Adler / Aggregate - A Change of Heart?
All,
Please refer to our unchanged Adler analysis here and Aggregate analysis here.
Maybe we did not see the Aggregate news in quite the right light the other day. While Aggregate have nothing in Germany for Bafin to go after, Adler of course do. Even the Aggregate funded report by Hogan Lovells, published earlier this week, and the previous Bulwiengesa report on admittedly the wrong side of the book have done nothing to prevent that, but disclosure rules differ between Luxembourg and Germany. Also, Adler’s accounting practices have been even more aggressive than Aggregate’s - at least on the main Aggregate projects.
What’s the real news:
- The Bulwiengesa report supported the value of the rental assets, but that had already been supported by several transactions and our own peer comparison.
- That Bafin would investigate Adler has been a risk for a long time. But it had become more likely following the recent postponement of Adler's publication date for the 2021 annual report.
- As a result, shares dropped sharply and we bought a 2% position at 9.50 the other day.
- Earlier this week, the Hogan Lovells report commissioned by Aggregate appeared to support the chances that perhaps no investigation was coming after all.
- Now it is here.
Fundamental value:
- Shares are trading at a deep discount to any NAV we can use.
- Once again, we think that a bid for the ADO assets should leave Adler (then effectively Consus) with some €500m to €1bn in net cash.
- When we correct the Consus balance sheet by a hefty €700m (to bring it back in line with 2020), consider the approx. €900m of remaining deferred tax liabilities and if we write off the remaining receivables by 50%, then we arrive at an EV of Consus today of approx. €1.9bn.
Subtract the market cap of €1.2bn and we have €700m of excess value above the current share price.
Limited fraud:
- Overall, we do not see particularly material wrongdoing in the greater scheme of things. There is the odd transaction involving someone’s brother in law etc, that created equity out of thin air, but in a low rates environment, equity does grow from thin air.
- The extent to which attorneys will be able to argue that Gerresheimer for instance had not grown in value while under Schratbauer’s control will be minor, because that value growth is based on rates. Of course, Adler should have been more prudent (and honest), but on a 10bn balance sheet the equity created from those transactions only amounted to a few hundred million and not all of it can be proven fake unless the industry-wide practice for property valuation is called into question (which may well be a good idea, but would not allege fraud per se).
- There is no giant cash balance missing either. So no, Adler isn’t Wirecard.
The downside:
- If Bafin and their advisors do find ground for fraud, the state attorney steps in and that could result in high shareholder redress claims. Because shares have dropped from around €24 to €10, we consider €1.6bn of however valid claims for damages a downside scenario. Well in excess, if not 10x the the actual malfeasance that in reality seems to have taken place, but again, the regulator may call the accounting practice overall into question, which would have wider repercussions, but would add the €700m of value correction we have made above to the Consus balance sheet into the calculation.
- In any event, audit opinions would have to be withdrawn and that’s when the wheels come off. Above calculated €1.6bn of claims would slip ahead of the shares and banks would accelerate.
- So the risk is approx. 1/3 priced in - only. As this drags on, pricing could move to 50/50, which would imply some €8 per share, or 20% downside from today’s valuation, before it either drops €4 or rises to €16 - the latter more slowly, the former is an arithmetic best-case.
Positioning:
- We are slightly down. We are in the money on the two Adler positions and have so far lost on our Aggregate SSNs. Our interpretation that the market reaction to the KPMG induced postponement of the annual results may have been premature/overdone turns out to be false.
- We do not expect material news on the Adler investigation before Easter, but judging by our record of getting that right so far, there is at least a risk that Aggregate will soon also be subject to an investigation.
- While the Adler investigation is underway and confirmed, we consider our upside scenarios of a bid for the shares or for ADO or similar to be our of the picture. That makes the next move in the name quite binary.
- Aggregate propcos by contrast may still receive their refinancing in the coming weeks, which would be a huge gain for the developer.
-> On the basis of the above we will be considering our positioning in the next days to possibly take some risk off at Adler level while giving Aggregate a chance to refinance its opcos. We’ll sleep over it.
Wolfgang
E: wfelix@sarria.co.uk
T: +44 203 744 7003