CapMan Q3'24: No drama behind the weak figures

Translation: Original published in Finnish on 11/8/2024 at 8:50 am EET.

CapMan’s Q3 result fell sharply short of estimates, but in our view, there was no major drama behind the figures, as the miss came from investment operations. Despite the continued challenging fundraising market, we continue to expect strong earnings growth in the coming years, driven by a gradual increase in new sales as well as carried interest and investment income. Relative to this, the current pricing of the stock is moderate and offers the investor a good expected return. Therefore, we reiterate our Accumulate recommendation and EUR 2.1 target price.

Negative investment returns decreased the result

CapMan published weak Q3 figures yesterday. The Management Company business developed better than we expected, as the lower costs allowed profitability to rise higher than our forecasts. On the other hand, management fees were lower than expected, slightly reducing the positive impact. However, the sharp earnings miss was again explained by investment returns, which, contrary to our expectations, plunged into the red. This was purely due to exchange rate movements, so there was no material change in the valuation of the assets one way or the other. Overall, the Q3 report was fairly neutral, although the sales outlook remains quite challenging. However, relief may already be on the horizon, as other Nordic countries have already seen an upturn in real estate transaction activity, which is also a prerequisite for a proper start to new sales.

Small tweaks to the forecasts for the coming years

Overall, our forecasts for CapMan's Management Company business over the next few years remain relatively unchanged, with only minor adjustments. However, we have lowered our adjusted EBIT forecasts for both this year and next year due to downward revisions to our estimates for investment income and carried interest income.

In terms of new sales, we remain confident in the long-term competitiveness of the company's products, but we expect the challenging market situation to slow down fundraising for at least the first half of next year. However, the long-awaited increase in carried interest income should  support earnings significantly in the coming years, and as the funds continue to perform well, the outlook for the longer term is also strong. At the same time, the profitability of recurring fees should gradually increase as assets under management grow. The last quarter did not bring any material new information on fund returns, so our assumptions in this respect have not changed. We continue to believe that the company's normalized EBIT level will be around 40 MEUR, which is already reflected in our 2026 earnings forecasts. In the current year, the level is still well below the level, as new sales are sluggish and investment income and carried interest income are well below average.

Expected return is good at current share price

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 is unchanged at around EUR 2.1 per share The majority of CapMan’s value consists of the Management Company business, which receives support from low investment needs and a good growth outlook. In addition, a lot of value is committed to balance sheet investments. The expected return for the share in the coming years consists, in turn, of dividend yield and earnings growth, as we believe that earnings-based pricing multiples are elevated, which affects the equation negatively. Acceptable multiples are depressed by the relatively high risk level of the investment portfolio. We expect the expected return in the coming years to be around 10-15%, which we find attractive enough to justify a positive recommendation.