Alright, I have other commitments this weekend, so I had to go through this listing prospectus and do my own valuation. The transparency in this listing is admirable, and a big hat tip to Neuvonen for the active discussion. Briefly put, the valuation seems quite tight.
Before the main course, a few observations from the prospectus:
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I couldn’t resist looking at the price at which the previously mentioned company-funded share issue to key personnel was executed. Of course, this is about committing key personnel, so subscriptions weren’t exactly extracted at “full price,” but it still gives some direction. The figure seemed low, but so be it: the company was at a significantly earlier stage when the issue occurred a couple of years ago, both in terms of financial indicators and operational level, so perhaps such a comparison is fruitless. For other curious minds, the calculation is: 400 T€ / 350,000 shares = 1.14 €/share.
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The company’s holding portfolio is significantly broader than I had understood before the listing. This is surprising in the sense that it is not particularly profitable compared to the company’s other business operations. I understand the historical reasons why this was originally done, and the keywords are likely financing, track, cash flow/support leg, and taxation. The company now states it is exploring the possibility of a portfolio sale and the premium obtainable through it. This is quite an interesting opportunity, the realism of which I cannot assess. This is, however, a good option, as it would allow capital to be used more productively for growing other business operations. Let this be a free upside for the investor, as it is difficult to assign value to it since its realization is entirely hypothetical.
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There is some related party business, and these always force me to get out the magnifying glass to check for conflicts of interest. It’s difficult to always know conclusively based on the given information, but it didn’t seem alarming. Perhaps they reflect the company’s current development stage, and in the future, as a publicly listed company, these will be conducted even more cautiously.
Now to the valuation. In my mind, I cannot approach this through individual key figures; instead, it must be viewed as a sum of its parts. Perhaps some analogy can be drawn from Toivo Group, whose business operations have certain similarities (develop-and-own). Toivo has also been under close scrutiny in my radar, in addition to Inderes’ excellent analysis; see Toivo Group company thread. It is worth noting, of course, that there are also significant differences.
If one wanted high fidelity in valuation, one could, of course, estimate each pillar separately, but I will simplify due to the small size of my cigarette pack lid and divide it into just two parts:
- the value of the balance sheet, i.e., practically the real estate portfolio, valued on a P/NAV-type basis
- the profitability of the development and sales business on an EV/EBIT basis.
Listed companies’ housing portfolios are typically valued with some discount to NAV. If I use some kind of average discount percentage (approx. -20% or even a bit more, this should also cover group expenses) and try to account for the value of the current development portfolio, I get a net value for this part in the range of 17-21 M€, depending a bit on assumptions about the completion stage of ongoing development projects and thus “missing revenue recognition.” The occupancy rate of the holding portfolio is certainly good, but the track record is quite short, and the real estate portfolio is, at least to my taste, of such a quality that a premium compared to peers cannot really be justified.
The business excluding rental operations is somewhat uneven in nature, and the timing of individual projects within the fiscal year can vary a bit. On the other hand, compared to Toivo’s real estate development, I consider this a clearer growth case (because the limiting factor is mainly capital, not finding suitable properties), in which case I could accept a slightly higher earnings multiple. With adjusted figures, I could perhaps favorably accept 7x EV/EBIT for this part. Roughly calculated, I believe the adjusted earning capacity without rental operations will be somewhere in the 7-8 M€ range on average in '22 and '23, which would make the value of this part at most 49-56 M€.
In the IPO, the pre-money valuation is 73.1 M€, and the range offered by my cigarette pack lid is thus 66-77 M€. This valuation also includes several favorable assumptions about business development, so it doesn’t really provide the safety margin I crave. A very difficult decision regarding participation for me, as I would gladly see myself as a long-term owner of this company. However, as a disciplined investor, the valuation is slightly against this conclusion.