Persistent Weakness in Real Estate Market Will Pressure Long-Term Prospects for This Asset Manager

Catalysts

About Branicks Group

Branicks Group is a real estate asset manager focused on commercial office and logistics properties, operating institutional mandates and managing assets throughout Germany.

What are the underlying business or industry changes driving this perspective?

• Despite a strategic focus on logistics and office assets, the persistent weakness in the German real estate transaction market is expected to hamper revenue growth and asset values for the foreseeable future.
• The rising vacancy rates in both the logistics and office portfolios raise concerns about future rental income and the company’s ability to sustain net operating margins.
• Large write-downs, such as EUR 178 million from asset sales at lower-than-book values, signal ongoing pressure on asset valuations and potential further impairments. This could negatively impact future earnings.
• Disposals of core assets to manage debt levels are reducing recurring rental income, posing risk to long-term cash flow generation and net profit targets.
• Economic headwinds, including lengthy transaction processes and delayed decision-making among institutional investors, are likely to depress management and transaction fees. This exerts additional pressure on top-line revenue.

Assumptions

This narrative explores a more pessimistic perspective on Branicks Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Branicks Group's revenue will decrease by 26.9% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -129.0% today to 9.8% in 3 years time.
• The bearish analysts expect earnings to reach €8.6 million (and earnings per share of €0.11) by about December 2028, up from €-289.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €43.3 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.9x on those 2028 earnings, up from -0.5x today. This future PE is greater than the current PE for the GB Real Estate industry at 11.0x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.98%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• Successful lease negotiations and new long-term contracts in both office and logistics segments could reverse rising vacancy rates, leading to more stable or even increased rental income and improved net margins.
• Continued deleveraging and proactive management of financial liabilities, as demonstrated by significant debt repayments and strengthened covenants, could lower interest expenses and thereby support a faster return to profitability and stronger earnings.
• A rebound in the German real estate market, particularly if institutional investor demand grows for quality logistics and office assets, could bolster asset values and transaction fees, driving higher revenue and improved asset valuations.
• The integration of VIB Vermogen AG and realization of operational synergies may enhance cost efficiency, governance, and cash flows, positively impacting group earnings and long-term financial stability.
• Persistent high occupancy rates and long-term lease agreements for the majority of Branicks’ portfolio, along with stable rent indexation, can provide reliable recurring income streams, supporting both revenue and net profit targets over the long term.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Branicks Group is €1.7, which represents up to two standard deviations below the consensus price target of €4.21. This valuation is based on what can be assumed as the expectations of Branicks Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €8.0, and the most bearish reporting a price target of just €1.7.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be €87.7 million, earnings will come to €8.6 million, and it would be trading on a PE ratio of 21.9x, assuming you use a discount rate of 10.0%.
  
• Given the current share price of €1.89, the analyst price target of €1.7 is 11.3% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.