Description

Catella is a Swedish asset manager & property broker that I feel is quite cheap, selling at around ~8x trailing earnings and ~6x on an EV basis.  Given that it only trades at a modest premium to tangible book value (with asset light core businesses) the risk-reward seems favorable.

You might already be assuming that assets are bleeding out but in fact AUM is experiencing nice inflows which hardly seem to match up with an EV/AUM around 1% even before giving any credit for a property brokerage likely also worth ~1/2 the enterprise value.

In short, Catella’s valuation seems to imply a firm in distress rather than a couple of growing capital light businesses sitting in a very healthy balance sheet.

If Catella simply traded at ~12-13x trailing EPS plus net financial assets that would imply considerable upside, and even that valuation might sound pretty interesting for a growing asset manager.

Background

Catella used to be called Scribona and was in the IT product business.  That went badly and people lost money. In 2008 those assets were sold leaving the listed company effectively as a cash-rich shell with a tax asset.

Enter Johan Claesson, a rich Swede with a real estate background, who took control and moved to focus the firm towards property related operations.  Johan helped to engineer the acquisition of Catella in 2010 which at the time was principally a corporate finance/property brokerage business. Since then Catella’s brokerage has produced relatively consistent cash flow while their asset management division has grown substantially and become increasingly center-stage.

Today Catella basically has three businesses: asset management, brokerage, and private banking (in that order of importance).  This last category optically complicates their balance sheet but is not very relevant from a valuation perspective.

Asset Management

Catella has three asset management categories: systemic funds (biggest & growing), real estate funds (middle-est & growing fast), and traditional mutual funds (smallest & treading water).

Informed Portfolio Management (“IPM”)

Between 2011 and 2013 Catella bought ~50% of IPM for a relatively small (in hindsight) consideration.  In the subsequent years, IPM has grown fast and become an extremely important profit contributor to the group.

In 2017 Catella negotiated to buy an additional ~11% of IPM at an implied valuation of ~2bn SEK.  This implies that their ~61% stake in IPM is worth ~1200m SEK, which is notable since that is nearly Catella’s EV and is only one part of one segment.  The business seems to be doing fine, with Q4 inflows of ~6bn SEK.

The most important IPM product is their flagship strategy Systematic Macro.  At least on a headline basis, the fee structure seems to be ~1.5/20 and I’ll leave it to the reader to run some possible upside math for what a good year (~15% gross) might produce for the GP.  It seems that the strategy’s selling points might include an apparent ~30% return in 08’ and theoretically uncorrelated performance.  As far as I can tell, the strategy was only up ~2% in 17’ but was up ~3% through February 18’.

Real Estate Funds

Catella has recently been very successful in growing real estate AUM, but heavy re-investment in growth (hiring, launching funds, etc.) has muted some of the P&L impact.  This is starting to change, and with long-lived contracts I’d anticipate this segment maturing with strong and durable margins.

Catella actually seems fairly well suited to grow in this category, since their property broker largely deals in institutional sized investment properties and they have a meaningful in-house property management business.

Mutual Funds

Catella’s mutual fund segment has had a rocky couple years and still faces comparable headwinds to peers in the industry, but this category of products is no longer a huge portion of their business value.

A couple years back, a few PMs defected to launch independent funds which (combined with underwhelming performance) drained some AUM and profits.  However, as it stands today the AUM in this category is basically stable and actually had net-inflows of ~800m SEK in Q4 (flat net flows in 2017).   

These three product categories taken together (estimated proportions from IPM ownership) earned ~310m SEK pretax in 2017 (some performance fees).  In 2017, AUM inflow was ~9bn for IPM, ~8.5bn for real estate, and ~0 for mutual funds. As such, it isn’t crazy to think 2018 earnings may surpass these levels.

Annualized guidance for just the IPM & mutual fund businesses based on fixed fees/fixed expenses is ~280m SEK (some of this would be backed out for minorities in IPM) while real estate funds contributed about ~70m SEK in EBT for 2017.  As such, the segment should still have very healthy results without performance fees, but if IPM can put up a good year that could really move the ball down the field.

In any case while I wouldn’t presume to tell a bunch of asset managers how to value an asset manager, how does this sound:  Given their growing AUM in the two largest product categories - perhaps ~10x trailing PBT is reasonable. At that level, the division would be worth about ~3,100 SEK.  That’d be about ~2x the EV (albeit this doesn’t deduct corporate overhead).

Property Brokerage

Catella has what seems like a nice property-broker/corporate finance business that largely deals in Swedish and French assets.  The business is high quality by traditional metrics (high ROIC) but relatively small by international standards and lumpy quarter-to-quarter.  Below are the segment’s pretax earnings for the past 5 years:

The business has grown revenues a tad in this period and EBT margins have started gravitating around ~10% but this division is unlikely to be the next CBRE.  Comps in the sector can trade at healthy levels but I won’t pretend that it deserves a global brokerage multiple. Perhaps ~10x trailing PBT is fair, which would imply a valuation of ~700m SEK.  This is still meaningful against an EV of ~1,400m but clearly less relevant than the asset management segment.

Private Banking

This segment doesn’t move the valuation needle much but it does optically distort the balance sheet.  As many readers will appreciate – even owning a small, super-well capitalized bank can do that to a “normal” business.

Private banking/wealth management currently runs at breakeven levels, although on the bright side it has been growing its own AUM as a pretty nice clip.

It is possible that at some point this business inflects to produce relevant profits and a decent ROE – but so far it has only managed to go from losses to breakeven.  Fortunately for a business taking deposits it doesn’t seem to add much risk, as most of the banking assets are just cash.

This division also has a credit card issuer with an interesting model but Catella recently announced that it would de-emphasize that segment/explore strategic alternatives in order to better focus on their core asset management business.

The whole private banking division isn’t very meaningful to Catella’s valuation so lets illustratively use ~50% of an estimated TBV (I’m very loosely approximating that TBV at ~300-400m SEK).

Balance Sheet

Sorting out Catella’s balance sheet is a bit tricky (I’m estimating a couple figures), but it basically just involves stripping out the bank.  The net financial assets on their books seem to look something like this:

Over time I’d expect for some of the excess balance sheet assets to shift towards real estate co-investments.  That is likely synergistic with Catella’s asset management segment (seeding, developing projects, etc.) and they’ve stated an internal target of 20% IRRs (we’ll see...)

These initiatives are leading the company to retain most of their current earnings, but they’ve nevertheless continued to increase their dividend (currently ~4-5% yield) and have stated a target to:

“transfer the Group's profit after tax to shareholders to the extent it is not considered necessary for developing the Group's operating activities, and considering the company's strategy and financial position. Adjusted for profit-related unrealized value increases, at least 50% of the Group's profit after tax will be transferred to shareholders over time.”

Valuation

I think Catella is quite cheap and some simple arithmetic might look like this:

I really don’t think the above figures are too crazy and I’ve definitely read decent pitches advocating the purchase of growing asset managers at a ~12x PE net of cash.  Catella’s current valuation metrics (~8x P/E, ~6x vs. EV) meanwhile seem like somewhat distressed levels.

Management appears quite capable, with the CEO having made substantial headway since taking over in 2013.  Johan (Chairman) has thus far directed an intelligent business strategy, seems quite involved, and has treated shareholders very fairly (clear communications, increasing dividends, etc.).  Catella’s core business is in an attractive industry, is growing with an excellent ROIC, and sits in a very healthy balance sheet.

As such, at current levels Catella seems to offer an attractive risk-reward, where the most notable risks include the types of things that can go wrong with an asset manager.

Disclosure

Have ownership interest in Catella AB at the time of this write-up that can change at any time without notice. There are no plans to provide future updates on the authors buying or selling activities for this or other stocks. The author may buy or sell shares of Catella AB without notice for any reason at any time.

Catalyst

Perhaps growing AUM and/or continued earnings growth