1. Company
Hungary-based Appeninn (BUD:APPENINN, Financial) is a publicly traded property leasing firm specializing in class A and B offices, retail property and tourism. Having a 10-year track record, established after one of the worst financial crashes, which drastically decreased the once thought safe real estate prices and pulled up financial growth globally, the holding now seems to be on a growing trend.
In the last two years, institutional investors such as Konzum, BDPST Zrt. and OTP Real Estate Investment Fund have acquired a 57% stake in the business.
A new regulation by the Hungarian government permitted real estate investment trusts as a form of a tax-efficient investment trust to materialize.
New reforms on taxation of dividend income to vivify residential investment may also be a prosperous sign. According to management, by the year 2022, Appeninn should become a REIT. It should pay a dividend starting in 2020.
It also has a very optimistic plan to multiply its assets in the next three to four years. Last summer, it bought 18 retail stores (with a leasing agreement with Spar, a well-established Hungarian retail chain) for 14.5 million euros, and it achieves 12.7% rental income on the purchase yearly.
Share price as of May 18, 201p: 468 Hungarian forint
Market cap: 70.18 million euros
Price-book ratio: 1.1261
Price-earnings ratio: 3.8
NAV/share: 1.31 euros
Shares outstanding: 47,371,419
Earnings per share diluted (euro cents): 36.53
2. History
There is no fancy, voluminous history for this company. Due to regulations, REIT as a corporate structure was not an easy-running road until 2018. The asset management Plc was set up in 2009 and traded since 2010 on the Budapest Stock Exchange.
The story became gripping after Konzum Plc bought a large stake in the company. Konzum Plc is connected to Lorinc Meszaros, who also owns Opus Global. Meszaros is a controversial but rather successful businessperson in Hungary who will be discussed later under the "risk" section.
Since then, the share price jumped to 1,000 forint from 220, then started to sink. For almost one year now, shares related to Meszaros have been in bear market territory. Despite the thriving underlying businesses, common shareholders punished the equities (Opus, Konzum, Appeninn and CigPannonia).
Pessimism was preceded by the madness of the crowd. Shares of Opus were trading around 800 forint, while the underlying business was worth about 200 to 250 forint per share. Now, trading has seen a 180-degree reversal. You can buy the same share at 400 forint, while the underlying business is worth around 522 forint. These stocks are traded below their book or asset values, mostly with low price-earnings levels (under 10). The company has experienced 40% revenue growth from 2017 and net asset value per share growth of 65% in a year. Despite that, the stock prices sank 28.4% in one year.
3. Financials
| APPENINN (EUR mn) | 2018 | 2017 | 2016 |
| Revenues | 7.006 | 4.933 | 4.63 |
| Cost of revenues | 2.803 | 1.420 | 1.777 |
| EBITDA | 19.022 | 4.407 | 2.729 |
| Net income before taxes | 18.533 | 3.289 | 1.695 |
| EPS (EUR cent) | 36.53 | 6.53 | 6.82 |
| Current Assets | 7.191 | 9.222 | 4.163 |
| Cash and cash equivalents | 2.969 | 8.758 | 1.152 |
| Long-term debt and leasing obligations | 39.741 | 32.676 | 32.272 |
| Short-term debt and leasing obligations | 7.655 | 1.702 | 1.521 |
| Number of employees | 24 | 19 | Â |
| Interest expenses | 1.142 | 1.105 | 0.819 |
| NAV/share | 1.31 | 0.79 | 0.71 |
| Shareholders equity | 62.286 | 32.187 | 28.207 |
There is not enough long-term data to predict future growth potential by using DCF or EPV models, so here the value of the underlying assets (properties) and cash-flows from operations are mostly used.
The growing cost of revenues is attributed to dynamic expansion. In 2018 the holding acquired three "A" category office buildings and 18 retail premises. It also bought 75% of a resort near lake Balaton called Club Aliga and retail property in Miskolc for development purposes. These new picks are going to boost the revenues for this year.
With a 95% occupancy rate and the new acquisitions working well, the company’s optimistic plan to double its revenues by business year 2019 can be carried out.
According to GuruFocus, the Graham number of this equity is around 1080 forint. The market value of its diversified real estate portfolio (retail, office, logistics and development) is valued by two independent firms at 117 million euros. Within a year, the market value of their investments almost doubled.
The return on assets is on average between 8-12%.
3.1 Moats
The company, despite its young age, appears to have a durable competitive advantage. Its main moat is the cost of the assets and the yield on cost. After the crash, the real estate bubble burst and provided a tremendous possibility to buy cheap. In the last five to six years, real estate prices gained on average 9% per annum. Appeninn predicts a 3% per-year gain for future valuations, and rents out at an 8-12% yield yearly. The real advantage, however, lies in the share price. Investors can buy this business at a 70 million euro market cap, while it has an 8-12% yield on the 117 euro market value.
The future yield on cost would therefore be around 13-14% (considering zero growth). If the company pays 90% of its net income as a dividend, shareholders may own a stock with a 10% or greater dividend yield later.
Second, access to affordable financing is also benefiting the company. OTP bank, which owns an over 5% stake in Appeninn Holding, or some of the banks (such as Takarekbank and MKB Bank) linked to Meszaros Group, can provide inexpensive debt to the firm.
Today, it pays 3.11-3.19% interest on its borrowings, while its last transaction (18 retail buildings, rented out to Spar) ensures a 12.7% yield on cost.
4. Management
The management does not overpay themselves; they have an emphasis on expansion so they do not plan to repurchase shares or pay dividends in the near future. There is a possibility to raise capital by issuing new shares or selling properties, too. The returns on invested capital indicate that the management is doing well.
None of the members of the management team will be named here because it is not relevant. Real estate is not an overly complicated business, and Hungarian professionals are not internationally recognized. Institutional investors own more than 50% of the Asset Management company via common shares. They likely have the same interests that retail investors have.Â
The doubling market value of the portfolio is a sign of effective management.
5. Valuation
Net asset value per share is 425 forint. However, this is the price that the company has paid for its properties previously. Those investments have since appreciated by 76%.
The Hungarian analyst estimate is around 750 forint (this is also the current estimated market value of its assets).
If the debt from the market value of assets is subtracted, it has a share value around 500 forint today. This is the amount of cash that would remain if everything were sold and borrowings were repaid tomorrow. According to a conservative valuation method, the security is worth around 688 forint. The current share price at 468 forint represents a 47% margin of safety.
Potential investors can achieve a 13-14% yield on cost today (imagine buying offices at a "crash" discount and renting them out in a prosperous economy).
6. Risks
As mentioned above, most investors consider Meszaros stocks as high-risk, speculative trades. While the underlying businesses are growing at a fast pace, many see them as a conspiracy theory against retail investors due to the recent decrease in share prices.
I do not value a stock according to the price of its common shares but really like discrepancies to research.
Practically, it does not make sense to buy empty or undervalued companies and contribute well-working businesses to these firms just to later destroy shareholder value (while owning the same shares as your business partners).
Regarding emerging markets, it is a common belief among many that there are additional risks (like fraudulent activities, lack of transparency, currency risk and so forth). The most ubiquitous risk must be the currency risk. According to my research, other factors listed above have a low probability of happening.
7. Outlook
Property prices are mostly affected by the underlying economics of the country. Economics in Hungary include a healthy, growing GDP at 5.2% and housing market boosted by the government.
Due to a weak forint, currency risk today is negligible. A low unemployment ratio, well-trained and cheap workforce and attractive taxation are appealing to multinational companies.
Appeninn has also a stable relationship with its clients and an above-average occupancy rate at 95%.
Overall, at this price, the security may be a stable and fruitful investment for the long term. This is a rather low-risk, high-uncertainty business.
Disclosure: I do own shares in this company as a long-term investment.
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