnings in 2021, leading to a level of net measurement gains and losses, which we already informed you about 3 weeks ago. The net asset value of Private Equity Investments increased by 3.6% to EUR 437.3 million. What I would like to highlight is net income from fund investment services at EUR 4.8 million. The figure clearly shows the extent to which the conditions in this business segment have improved for us since DBAG Fund VIII commenced investing last August. I'll be reporting on changes in the portfolio in a few minutes. On this slide, as usual, we summarized the most important financial indicators of DBAG Group using -- and of both segments. As you know, we manage our business using net asset value of our Private Equity Investments and net income from Fund Investment Services. I'll be explaining the respective KPIs in a minute. Our investment team is pretty busy. We were able to deal with [ the extremes ] of handling more transaction opportunities during the first quarter than a year ago, when the coronavirus was not yet an issue. We have intensified our market coverage, and we have broadened our product offering. This has paid off. We reported on the expansion of our investment team some time ago, and we also informed you that DBAG is determined to keep on growing. Our medium-term planning provides for significantly higher investments over a 3- year period than in the previous years. A good deal flow is an important prerequisite for this. Buy and build is increasingly a firm component of the value appreciation strategy for our investment. We've invested around EUR 25 million in the first quarter. The congatec investment, which we had agreed upon in August last year, accounted for the vast majority of these funds. Investment was structured using the top-up fund, which is important for us because it increases income from fund services. This is due to the fact that fees for advising in the top-up fund are not based on committed funds but on funds invested. No further equity contributions were required for the 2 investments closed during the first quarter. The blikk radiology group has agreed to spin-off its nephrology division in December 2020. To date, operasan with activities covering renal medicine and dialysis, including the operation of 3 dialysis centers, has been part of the blikk group. Now the plan is to develop operasan as a stand-alone health care platform investment using a buy-and-build strategy. This will make it the 10th investment of DBAG Fund VII. operasan generated revenues of some EUR 30 million in 2020. The company treats around 300 patients. Within the scope of the spin-off, operasan has acquired another nephrology center. DBAG invested approximately EUR 3.2 million alongside DBAG Fund VII, including the top-up fund. The amount will be recognized in the second quarter. The transaction was closed in January. On a look-through basis, DBAG holds a stake of approximately 13% in operasan. All other transactions executed between the 1st of January and the end of last week were add-on acquisitions by portfolio companies. I would like to draw your attention to the acquisition of TBS Brandschutzanlagen by Multimon. It's worth noting that Multimon has only been part of our portfolio for a few months. As you can see, the buy-and-build approach is often part of the investment decision for a particular company. After all, Multimon has gained around EUR 40 million in additional annual sales on top of more than EUR 90 million generated by Multimon to date through inorganic growth. Net asset value rose by EUR 15.3 million in the last quarter -- in the first quarter of the current financial year. This translates into a 3.6% increase compared to the end of the previous financial year. This was largely driven by value appreciation of the portfolio companies. For the first time, loan liabilities exceed reported financial resources as at the current reporting date. I'm using this slide to outline the change in portfolio value, which is a key determining factor for financial assets. As I mentioned, the additions were largely due to the closing of the congatec Holding management buyout, an investment of DBAG Fund VIII, which had been entered into at the end of the previous financial year. Disposals predominantly related to transactions involving Pfaudler Group, the placement of shares in Pfaudler's Indian subsidy, GMM. Our portfolio value is usually expressed as a gross value, also including imputed noncontrolling interests, which are largely current interest. At the end of the previous -- of the period under review, these claims amounted to around EUR 47 million, up EUR 13.8 million due to the value appreciation in the first quarter. Net measurement gains and losses are largely influenced by changes in the fair value of unlisted investments measured using the multiple method. Usually a debt or valuation as at 31st December to the budget of the portfolio companies for the forthcoming year. As in the previous year, the adjusted budget for 2021, in some cases, has gone nonsustainable effects, with uncertainty haircuts applied in some instances, also reflecting historical reliability of forecast. Earnings multiples of listed total companies are derived using report in gas prices and earnings estimates for 2021. Having outlined our methodology, I would like now to provide some explanations on the figure. Net gains and losses on the recognition really comprises the reversal of retention for representations and warranties relating to previous disposals. I will therefore focus on net measurement gains and losses now. This figure predominantly reflect changes in the valuation of investments in the broadband communications and IT services software growth sectors. There's a good operating performance, which is a combination of improved earnings and lower debt levels, have been underpinned by higher multiples in some cases. This was the case for our broadband communication companies, for example. Changes in debt significantly affected the change in value in a few individual cases, for example, where the portfolio company financed acquisitions with debt. Investments linked to manufacturing businesses and related service providers also reported overall increases in earnings and reductions in debt, yet their valuations were negatively impacted by lower multiples. As a result, these investments made only a minor value contribution overall. Overall multiples as at December 31, 2020 were lower than 3 months previously. Quite obviously, analyst expectations regarding company earnings have risen more strongly than the share prices of previous companies. This applies especially for multiples to use to value investments linked to manufacturing businesses and related service providers. The reference multiple for automotive suppliers, specifically enterprise value to EBITDA, has declined by more than 2 points, while the multiple for mechanical engineering companies fell by just under 2 points. As we pointed out recently, these multiples, in particular, were rather high historically, implying that there was a certain potential for setbacks. Our portfolio comprised 33 investments on the reporting date. On average, these were valued at 1.2x initial acquisition costs. Business models linked to manufacturing businesses and related services service providers continue to be valued slightly below acquisition cost at 0.9x acquisition cost. These companies have been disproportionately affected by the pandemic. Also structural changes in the automotive industry have yet to be fully absorbed. At 43%, these companies' share in the portfolio value is currently lower than 1 year ago at -- and at the reporting date of 30 September 2020, which was 48%. Note that the portfolio value as at different reporting dates may relate to different underlying universe due to investments and disposals which restricts comparability. Moreover, we reclassified 1 investment during this quarter under review. The differences would have been lower without this change. At this point, I would also like to draw your attention to the large variety of business models, which we summarized under manufacturing businesses and related service providers. With duagon and now also with congatec, we hold 2 portfolio investments, which hardly match the traditional definition of industrial manufacturing. congatec supplies the computer components required for the Internet of Things and for Industry 4.0, for example. The pandemic has provided another strong push at a fast-growing technology business congatec is set to benefit. Six -- 23 -- 33 portfolio companies are engaged in broadband telecommunications. It now accounts for 31% of the portfolio's value, with a valuation of 2.5x acquisition cost, markedly higher than the 19% figure as of December 31, 2019 or the 27% reported as of the most recent reporting date. The percentage of portfolio value accounted for by companies with a leverage of 3.0 or more has fallen from 71% as at 30 September 2020 to 54%, largely as a result of companies' higher earnings expectations for the new year. I would also like to note that changes in leverage are not only influenced by economic development, but also through financings of acquisitions of portfolio companies, for example. Cash and cash equivalents as at December 31, 2020, result entirely from drawdowns on credit lines. We have 2 credit lines in place totaling EUR 90 million. We've made further drawdowns of EUR 23.8 million during the quarter under review, bringing total drawings up to EUR 36.9 million as at the reporting date. That's the amount of available financial resources as at year-end, December 31, is EUR 69.4 million, which is the sum of financial resources and undrawn credit lines. Investment entity subsidiaries hold additional financial resources amounting to EUR 5.1 million. And on top of this, we can call EUR 19.2 million in fees for which we have granted a deferred to DBAG Fund VII. Cash flow from investing activities is now almost entirely dominated by cash flow from investment activity and its volatility, which is characteristic for our business. Cash flow from financing activities reflects the aforementioned drawdown of the credit line. As in the past, we expect to be able to finance a significant part of required financial resources using returns from -- for your disposals. Such returns may be delayed due to economic development. This is why we are exploring various options for raising debt or equity financing in order to finance our growth strategy. Net income from fund investment services clearly shows a step change we've achieved with DBAG Fund VIII. The base for calculating income from Fund Investment Services is now considerably higher. We've generated EUR 4.6 million in income from DBAG Fund VIII alone. The fund had not yet been closed in the corresponding quarter of the previous financial year, as you know. The higher calculation base is reflected in income before taxes of EUR 4.8 million generated in the Fund Investment Services segment. This is the highest value we have ever achieved in the quarter, and it exceeds the levels posted in 4 of the past 7 financial years. Costs were affected by higher personnel expenses, in particular. We have invested in our team, hiring additional investment manager. You're familiar with this table, it is our forecast for the 2020, 2021 financial year, which we published on 30 November last year. It continues to apply without change. Our key performance indicators, the net asset value of Private Equity Investments and net income from Fund Investment Services, as well as the group's net income, grew within the forecast ranges in the first quarter of '20 -- of the current financial year. Allow me to once again point out to those attending today's call that the results of a single quarter cannot be extrapolated to the financial year as a whole. On the one hand, this reflects the fact that quarterly results, in line with our business model, are influenced by individual events and developments on the capital markets. On the other hand, and this is something I note with respect to income from Fund Investment Services, it is because the volume of assets under management and advice, and hence, the base for calculating income from Fund Investment Services may decline when we sell companies. I opened my comments by referring to new investments and acquisitions. I hope -- in our business, these are mirrored by disposals. Our portfolio contains a number of companies that we have been supporting over a longer period of time now. In some cases, change processes at these companies are now at a very advanced stage, which is why we continue to work on disposals this year. This brings me to the conclusion of my comments. We are in good spirit. Firstly, for our market. The deal flow promises attractive investment opportunities for management buyouts as well as for long-term investments. We informed you about our continued good market position a couple of weeks ago. Secondly, our portfolio is broadly diversified with a high proportion of investments in growth sectors. And as I just mentioned, it provides for attractive business models to strategic buyers and financial investors alike. From today's point of view, the impact of the pandemic continues to be manageable. And thirdly, when looking at the reasons for our success, we always come back to our investment team. The team holds a vast treasure of experience. This is particularly important when we are surrounded by major uncertainty. We're determined to further grow our team because we are convinced that equity investments will be in strong demand over the coming months. With this, I would like to thank you for your attention, and we are now willing -- pleased to answer any questions you might have.