RCM Beteiligungs (RCM) is primarily a residential property developer focusing on the refurbishment of assets in the area of Dresden, Saxony. Additionally it invests in financial assets. RCM acquires low to medium value residential multi-family homes and modernises them. The objective is to achieve rent increases and an appreciation of the asset value. RCM realises value by selling the asset and re-investing in new real estate assets and opportunistic financial participations. While the real estate business accounted for 89% of revenues and represented 70% of the balance sheet total of €55m in 2016, the financial holdings and participation business represented 11% of revenues and tripled in value to €5.5m.
RCM’s property business is focused on the Dresden area, but it also holds some legacy assets in other selected locations. RCM adds value through sourcing attractive assets with the potential for profitable refurbishment and reduction in vacancies. Valuation improvements are crystallised through asset sales, with cash largely being recycled into new opportunities. In addition to real estate assets, RCM acquires shares and financial investments it considers to be undervalued.
RCM has diversified its real estate income streams, which comprise recurring rental income and income from asset sales, with income from valuation gains from its financial investments and dividend income. The combination of the business activities allows RCM to exploit opportunities in both segments. Its significant shareholding in KST Beteiligungs follows a similar ‘value approach’ in the capital market as RCM does in the Dresden real estate market. The diversification has led to stable EBIT margins of more than 35% since 2014.
RCM is trading at a trailing P/E ratio of 24x, which is a premium to the peer group. We suggest RCM’s current valuation reflects an improved outlook given the recent stability of its operating model and the net profit progression over the last three years. RCM now needs to confirm these expectations. On a P/BV multiple, RCM trades at a discount to the peer group, which, we believe, is due to a significant difference in the size of the company.