Total income, as shown in the table below, was SEK423m, +12% y/y and 13% above our estimates of SEK373m. This is not a true picture, however, as Catella is now recognising Principal Investments’ income from divested and property development projects as net sales for the first time this quarter. The reason for the change is that income derived from these sales is now considered part of the core operations of the group, a rationale with which we agree. Adjusted for this, total income decreased by SEK44m, from SEK468m to SEK424m. For future quarters, we will rework our comparable figures to reflect this change.

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 SEK151.3bn, -1% q/q. Adjusted for FX, the AUM decreased by cSEK5.1bn, which is higher than what we had estimated. However, the outflows were driven by the termination of the Hollborn Island mandate from Catella UK. The mandate had been initiated based on the targeted size six years ago, and once it reached that size, the mandate was ended. We thus don’t view the outflow as anything dramatic.

Property Funds (PF) increased by 4% q/q and now account for 74% of total AUM. The increase is mainly a result of the FX effects during the quarter.

AUM for Asset Management (AM) declined by -11% q/q and now represents 26% of AUM. The segment took a large jump in AUM between Q2 2023 and Q3 2023, following the acquisition of Aquila in the quarter, and the downturn in this quarter is the result of terminating the Hollborn Island mandate.

As we have highlighted in previous updates, we argue that 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 lower growth due to more cautious investors. This was repeated during the conference call, were management stated that AM will be the primary driver going forward.

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. In Q3 2023, the acquisition of Aquila is also evident. As the chart below is depicted in EURbn, the strong FX tailwinds are evident in this quarter, given that the q/q development in local currencies was approximately flat despite the outflows related to Catella UK. On the topic of Aquila, management stated that the integration between the two organisations is going well.

The company’s current outlook with regard to AUM growth is that it will most likely be flat in the near term (we assume 2-4 quarters). Both inflows and outflows are expected to remain low, keeping AUM relatively constant. At the current market climate, we argue that keeping AUM flat is to be considered very solid.

Revenue generation (revenue/AUM) was 0.16% 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 low end of the scale for the past nine 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 mostly 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.

For FY2024, we believe that revenue generation will remain muted. Nevertheless, the 0.7% level should constitute a relatively solid floor given that this level can be reached almost entirely through fixed fees.

Management has previously 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. This also means that the company’s performance fees will return a while after the general market sentiment bottoms out, as it will take some time for the funds to reach their previous highs. 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.

Revenue was SEK245m, down from SEK250m last year, corresponding to a -2% y/y decline. Similar to Q3 and Q4 2023, the variable compensation was almost zero in the first quarter. The fixed management fees declined by -2% y/y, although they increased by 4% q/q, driven (we assume) by strong FX. The fact that fixed fees remain strong despite the incredibly challenging market is a testament to the quality and stability of the underlying business, and it is a result of long-term mandates and an overall stable business.

EBIT came in at SEK32m (26), corresponding to an EBIT margin of 13%. The margin is generally highly correlated to revenue generation, and considering that revenue generation was weak during the quarter, the y/y increase in EBIT is especially impressive. We are positive about the cost control, as that will make the scalability of the platform even more evident once the market returns to more normal levels. This was confirmed by management, stating that it stands to benefit from this strong position and pipeline once sentiment rebounds.

In the conference call, management highlighted that there have been material adjustments to the cost base over the past year, as a result of adapting the organisation to a slower market.

During last quarter’s 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 below SEK200m for 2024e.

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 latter 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 were derived from two primary factors: 1) Catella exited several low-margin mandates since 2021 which 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. As mentioned, we believe that the currently tight cost control will enable further margin expansion once the market normalises.

Over the last few quarters, the employee count has been volatile. The acquisition of Aquila and the initiated cost-reduction program worked simultaneously to influence the number of employees. In the first quarter, we saw a slight downtick in the AUM per employee, although it was only moderate.

Looking into the next quarters, we expect variable compensation to remain low. Management said in the conference call for Q4 2023 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 in the first half.

Revenue was SEK69m, a y/y decline of -15% and 30% below our estimates. EBIT landed at SEK-23m, compared to last year’s level of SEK-20m and our estimated SEK7m. Transaction levels are down 14% y/y, from the low levels seen during 2023. We assumed that the slightly upbeat sentiment we heard during Q4 2023 would spill over into the beginning of 2024, which it didn’t. This overly optimistic assumption explains the whole deviation against the outcome in the quarter.

Management confirmed this development during the conference call, where it was stated that following an optimistic end to the year, investors once again became more cautious.

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.

In terms of geographical segmentation, management stated that the Nordics were slightly stronger than continental Europe, as colleagues in the region expressed slightly more optimism with regard to the short-term market outlook. Still, management has, over the past few years, closed down operations in four geographical markets and is currently satisfied with its position in the remaining five markets. Any dramatic further cost cuts in the segment are not deemed necessary, although general streamlining, automation, and AI initiatives are stated to hold potential to further reduce costs.

Management expects the transaction market to remain muted until we see (potentially) lowered interest rates later in 2024. Buyers and sellers are still unwilling to meet, and if anything, buyers seem to have more patience to wait for deals than expected, meaning that the number of transactions remains low.

Earlier during the quarter, it was announced that Catella divested the last property under the Infrahubs partnership, which has had Svenska Retursystem as a tenant. We previously commented on the transaction in a separate research note, which can be read here. The divestment contributed to liquidity in the quarter but had no noteworthy impact on the PnL. Given the timing of the market cycle for this asset (bought in the go-go years and sold in a market through), we consider everything above negative IRRs to be good.

Management said during the conference call that the assets related to Polaxis will be closed during September/October this year, depending on the exact procedure for closure. The company will free up cSEK270m in liquidity (ballpark numbers), although with a modest impact on profitability. The IRR is stated to be in the range of high single digits. As mentioned, this is considerably stronger than what we think can be taken for granted given the circumstances. For example, in our SOTP valuation, we assume that projects in Principal Investments would be sold at a c10% discount in our Bear Case and to book value for our Base Case (except for Kaktus). For the sake of prudence, we maintain these assumptions for now. This admittedly reflects a pessimistic scenario, but the markets are rough, and we don’t think investors should entirely discard the idea of projects selling at a discount to book value.

General Kaktus commentary has become somewhat of a recurring theme in our quarterly updates, which reflects our view of the potential that a divestment of the project would have for Catella. Not only would it free up a significant chunk of liquidity. It will most likely also generate a significant profit for the company in excess of the booked values on the balance sheet (helping the market in correctly evaluating the company’s strong financial position).

During the conference call, management, in our opinion, continued to express optimism regarding the project. In our estimates, we nevertheless choose to change the expected divestment date to Q3 2024e. The reason is that although the transaction could be executed in the very near term, management still seems to be waiting for the right price. The company stated that holding the project on its own balance sheet is cash flow neutral. Further, it states that it might potentially wait for central banks to lower interest rates before making a transaction.

We consider this approach to be sensible, and understand where management is coming from. In Kaktus, the company has a “landmark” asset with an excellent sustainability profile in a prime location. It represents a significant chunk of the capital that management has tied up in its own projects, and there is really no need to rush such a property to the market at the first available price, given the company’s strong financial position. We understand why short-term oriented investors might root for the project to be sold rapidly, but by applying a mindset focused on long-term business value, we argue that the one who waits for something good never waits too long.

Other than being way too optimistic about Corporate Finance, the quarter was generally in line with our estimates. We broadly lower revenue generation and EBIT assumptions for Corporate Finance, but other than that, our estimates remain mostly intact. The changes per segment are outlined below.

Variable compensation + fixed fees (excluding performance fees) in Investment Management have amounted to SEK301m, SEK278m, SEK265m, and SEK280m for each Q2 between 2020-2023. AUM has grown over the period, and we see really no reason as to why the revenue generation would be significantly worse (obviously excluding performance fees). As such, we slightly increase revenue generation against our previous estimates for Q2 2024e, where the effect on revenue is partly mitigated by reducing the AUM growth rate for the remainder of the year.

Catella has three legs to stand on: IM, 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 SEK56 (53) per share.

In our DCF model, for our base case, we use a total EBIT margin of 18% in 2027e-2030e and a terminal EBIT margin of 18%. The annual growth rate (CAGR) between 2027e and 2030e is 3%, and the terminal growth rate is 2% from 2030e. We use a WACC of 11%, resulting in a fair value of SEK51 (53) 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.

In our Bull Case, we assume that AUM CAGR for IM will be c7% 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 13x rather than 11x.