Subdued 2019 but strong midterm outlook
FY 19, Traumhaus reported total sales of EUR 74m (+12% yoy), however c. EUR 6m less than previously anticipated. Net sales (i.e. incl. changes in finished goods and work in progress) rose by 60% yoy, to EUR 86m, also slightly shy of the envisaged EUR 90m. This was mainly due to end of period accounting effects as the notarisation of property sales at three projects was delayed considerably due to a lack of staff at the land registry offices, amid the corona pandemic.
The restrictions imposed in the course of measures to contain the corona pandemic have further extended these bottlenecks. As such, revenues from the sale of land, for which preliminary contracts in the amount of EUR 16m had already been concluded, as well as from construction projects worth EUR 12m could not yet be booked as revenue and earnings in the 2019 report. Adjusted for these, we estimate that our forecast would have been exceeded by approx. EUR 4m. However, whilst the lack of these revenues was a burden to Traumhaus’ 2019 results, it creates ample upside potential in the years to come, in our view.
EBITDA of around EUR 8m was on a par with the previous year, also missing company guidance, which had been envisaged in the magnitude of EUR 13m. Besides the shortfall in (high margin) revenues, extra costs for a multi-family house project were burdening the company’s 2019 results. That said, more excavation work than planned was required to build an underground car park. In view of the general sharp rise in construction costs, which we estimate to have had an impact on EBITDA of around EUR 0.8m. Consequently, EBITDA margins declined by some 500bp yoy, which however should be gradually reversed in the forthcoming years (EBITDA margin improvement of c. 300bp between 19-22E despite further growth related caveats).
Outlook: In our view, the structural growth elements of the German residential building market remain intact and even improving in our view. As such, we expect Traumhaus’ growth opportunities to improve significantly in the midterm.
Strong order backlog: Traumhaus plans to complete around 250 residential units in 2020, of which around 85 are in the recently created business segment for apartment buildings. The high order backlog thus creates high visibility into Traumhaus 2020E revenue forecast, which is why we feel comfortable with our new sales projection of EUR 88m in 2020E and stellar CAGR sales of 17% between 2019-2022E.
Competitive edge: Affordable houses as constructed by Traumhaus remain highly desirable by an ever increasing target group of young families. Especially in an economic downturn, price becomes a key selling argument. Here, Traumhaus can bank on its long lasting track record of building standardized properties at competitive prices. Marketing of major projects is already showing signs of success, and there are advance reservations for 700 properties in the city of Mannheim, Germany.
Upward trend in land prices: The scarcity and thus further upward trend in land prices will continue to guarantee continued high profitability. We expect a similar trend to that already seen in the USA to establish itself on the real estate market in Germany: many young families are once again moving to suburbs and small towns further afield with good transport links to the inner cities of metropolitan regions. It is precisely there that Traumhaus has already built up an extensive portfolio of properties.
Change in regulations: A change in the building law is also providing additional tailwind. The “model type approval”, has now already been introduced by two federal states (Hamburg and North Rhine-Westphalia), is a tailor-made fit for the “Traumhaus concept” of standardized residential units. This will enable building applications to be approved much more quickly throughout Germany in the near future.
On the downside however, we remain skeptical about the establishment of the planned robot production. On the one hand, building permits are still pending here as well. In addition, in view of the current full utilization of capacities, it will probably take longer before this innovation is integrated into the production process and can provide significant impetus for the Group's financial statements. From our point of view, a break-even for this production line seems realistic from 2022E at the earliest.
Housekeeping issues and returns analysis
Looking at Traumhaus balance sheet one realizes the relatively high amount of net working capital tied up in the business model. In fact, Traumhaus does not need a lot of fixed capital to run the business. The chart below depicts that c. 80% of capital employed is in the form of w/c requirements, mainly inventories (purchase of properties or land) or trade receivables (late settlement of disposals).
Unlike other companies, where higher w/c requirements purely mean more capital tied
up in the business, higher working capital at Traumhaus should rather be regarded as
good news as
Properties and land still have a positive time value of money, where the value increases (rather than decreases) over time and
Higher inventories are a safe indicator for future sales and earnings at Traumhaus In 2019, Traumhaus acquired building land in the Frankfurt/Main metropolitan region, worth EUR 32m. In addition, further plots of land were pre-contracted worth EUR 11m, the values of which will not appear on the balance sheet until 2020. On the downside, receivables increased due to delays in the handover of properties, and with it, later collection of receivables than previously assumed.
In sum, 2019 numbers can be regarded as slightly disappointing. However, the company’s growth prospects and competitive positioning as a provider of standardized affordable housing remain intact in our view. On the positive, Traumhaus has resumed paying a dividend, making the investment an attractive dividend play, yielding between 3-5% between 2020E and 2022E. However, given the massive investment into property and land, balance sheet looks slightly stretched in our view. Given the appreciating nature of the tied up w/c, net debt/EBITDA of 6-8x (2019/2020E) does not raise concerns with us. Still, in order to pursue further growth opportunities, we would regard a rights issue as feasible. At a side remark: An increasing free float by diluting major shareholder Otfried Sinner would yield further positive momentum to the equity story as this would make the stock more fungible in the future.