CapMan: Eyes firmly on the fund business

Translation: Original published in Finnish on 10/7/2024 at 7:50 am EEST

CapMan announced on Friday that it will sell its Service business for a 75 MEUR debt-free price. Even though the price was below our previous estimate, our view of CapMan’s share value remains roughly unchanged. This is particularly explained by our increased estimate of the normal level of carried interest income. We therefore reiterate our EUR 2.1 target price and Accumulate recommendation.

Strategy sharpened, but the price of the Service business was below our estimates

CapMan announced that it will divest its service business CaPS and focus purely on managing alternative funds. Thus, the arrangement sharpens CapMan’s strategy focus, which we consider positive. On the other hand, the 75 MEUR debt-free purchase price (including an additional consideration of 5 MEUR) was well below our estimate of the fair value of the business, so CapMan’s management’s view of the future of the business is thus more modest than our interpretations. This may stem from higher-than-expected investment needs in internationalization or a more moderate growth outlook for the business  than we estimate. However, the transaction seemed to please the market as CapMan’s share  rose clearly on the day the transaction was announced.

CapMan records a huge one-off income from the transaction

The sale of the Service business resulted in big changes in our earnings forecasts for the coming years. Firstly, we have included the one-off earnings impact of the transaction (EUR 0.33 per share) in our forecast for this year. Secondly, we have removed CaPS from our forecasts starting from Q4 as the transaction is expected to be completed this month. We also made small revisions to other operating estimates. However, the significance of these is modest, and most of the forecast changes concerning continuing operations mainly stemmed from income shifting between years. Our cumulative EBIT forecast for 2024-2026 (excluding the impact of the Service business divestment) remained almost unchanged.

After the transaction, the balance sheet has plenty of extra capital

CapMan will receive some 60 MEUR in cash from the transaction. We expect the company will use part of the sum to repay interest-bearing debts, but have not otherwise taken a position on how the funds will be used. As a result, our total profit distribution estimates for the next few years have decreased by roughly the amount of the Service business' result. However, our dividend forecast for this year increased, as CapMan’s Board of Directors estimated in the release that the upcoming dividend proposal will be EUR 0.14 per share. In any case, CapMan has liquid assets well above our current profit distribution forecasts. The company said it would use the additional funds either to grow the Management Company business or, in the absence of attractive acquisition/investment targets, for additional profit distribution.

Expected return is sufficient

The sum of the parts provides a good starting point for CapMan’s valuation, as the company’s earnings components differ, e.g., in terms of risks. The value based on our SOTP calculation has remained unchanged at approximately EUR 2.1, even though the price from CaPS was somewhat below the value we previously gave the business. This is particularly explained by our increased estimate of the normal level of carried interest income. Our target price is in line with our sum of the parts, and despite the price rise following the transaction, we still consider the risk/reward ratio sufficient to justify a positive recommendation.