Nikada
Investment Thesis
Since our last article, real estate company Branicks Group AG (OTCPK:DDCCF) has made steady progress in their recovery, including a successful debt restructuring and asset disposals. While both the stock price has recovered by over 35% and the bond prices have recovered by around 50% since our last article, there is still significant risk. We believe that the bonds are still undervalued and have an attractive risk/reward profile.
Our Last Article
In our last article, we argued that the lows the stock and the bond prices have seen around 6 months ago were a result of heightened pessimism around the stock and the industry as a whole, presenting an attractive investment opportunity. During the time our last article was published, the company was still in the midst of negotiations with several lenders, was just downgraded by S&P, and struggled to show high-value property sales. We believed that these circumstances, combined with heightened pessimism around the market, were temporary, positioning both the stock and the bond for recovery.
Since Our Last Article
Debt Restructuring
In our last article we discussed the company being in negotiations with certain creditors regarding ongoing loans. Following these negotiations and a restructuring process in court, the company announced their significant restructuring on 26th March 2024. The company was able to postpone maturities of promissory notes worth €225m, repay €40m of their bridge-loan and postpone the rest of the €200m bridge-loan maturity until the end of 2024.
Property Sales
Since our last article, the company announced several property sales.
Including a sale of a portfolio for €99m between Branicks Group AG and its daughter VIB, in total, the group reports sales of over €300m for the first half of 2024.
Furthermore, the company reports that there are further sales in the pipeline and that it still expects to reach the goal of €500m – €600m for the full year 2024.
Using proceeds from property sales, the company has paid back a further €40m on their bridge-loan, reducing the total outstanding amount for the bridge-loan to €120m.
Operations
For the first quarter of 2024, the company has reported operational results in line with expectations. The company has reported €9m in FFO and cash flows from operating activities of €18.6m. Furthermore, the company has reiterated its guidance for the full year of 2024, with a projected FFO for the full year of €40m – €55m.
Based on the company’s action plan “Performance 2024”, the company also continues to reduce OPEX. For the first quarter of 2024, the company reports a reduction of YoY OPEX costs of 7%.
With operations being reported in line with expectations and the company clearly showcasing its ability to continue to produce positive cash-flows and willingness to cut costs, we believe that the operational results contribute positively to the recovery.
Price Action
In our last article, where we stated following:
With common stock and bonds currently trading at extremely distressed levels, (Branicks) presents favourable risk/reward profiles for brave investors.
Since our last article, both the stock price and the bond price have recovered from their lows. The successful debt negotiations and the steady process on property sales and debt reductions allowed the company to regain some of their trust from the market.
Branicks Bond Prices (Boerse Frankfurt)
The bond price has recovered from less than 30% on the dollar to over 45% on the dollar, since we wrote our last article, stating the following:
The bond is displaying an (…) attractive investment opportunity.
This represents a return of over 50% in less than 6 months since we gave our buy rating for the bond. We believe the price action was primarily driven by the successful debt negotiations, paired with ongoing property sales and positive cash flows from operations.
Branicks Stock Price (SeekingAlpha)
The stock price too has shown a recovery over the last couple of months. From a price of $1.6 at the date of our last article to $2.2 today. This represents a return of over 38% since we gave our buy rating for the stock just 6 months ago. We believe the stock to also have benefitted from debt negotiations, property sales and positive cash flows from operations.
We believe, furthermore, that the stock represents a steeper risk/reward profile due to the nature of stocks vs. bonds, meaning that in the best-case scenario for Branicks Group AG, the stocks should outperform the bonds. This means however that at the same time the bonds are a safer investment in case of further distress.
Conclusion
Given the ongoing recovery and successes on debt restructuring and debt reduction, we believe that at current prices both the common stock and the bond of Branicks Group AG could be investments with favourable risk/reward profiles for brave investors. While there is still significant risk of total loss, especially for the stock, we believe that the process over the last 6 months has been a significant de-risk for investors.
We reiterate our buy rating at these prices for both the stock and the bond, with the addition that we still believe the bond to be the more attractive vehicle from a risk/reward profile. While the company’s progress over the last 6 months is a de-risk, the price increase in the stock, especially, simultaneously adds further risk for investors.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
