Deutsche Beteiligungs AG

XETRA:DBAN

Earnings Call Transcript 2021-Q3

[Roland Rapelius, Senior VP & Head of Investor Relations]

Yes, ladies and gentlemen, good morning also from my side and welcome to DBAG's conference call regarding our 9-month results. It's a pleasure to welcome you on this call. And without much ado, I would now like to hand over to Susanne Zeidler, our Chief Financial Officer, for the presentation. Please go ahead.

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

Thank you, Roland. Good morning, ladies and gentlemen. A warm welcome also from my side. I would like to start my presentation today by reporting on the disposal of blikk group, which we agreed upon at the beginning of the fourth quarter, which was after the quarterly reporting date of 30 June 2021. The radiology group's MBO was agreed in March 2017 together with DBAG Fund VII. Owing to a complex approval process, however, it did not take effect until May 2019. Over the past 4 years, the group has grown strongly through a total of seven acquisitions. blikk group's revenue for the current year is expected to reach EUR 103 million, around EUR 50 million more than at the start of the investment. Since then, intensive efforts have been undertaken to enhance services for patients. For instance, centralized scheduling allow to reduce waiting times, which quality was further enhanced, thanks to numerous medical experts. This has allowed the group to acquire many referring physicians and hospitals with a corresponding increase in patient numbers. Moreover, the group's size facilitate attracting personnel. Selected locations were refurbished in -- following significant investments. As a result, the blikk group is seen as one of the leading providers of radiology services in Germany. These achievements and the continued good development prospects with further acquisitions planned have made blikk group an attractive investment for an infrastructure fund managed by the EQT investment group. We will also participate in further growth. DBAG Fund VII and DBAG itself will use a significant part of the proceeds for a reinvestment of up to 15% in blikk group, with up to 3 percentage points attributable to DBAG. The selling price translates into a multiple of 2.1. The disposal proceeds clearly exceed the valuation of the investment in DBAG's most recent interim financial statements as of 31st March. The additional unexpected value contribution amounts to EUR 26 million, which has been accounted for in the net asset value of private equity investments as at 30 June and in net income for the third quarter. At the closing of the transaction, we not only expect the cash inflow from the pro rata net disposal proceeds but also of the advisory fee of EUR 24.8 million as at 30 June, which had been deferred so far for DBAG Fund VII. Now I come to the next slide. Let me now turn to the highlights of the third quarter. We already reported on our capital increase at the last conference in May. We now see its impact on key performance indicators in the third quarter. The capital increase was yet another step in the consistent implementation of our solid financing strategy. We will use this cash inflow as well as proceeds from the portfolio to finance our planned growth. The inflow of funds from the capital increase, the unplanned value contribution from the disposal of blikk group and the positive development of portfolio companies have together led to an increase in the net asset value of private equity investments to EUR 623 million. On the basis of these positive developments on last 22nd of July, we once again raised our forecast for the current financial year. This forecast is now confirmed. Net asset value per share rose by 20.3% compared to 30 September 2020 to EUR 33.12. This growth rate is adjusted for the capital increase and the dividend payment. The favorable portfolio companies has thus offset the dilution effect from the capital increase. I will be covering further KPIs in more detail now as usual. DBAG's financial resources have increased by around EUR 141 million in the first 9 months of the current financial year. The increase was predominantly attributable to financing activities. Besides the EUR 100 million cash inflow from the capital increase, this reflects in particular the prior drawdown of credit lines to prefinance investments. Note that these credit lines will be repaid in the first quarter once we receive the proceeds from exits. Besides cash flow from investing activity, which is generally volatile depending on our transaction activity, it was positive in the reporting period at around EUR 90 million mainly due to the cash inflow from the disposal of DNS:NET. Cash flow from operating activities remains influenced by the deferral of advisory fees for DBAG Fund VII. During the first 9 months of the current financial year, the amount deferred increased by EUR 8.4 million to EUR 24.8 million. This advisory fee is expected to be paid upon the closing of the blikk group disposal. Undrawn credit lines in the amount of EUR 46.2 million are available in addition to financial resources of EUR 159.3 million, bringing DBAG's available financial resources as at the reporting date to approximately EUR 206 million. This figure will again increase significantly upon closing of the disposal of blikk group. With this financial cushion, DBAG is well positioned for the ambitious investment program we have undertaken for the years ahead. Just to remind you, DBAG plans to invest around EUR 120 million per annum over the medium term, which is an increase of around 40% compared to the previous year's. This amount includes co-investments alongside DBAG funds, plus long-term investments using exclusively our own balance sheet. I would like to draw your attention to the fact that, that amount, just like all statements on expected medium-term developments, reflect the state of planning as at November 2020. We are currently in the process of updating our medium-term planning extrapolating it to 2024. The key parameters of the new plan will be published together with the consolidated financial statements as at 30 September 2021. The shortfall of available liquidity relative to co-investment commitments vis-à-vis DBAG funds has declined markedly as at the reporting date. Two aspects are important in this context. Firstly, co-investment commitments extend for a multiyear period of up to 6 years. For instance, the investment period of DBAG Fund VIII commenced in August '20 and will end in December '26 at the latest. And secondly, the presentation does not include the funds required for future long-term investments. The shortfall of some EUR 67 million compares to a portfolio value of around EUR 542 million. We believe that we will be able to generate proceeds from the portfolio, which will significantly exceed that EUR 67 million between now and December 2026. The M&A market has recovered significantly and quickly following the pandemic-induced weakness between April and June 2020. During the current 9-month period, the number of investment opportunity has doubled year-on-year to 241. This means that on an annualized basis, our investment team not only reviewed and assessed twice as many transaction opportunities during the past 9 months than in the same period of the previous year. This figure represents an increase of 42% over the average for the past 5 years. This is a notable increase, which supports the general perception that the M&A market environment is very active indeed. The higher number was driven by 2 factors. Firstly, MBOs. 195 transaction opportunities involving MBOs during the first 9 months compared to 112 in the same period of the previous year. And secondly, transaction opportunities concerning long-term investments experienced a significant increase, accounting for 46 of a total of 241 opportunities. The reporting period was strongly influenced by disposals. Firstly, the disposal of DNS:NET agreed in March, and this was closed in June. I provided a detailed account on this in May. According to the closing, the value contribution from the transaction was recognized in the second quarter. As reported, the cash inflow occurred in the third quarter. We were able to agree the disposal of Telio, a British financial investor, Charterhouse Capital Partners LLP, in June. The disposal was the fifth exit of a management buyout from DBAG Fund VI portfolio. Since the start of the investment in 2016, Telio has evolved into a global market leader in inmate communications, together with the requisite technology and infrastructure. Sales have more than tripled to approximately EUR 83 million in 2020. In addition to organic growth, the CAGR in excess of 22% has also been driven by acquisitions for which DBAG and DBAG Fund VI provided additional funds on 2 occasions. Besides entering into new regional markets, Telio has significantly expanded its product offer, for example, through technology, which detects and blocks illegal use of mobile phones in correctional facilities. The company also increasingly focuses on digital solutions, including the areas of video telephony and e-learning. Nowadays, Telio systems are installed at 700 facilities in 21 countries worldwide. Telio's number of staff has more than doubled since the start of investment to 218 employees. The disposal proceeds are roughly in line with the valuation of the investment in DBAG's interim financial statements as at 31st March 2021. Therefore, the transaction has not generated any further value contribution in the third quarter. However, a reinvestment may generate additional value contributions from the company's future performance. DBAG and DBAG Fund VI will invest a portion of the disposal proceeds and will hold a 13% stake in Telio going forward, of which 2.5% will be attributable to DBAG. The long-term investment in R+S as provider of technical building services agreed in March was closed and thus recognized in May 2021. DBAG invested EUR 60 million, thereby strengthening the equity base of R+S. A significant transaction took place in the area of growth investments. The merger of Vitronet and DING has created a provider in the fast-growing market for expanding fiber optics and energy infrastructure with broad regional coverage and a service offer comprising all the essential stages of the value creation chain, from planning and constructing of networks right through to operations and services. Going forward, the combined entity will trade as Vitronet Group. The merger was complex since it involved 2 ECF vintages with different investors. Vitronet was an investment of DBAG ECF original 2017 vintage, while DING was an investment of ECF II dating back to 2019. Net asset value has increased by approximately EUR 200 million since the beginning of the current financial year to around EUR 623 million. Adjusted for the capital increase and the dividend payment, this translates, as already mentioned, into an appreciation of 22 -- 20.3%. The increase in financial assets was largely driven by the value appreciation of the portfolio. I will look at the detailed development of portfolio value with the next slide. The increase in net financial resources was, as already mentioned, due to the capital increase. The portfolio value rose by EUR 130 million to around EUR 552 million. The increase reflected the positive performance of the existing portfolio, which I will discuss in more detail in a moment. Additions and disposals resulted in a decrease in portfolio value by EUR 9 million. This corresponds to the positive cash flow from investing activities, which I mentioned earlier. Our portfolio value is, as you know, always a gross amount, which includes the interests of other shareholders in the investment entity subsidiary, predominantly imputed carried interest for those members of the investment team who have invested private assets in DBAG funds. At the end of the period under review, these claims amounted to around EUR 47 million. They increased since 30 September 2020, in line with the performance of the DBAG fund portfolio. EUR 85 million in net measurement gains and losses is attributable to the operating performance of the existing portfolio, excluding blikk group, and completing disposals. The net figure of the 2 first columns reflects the change in earnings and the change in debt. The positive development continues to be materially driven by investments in growth sectors, especially in broadband telecommunications and IT services software. One company from the other sectors has also contributed significantly to this. The strong increase in debt was attributable in particular to borrowings related to add-on acquisitions by one portfolio company pursuing a buy-and-build strategy. Earnings contributions from these acquisitions are included in change in earnings accordingly. Automotive suppliers also delivered positive earnings contributions, as did mechanical and plant engineering investments. Specific burdens slowed earnings growth in isolated cases. For example, the delivery bottlenecks occurred due to a shortage of certain components in spite of a healthy order book. Rising raw material costs and freight rates also imposed burdens in individual assets. Finally, some companies expect delivery shortages, especially regarding semiconductors in the automotive industry, to lead to further impediments. The earnings contribution of blikk group during the 9-month period is included in the multiples effect, predominantly as a result of a selling price which clearly exceeded the most recent fair value measurement. Valuations of listed peer group companies have contributed some EUR 10 million to this effect. A sector analysis provides a mixed picture. Whilst investment in broadband telecommunications and in IT services software benefited from positive effects, significant valuation markdowns were seen as at 30 June 2021 in the automotive suppliers peer group. Net gains and losses on disposals includes earnings contributions from completed disposals, largely related to DNS:NET and Rheinhold & Mahla. In addition, the figure includes minor amounts released from purchase price retentions of previous disposals. The portfolio currently consists of 32 equity investments which are valued at an average of 1.3x cost as at the reporting date. The sector analysis continues to show a mixed picture. Whilst investments in industrial sectors continue to be valued slightly below cost, investments in growth sectors are valued at 3.7x cost. The most recent disposals have not yet led to a significant shift in the value-weighted sector mix. The percentage of portfolio value accounted for by companies with a leverage of 3 or more has fallen from 72% as at 30 September 2020 to 45%, largely due to changes in the portfolio and higher 2021 earnings forecasts for the existing portfolio companies. Let me now turn to our Fund Investment Services segment. Earnings development has been positive here as expected. With an EUR 11.1 million increase, income is up significantly year-on-year, driven in particular by DBAG Fund VIII, which alone contributed EUR 13.9 million to segment income over the last 9 months. Given that the fund's investment period commenced on 1st August 2020, in the fourth quarter of the past financial year, no income from this fund was recognized during the comparable period of the previous financial year. The increase was offset by a slight decline in income from DBAG Fund VII on account of a change in the assessment basis for the principal fund. Since the beginning of August 2020, fees have been charged on the basis of capital invested as opposed to capital commitments previously. The net expense from other income expense items largely reflected the buildup of the team and higher provisions for variable remuneration. This brings me to our forecast for the current financial year. On 22nd July 2021, we raised our forecast for key performance indicators based on the performance of our portfolio company, which exceeded most recent projections, and the unexpected value contribution from the disposal of blikk group. We affirm this forecast today. We now anticipate net income for the current financial year in a range between EUR 125 million to EUR 145 million. The most recently forecast range published in March and affirmed in May was between EUR 70 million and EUR 80 million. The anticipated earnings improvement is based on significantly higher net income from investment activity, which is now forecast in a range between EUR 125 million and EUR 140 million, up from the previously forecast EUR 65 million to EUR 75 million range. Accordingly, net asset value of private equity investment as of 30th September 2021, including the net proceeds from the capital increase, is forecast in a range between EUR 620 million and EUR 690 million. The previous forecast has specified a range between EUR 415 million and EUR 505 million. And this was excluding net proceeds from the capital increase. Earnings from Fund Investment Services are now forecast in a range between EUR 16 million and EUR 17 million, up from EUR 15 million to EUR 16 million previously. The higher projection is based on a lower-than-expected cost increase, especially regarding personnel and travel expenses, given that budgeted staffing levels exceed the actual number of employees. I would like to reiterate the fact that our ambition for 2022/2023, which you can see in the right-hand column, continues to be based on the medium-term planning concluded in November '20, which we have not changed since. The net proceeds from the capital increase continue to remain unaccounted for in this respect. We are currently in the process of updating this medium-term planning and extrapolating it to 2024, as already mentioned. Once again, I would like to point out that the results of a single quarter are strongly influenced by valuation levels on the capital markets prevailing on the respective quarterly reporting date. The current forecast is based on valuations as at 30 June 2021. Valuation levels at the end of the financial year on 30 September 2021 may be higher or lower. Concluding my comments, I would like to reiterate our summary looking at these quarterly results. We are in an excellent position. Our equity platform is well established in the market. Thanks to the expansion of our team, our range of long-term investments and extended regional focus on Italy, we are in a strong position to exploit our market opportunities even more successfully. We have an attractive investment portfolio that offers significant upside potential. This is underlined by our earnings performance and successful disposals during the first 9 months of the year. Along with the high proportion of investments in growth sectors, our investment portfolio also includes attractive business models for strategic buyers and financial investors alike. We strengthened our financial resources considerably. The investment period of Fund VIII started in August '20, we extended our credit lines in the second quarter of the current financial year and successfully placed our rights issue in the third quarter. This means that we are on track for continued growth. So I would like to thank you again for your attention, for your attendance or participation in our conference, for your very good questions. And I'm now looking forward to seeing you again at our Annual Conference in December, and I hope very much that this will be a meeting in person. I'm looking forward to this and wish you all a nice day and a good weekend. Thank you so much.