CapMan extensive report: It's time to redeem the potential

Translation: Original published in Finnish on 10/20/2024 at 6:59 pm EEST

Under the new strategy, CapMan’s business operations have turned to strong growth and profitability has improved clearly. Even though the challenging market situation throws a spanner into the works of new sales in the short term, we believe the company has an excellent position in its sector. As a result, CapMan is well positioned to continue its healthy growth also in the longer term, just like the rest of the asset management sector. Relative to this, the stock is moderately priced, so the expected return is sufficiently attractive. We therefore reiterate our target price of EUR 2.1 and Accumulate recommendation.

An asset management house focusing on alternative investment products

CapMan has two business areas: the Management Company business and balance sheet investments. Previously, the business also included services outside the fund business, but these will be permanently exited during the current year. The Management Company business focusing on alternative funds is the core of CapMan’s business, as balance sheet investments are mainly made in funds managed by the company.

After the strategy renewal in 2017, CapMan has undergone a significant transformation as the company's ownership base and key personnel have largely changed, the product offering and customer base have expanded, and the performance of the funds has improved. As a result of these factors, the company’s assets under management and net sales have turned to strong growth. Profitability has also seen a clear improvement, which has also led to a positive development in the result based on recurring feed from the Management Company business, which is key for investors.  However, weak new sales have slowed down profitability development over the past two years.

Despite short-term uncertainty, the company’s long-term earnings growth outlook is favorable

In the short term, the challenging market situation and lackluster demand for alternative investments puts pressure on new sales, but we expect CapMan's fund assets to continue to grow clearly in the coming years, supported especially by real estate products and forest funds. Overall, we expect CapMan's EBIT to grow by an average of 9% in 2024-2027. In addition to the Management Company’s improved profitability, performance is supported by investment income, which is expected to increase from the muted level of 2024. Around half of the expected earnings still come from investment income, and the weight of carried interest income is significant (>20%). This highlights that CapMan’s value development and share return are strongly linked to the performance of the funds the company manages. As typical for the sector, the dividend stream remains abundant while investment needs are low.

The company is priced below its value on the stock exchange

The sum of the parts provides a good starting point for CapMan’s valuation, as its earnings components differ, e.g., in terms of risks. The value based on our sum of the parts calculation is approximately 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. A lot of value is also 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 predict that the expected return in the coming years will be around 10-15%, which we find attractive enough to justify a positive recommendation.