Deutsche Beteiligungs AG (DBAN) Earnings Call Transcript & Summary

Dear ladies and gentlemen, welcome to DBAG's conference call regarding our H1 results also from my side. It's a great pleasure to welcome you to this call now for the first time. And without much ado, I would now like to hand over to Susanne Zeidler, our Chief Financial Officer, for the presentation. Please go ahead.

Thank you, Roland, and also a warm welcome from my side to our today's conference call. I begin my presentation today with a topic that is of paramount importance to our shareholders and the company. Please go to the next slide. In April, we decided to carry out a rights issue and we successfully placed it. Through this, we were able to raise net proceeds of around EUR 100 million. Over the past year, we have successively (sic) [ successfully ] aligned our private equity platform for growth, which included expanding the product range, expanding our investment team and extending our credit line. This capital increase marks another important milestone for our future growth. DBAG plans to invest an average of EUR 120 million per annum during the current and 2 subsequent financial years. This translates into an increase of around 40% compared to the 3 previous financial years. This allows us to unlock new opportunities to increase value for DBAG and its shareholders. With a 99% take-up rate, the capital increase was very well received on the market. Whilst existing shareholders exercise their subscription rights to a large extent, in addition, new institutional shareholders were acquired through subscription rights trading. Our major shareholders also strongly supported the capital increase, thus expressing their confidence in the company and its management. Our portfolio companies completed 2 notable transactions after the end of the first half of the financial year. The first is the acquisition of Semecs by Sero. This acquisition will speed up Sero's transformation and will enable the company to explore customers in new industries. In the future, Sero's automotive business will be supplemented by application in other industries and medical engineering with the objective of broadening the company's customer base. Like Sero, Dutch Semecs is a developer and manufacturing service provider for full contract manufacturing of electronic component devices and systems or shortly EMS. Those companies will benefit from a combination of production facilities, including the Semecs site in Slovakia, which will enhance their flexibility regarding different order sizes and will strengthen their position when acquiring new business. DBAG supported this transaction with a follow-on investment of about EUR 4 million. The second significant transaction in the portfolio, Vitronet and Ding, 2 portfolio companies are merging to become the leading service provider for fiber optics and energy infrastructure in Germany. This combination will create a group that in 2020 generated approximately EUR 340 million in sales revenues, employing around 2,300 people at more than 30 locations across Germany. The goal of the transaction is to create a provider with broad regional coverage and a high degree of value added across what continues to be a fastly growing service market for fiber optic and energy infrastructure. The new Vitronet Group plans to continue to actively drive the consolidation of this fragmented market and generate impetus for growth from the need for high-performance Internet connection. The group's business in the energy and utilities market, which has accounted for 30% of sales revenues to date, is set to benefit from turnaround in the German energy sector, the Energiewende, which requires its aging infrastructure to be replaced but, more importantly, to be rebuilt. Take e-mobility as an example. Both companies have been -- have seen strong growth in recent years. In addition to the respective double-digit organic growth, a total of 15 add-on acquisitions have also contributed to this. The current transaction per se will not impact upon the valuation of investments in DBAG's statement of financial position at 30 June 2021. There are also no [ cash flows ] associated with the transaction. This brings me to the occasion of today's analyst conference, DBAG's half yearly financial report. I will report to you on the brisk transaction activity in our portfolio. We've seen an overall improvement in the earnings performance of our portfolio companies. This has contributed significantly to the 10% increase in net asset value to EUR 465 million in the first half of the current financial year. Earnings from Fund Investment Services also increased significantly to EUR 9 million. In summary, we confirm our new forecast for our current financial year. On this slide, as usual, we summarize the most important financial indicators of DBAG Group and of both segments. As you know, we manage our business using net asset value and earnings from Fund Investment Services. I will be explaining the respective KPIs in a moment. Our investment team is pretty busy. In the second quarter, the already significant number of investment opportunities of the previous 2 quarters increased once again. Many transactions were also concluded at the level of our portfolio companies. For example, Multimon [ AG ], the leading provider of fire protection systems, is expanding its market coverage and agreed and closed its first add-on acquisition in the first half of the year. The 2 health care companies, blikk group and operasan, are moving forward with the buy-and-build strategy. Fund VI with Gienanth continues to expand its product offering and have agreed and closed 2 add-on acquisitions during the 6-month period. And last but not least, in DBAG ECF, 3 portfolio companies from the broadband telecommunication sector agreed and closed 5 add-on acquisitions. And in addition, FLS has merged with 2 companies to form the Solvares Group. I'm also pleased to report that we have reached agreement on our second long-term investment. We have taken a stake in R+S Group, and the transaction was closed a few days ago. R+S is a leading provider of technical building services. The company is well positioned in the market and over the past 2 years has made the foundation from which it can continue to grow. This includes continuing with the success for reorganization of the company. In a positive market environment, R+S aims for strong revenue growth in the future. We've also agreed or concluded 2 -- completed 2 disposals, which are DNS:NET and Rheinhold & Mahla. To start with DNS:NET, this is a very good example of the long-term support DBAG provides a company founder in developing his enterprise. We invested a total of EUR 6 million for a 16% stake in the company's capital on a look-through basis over the 8-year holding period, plus an additional EUR 19 million for interest-bearing instruments. During this period, DNS:NET has become the second largest provider of VDSL connections in Brandenburg and is meanwhile a leader in connecting newly built residential properties in Berlin to its proprietary fiber optic network. We realized our equity investment with a disposal multiple of more than 5 now, making it a very successful investment for us. Over the past 20 years, we've generated an average of 3.4x the invested capital from growth financing. A further value contribution is included in the result of the second quarter. In fact, it was one of the reasons for raising our forecast for the current financial year. We expect an inflow of funds from this and from the redemption of interest-bearing instruments in the current quarter. We acquired a stake in Rheinhold & Mahla in September 2016. The overall investment amounted to EUR 18 million for a 46% stake. Rheinhold & Mahla made strong progress in recent years with regard to its efforts to tap into the Chinese market. In the 2019-2020 financial year, the company attracted the interest of a strategic buyer. However, in view of the challenging environment affecting the cruise industry, overall proceeds from the disposal remains below the acquisition costs. Here, too, we've recognized a further value contribution in the second quarter results. We expect the inflow of funds during the current quarter. This brings me to the explanation of the figures for the 6-month financial statements. Net asset value rose by EUR 43 million in the first half. This translates into a 10% increase compared to the end of the previous financial year, which was largely driven by value appreciation of the portfolio companies. Credit liabilities from drawn credit lines exceed financial resources so that unlike at the end of the 2019-2020 financial year, the balance from both items reduced its net asset value by EUR 44 million. Portfolio value largely determines financial assets. The portfolio value increased by EUR 104 million in the first half of the year mainly due to the change in value of the portfolio companies of more than EUR 83 million. The net of additions and disposals contributed more than EUR 20 million to the increase in portfolio value. Additions were largely attributable to the closing of the congatec management buyout entered into at the end of the previous financial year. In addition, FLS merged, as already mentioned, with 2 other companies to form the Solvares Group. And operasan was spun off from the blikk group to be further developed as an independent investment in the future. Disposals mainly related to the partial sale of the Pfaudler Group with transactions that we had agreed in the previous financial year. Our portfolio value is always a gross sale. It is -- it also includes interest of other shareholders, which is largely carried interest. At the end of the period under review, these claims amounted to EUR 49 million, up EUR 18 million due to the half -- portfolio value appreciation in the first half. The net gains and losses on measurement and derecognition in the first half of 2020-2021 mainly reflect the improved earnings development of portfolio companies. 17 of the 33 companies contributed positively to this net figure. These included in particular companies from the broadband telecommunications sector but also companies linked to manufacturing industry. Please go to the next slide. The change in debt was negative on balance. This was mainly due to the financing of add-on acquisitions by a company with particularly high growth momentum and the closing of acquisition, which, besides higher debt, also resulted in higher earnings contributions. In contrast, 13 companies reduced their debt. Changes in multiples provided a positive contribution overall concerning numerous peer groups of our portfolio companies. However, changes in automotive multiples resulted in a negative value contribution of EUR 13 million. Net gains and losses on disposal and other reflect in particular the disposals of DNS:NET and Rheinhold & Mahla. Our portfolio comprised 33 investments on the reporting date. They were valued at a total of 1.3x acquisition cost compared to only 1.1x as at 30 September 2020. Business models linked to manufacturing businesses and related service providers continue to be valued slightly below acquisition cost at 0.9x. These companies are still affected by the consequences of the pandemic. Structural changes within the automotive industry also continued to have a negative impact. Their share of the portfolio value currently stands at 37%, down from 48% at the reporting date of 30 September 2020. However, it should be noted that we reclassified one investment during the first half of the year. In addition, the partial disposal of the Pfaudler Group and the sale of Rheinhold & Mahla have an effect here. The percentage of portfolio value accounted for by companies with a leverage of 3 or more have fallen from 72% as at 30 September 2020 to now 48%. And this is largely a result of companies' higher earnings expectations for the new year. On the reporting date of 31st March 2021, available financial resources amounted to EUR 63 million, comprising EUR 13 million in cash and cash equivalents and EUR 50 million in undrawn credit lines. One credit line totaling EUR 50 million to date was increased to EUR 67 million in the second quarter and extended by 2 years to May 2025. There's also a second line of over EUR 40 million in place with the same finance terms. Cash flow from investing activities is largely dominated by cash flow from investment activity. In the first 6 months, outflows for new investments exceeded inflows after disposals by EUR 20 million. Cash flow from financing activities reflects the aforementioned drawdown of the credit line. In addition, we paid out the dividend to the company's shareholders following the AGM at the end of February. It is intended that future financing requirements for the significantly increased program of investments will be covered by returns from the portfolio, from the increased credit lines and, last but not least, the proceeds from our capital increase. Earnings from Fund Investment Services were significantly higher than the previous year's figure. It increased from EUR 4 million in the previous year to EUR 9 million in the first 6 months of the current financial year, thus already approaching the figure achieved for the financial year 2019-2020 as a whole. This sharp increase is attributable to the start of DBAG Fund VIII investment period in August 2020. In addition, further funds were called from DBAG Fund VII and Fund VIII top-up fund. As a result, the assessment base for calculating income from Fund Investment Services is now considerably higher. Advisory fees from DBAG Fund VIII totaled EUR 9 million. No remuneration was generated from this fund in the previous year. Costs were affected by higher personnel expenses in particular. We have invested in our team, hiring additional investment managers. And furthermore, given the positive business development, higher provisions had to be recognized for performance-related remuneration. This brings me to our forecast for the current financial year. Let me start by saying the figures we are discussing here do not yet include our capital increase. As already mentioned, the net cash inflow from this amounts to around EUR 100 million. We raised our forecast on 26th March 2021 to the overall improved performance of our portfolio companies. Overall, our new forecasts and corporate information is now reflected in the half results. We expect net asset value to be in the range between EUR 450 million and EUR 505 million. At the end of the first half year, the figure was EUR 465 million. Net income from investment activity is expected to be in the range between EUR 65 million to EUR 75 million. Again, in the half 6-month period, we generated EUR 71 million, which is in this range already. As you can see, we are not simply extrapolating the improved development of our portfolio companies to the second half of the year. Following a very good first half year, we would like to first gain more insight into how things will actually unfold in the future. DBAG always points out that results of any single quarter or half year cannot be extrapolated to the financial year as a whole. This is especially true in that this reflects [ the fact ] that in the third period's results, in line with our business model, are influenced by individual events and developments on the capital market. Earnings from Fund Investment Services are forecast in the range of EUR 15 million to EUR 16 million. This continues to be in line with our forecast published in the Annual Report 2019-2020. Based on earnings of EUR 9 million for the first half, we anticipate a lower result for the second half of this financial year. Specifically, we expect rising personnel expenses especially given the further expansion of our investment team. Net income for the current financial year is expected to be in the range of EUR 70 million to EUR 80 million. In the first 6 months, net income was EUR 73 million. Development of group net income was significantly influenced by the development of net income from investment activity. This brings me to the conclusion of my comments. Let me sum up. We are in an excellent position. Our equity platform is well established in the market. Thanks to the expansion of our team, a range of long-term investments and extended regional focus in 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 half of the year and our high proportion of investments in growth sectors. It also includes attractive business models for strategic buyers and financial investors alike. We have strengthened our financial resources considerably. The investment period of DBAG Fund VIII started in August 2020. We extended our credit lines in the second quarter of the current financial year and successfully placed a large volume rights issue in April 2021. All these signs point towards growth, which brings me back to the start of my presentation. DBAG plans to invest another EUR 120 million per annum during the current and 2 subsequent financial years. This translates into an increase of around 40% compared to the 3 previous financial years. Thank you very much for your attendance.