Lloyd Fonds (DE:L1OGk) is accelerating its transformation into a leading asset manager in Germany with the proposed acquisition of highly regarded SPSW Capital. This follows the recent sales launch of its new business model, focused on open-end retail funds and targeting assets under management to exceed €5bn by 2023 (€1bn+ in 2019). While repositioning makes financials difficult to assess, this move gives reassurance as growth in assets under management is the stated driver of future earnings.
Busy Execution Of ‘Strategie 2019+’
Following the recent acquisition of Lange Assets & Consulting (€350m assets under management), which is subject to completion, the proposed takeover of SPSW Capital brings further scale (€650m assets under management) and complementary expertise to Lloyd Fonds’ reorientation towards open-end investment products. The deal (expected purchase price in shares and cash in the mid double-digit million range) is due to complete by next year, effecting also a new CEO (current company chairman as well as co-founder of SPSW) and a change of name to Lloyd Capital (subject to AGM approval). Meanwhile, the sales launch foran initial four retail funds is newly underway, supplemented by a reworking of the Lloyd Fonds brand. Repositioning has been supported by key management changes, including a chief investment officer from April, new anchor shareholders, notably DEWB, a listed private equity company, and first expansion from the company’s Hamburg base with office openings in Munich and Frankfurt.
2018 Results As Forecast
In view of such operational change, analysis of recent financial performance offers limited guidance. In addition, repositioning brings substantial one-off costs, eg in infrastructure, IT, and above all new staff. In 2018 these amounted to €2.5m, moving net profit firmly into loss, albeit in line with guidance and despite a late surge in real estate sales. Finances remained sound with €12m year-end net cash.
Valuation: Long-Term Appeal
After early investor appreciation of Lloyd Fonds’ reorientation (share price more than doubled after the arrival of new shareholders a year ago), consolidation is understandable in the absence of a quick earnings fix (guidance of 2019 break-even, albeit with risk of one-off costs) and possibly no dividend payout. Evident strategy execution enhances the prospect of exposure to the open-end funds market, which is attractive in terms of size, expected growth and high margins.
Business Description
Lloyd Fonds is repositioning as a leading asset manager with its own range of retail funds, digital portfolio management and individual direct asset management. It has over 20 years’ experience as an asset and investment manager in a range of alternative real assets, primarily in the areas of shipping and real estate.
Bull
Proposed broadening of business to become an active asset manager.
Ambitious targeted AUM growth.
New, experienced management and sound finances.
Bear
Execution risk in repositioning the company.
Markets for current activities remain challenging.
Regulatory risks.
Review Of 2018 Results
We reiterate that the current wholesale shift in Lloyd Fonds’ activities mitigates concern about the financial performance of activities soon to be superseded, although there is of course considerable risk in execution of the repositioning strategy. Moreover, the refocusing of management and array of one-off items, both accounting and restructuring-related, make it difficult to assess underlying performance, notwithstanding acknowledgement of persistent market pressures.
In 2018, the guidance had to be adjusted due to the implementation of the new business model. The shortfall was anticipated after H1 results and was largely attributed to €2.5m (€1.0m in prior year) restructuring-led costs rather than underlying trading, although shipping markets in particular did remain challenging. This accounts for the sharp rise in other operating costs (net), notably a doubling in H2 (see Exhibit 1), since the category’s other material items, asset impairments and valuation gains, broadly cancelled each other out. Predictably, there was an encouraging fall in H2 labour costs owing to 20% reduced headcount and lower severance payments (the comparative was inflated by settlement costs associated with the premature exit of the CEO following strategic disagreement). Lower depreciation reflected a change of accounting policy with the expense transferred to the finance result, while associates in 2017 was flattered by a €1.5m tax refund.
As for real estate, after a quiet H1, two sizeable transactions in December 2018 (see Exhibit 2) justified management confidence about macro factors. Disposals of an office building in Eindhoven and hotels in Hamburg and Sylt realised pre-tax annual returns of 10% and 11.5% respectively for fund investors over a decade’s ownership. Shipping, the other prime field, saw some improvement in charter rates but markets remain subdued with container tanker fleet oversupply. The company mitigates this by pooling 8 container ships, thereby stabilising income and optimising utilisation, and has agreed a flexible debt service until 2020.
