Value Investing Seminar July 2009
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Value Investing Seminar July 2009

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Presentation made in Molfetta Italy in July 2009. Topic: value investing and the case for investing in Vicat - a French cement manufacturer.

Presentation made in Molfetta Italy in July 2009. Topic: value investing and the case for investing in Vicat - a French cement manufacturer.

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Value Investing Seminar July 2009 Presentation Transcript

  • 1. VALUE INVESTING IN EUROPE DON FITZGERALD, CFA dfitzgerald@tocquevillefinance.fr Fund Manager, Tocqueville Value Europe 6th Annual Value Investing Seminar Molfetta, Italy July 14-15, 2009
  • 2. Tocqueville Finance Tocqueville Finance & investment philosophy Some investing principles re-visited Case study: Vicat 2
  • 3. Tocqueville Finance
  • 4. Tocqueville Finance Established May 1991 (AMF [French Financial Securities Regulator] approval No. GP 91-12) International footprint - France, Switzerland, USA Independent company with capital divided between European (92%) and US (8%) shareholders 2 business lines: Asset Management and Private Wealth Management 53 staff in Paris and 8 in Geneva €1.5bn of assets under management at 30/6/2009 A range of 9 funds 4
  • 5. The investment philosophy Fundamental analysis of companies based on a bottom-up approach No geographical or sector bias Non-benchmarked, contrarian, value-oriented approach Interest in all market caps • History of expertise in small and medium caps (€ 100 m - € 5 bn) Low portfolio turnover Marginal use of derivatives (covered calls…) 5
  • 6. The investment philosophy Profile of stocks in which we invest Quality companies we understand • Unique & durable market position • History of improving margins and return on capital employed • Sound balance-sheet structure • Quality management or replacement of disappointing team Stocks undervalued in relation to intrinsic value (probable transaction value) • Company generating high cash flows: high FCF yield • Candidate for corporate activity: sum of the parts vs market value • Turnaround situation • Optimisation of capital structure: significant cash surplus Stocks of companies out of favour with or forgotten by the market • Historically weak stock-market price • Succession of profits warnings • Illiquid & ill-covered 6
  • 7. The investment philosophy Performance of Ulysse since creation Past performance is no indication of future performance. Performance is not constant over time 7
  • 8. Some investing principles re-visited
  • 9. Some investing principles re-visited Carry cash ... “Holding cash is uncomfortable but not as uncomfortable as doing something stupid” W. Buffett … and be patient … But remain alert Continuous review – Add where fundamentals are intact & cull value traps Discipline to sell when value is “outed” 9
  • 10. Some investing principles re-visited Be humble not dogmatic Don’t confuse a bull market with being a super-investor Balance conviction with humility If facts change or new facts emerge that challenge investment, take action 10
  • 11. Some investing principles re-visited How to get most out of Management Meetings Some “Dos” Use meetings to understand barriers to entry, competitive advantage & company strategy, alignment of shareholder interests Complement/cross-check insights with other sources Judge by actions not words Some “Don’ts” Search for information that confirms your investment case Expect management to pick economic turning points 11
  • 12. Some investing principles re-visited Try to have basic understanding of cycles … Credit/ Liquidity – cost, availability & terms • For financials, corporations, households & sovereigns Industry Economics – supply, demand, capacity utilization, etc. Sentiment – Irrational exuberance & hubris to gloom to doom "Buy when there's blood in the streets, even if the blood is your own and sell to the sound of trumpets." Baron Nathan Rothschild, 19th Century Identify bubbles (and inverse bubbles) in earnings, valuation multiples and sentiment 12
  • 13. Some investing principles re-visited … But precisely predicting the future is a waste of energy “Better to be roughly right than precisely wrong” John Maynard Keynes Macro variables Economy, inflation, interest rates, FX rates, sector bets, political interference etc. Micro variables Price, volumes, gross margin, SG&A, tax rate etc. EPS more volatile than intrinsic value Focus on where consensus thinking is wrong Use price volatility arising from short term trading noise, quarterly EPS revisions, sector rotation etc. to optimize your entry & exit point 13
  • 14. Some investing principles re-visited Understand different layers of Leverage Investor level – amongst shareholders of your (potential) investments At level of corporation’s clients and supply chain Concealed leverage at company level e.g. lease obligations, defined benefit pension obligations etc. On pensions • Gross assets vs gross liabilities not net position • Are you investing in an operating business or an investment company that also controls an industrial company? • Accounting Liability – Challenge key assumptions regarding life span of retirees, discount rate • Is statutory liability disclosed 14
  • 15. Some investing principles re-visited We should all be better Investors after our experiences in 2008 “Experience is not what happens to you It's what you do with what happens to you.” Aldous Huxley But we’ve had several boom bust cycles in last 20 years 1980s Japan, 1990s Tech, 2000s Structured credit, real estate etc. Understand both fundamentals & psychology What is next bubble? Guiding principal “Price is what you pay. Value is what you get” not seducing story 15
  • 16. Case Study: Vicat
  • 17. Case Study: Vicat Company Overview Leader in South East France and strong regional positions in mature markets (Western Switzerland, California, South East USA) and in emerging countries (Western Africa, Egypt & Turkey) Vertically integrated - 2/3 cement, 1/3 aggregates / RMC Modern production base & cautious acquisition strategy 60% family controlled. Free float increased from 5% to 40% in 2007 Strategy - use group cash-flow to improve vertical integration, diversify from home base and increase exposure to faster growing markets 17
  • 18. Case Study: Vicat Cement Industry Uses - housing, commercial construction, infrastructure, RMI High weight to value Producers concentrated vs customer base, limited substitutes Barriers to entry • Ownership of quarries / environmental constraints • Capital intensity • Geographic / Transport costs • Control over import terminals • Vertical integration 18
  • 19. Case Study: Vicat Cement Plant, Montalieu, France 19
  • 20. Case Study: Vicat Extracting & crushing aggregates at quarry, Maizieres France 20
  • 21. Case Study: Vicat Concrete Plant, Turkey 21
  • 22. Case Study: Vicat Business overview Supply / Market % of sales Market Share C A R Producers Imports Comments Demand • Demographics Terminals France • • • 4 Balanced • Limited housing controlled bubble • Western border Switzerland • • • 3 Balanced Landlocked • Alpine • No housing bubble • Infrastructure South-East Distance • • 6 Balanced deficit US from sea • Integrate vertically Terminals • Demographics California • • 7 Normally deficit controlled • Integrate vertically Key : C : Cement / A : Aggregates / R : Readymix concrete Source : company filings, industry reports 22
  • 23. Case Study: Vicat Business overview Supply / Market % of sales Market Share C A R Producers Imports Comments Demand Senegal Exports Mali, • • 2 Deficit • Limestone rare (West Africa) Mauritania Fragmented, Turkey • • • Surplus Exports Russia, Syria • Lowest cost producer volatile Will move • Regional leader Medium Deficit moving to Egypt • from importer Sinai concentration surplus to exporter • Low cost energy Key : C : Cement / A : Aggregates / R : Readymix concrete Source : company filings, industry reports 23
  • 24. Case Study: Vicat Management Alignment of interests - Allocate capital with care, no dilutive option programmes All growth self-financed Conservative capital structure – net debt ca 1.6x EBITDA Long term approach – secure reserves of ca. 100 years for limestone / clay & 30 years for aggregates Efficient operator – production per employee, ROCE, alternative energy 24
  • 25. Case Study: Vicat Investment Programme - Efficiency Gains Increase portion of alternative fuel sources from 14% to 23% and other measures to reduce energy costs per tonne by ca. 10% (ca. 1% of sales) Less external procurement, reduced logistics & maintenance costs (ca. 1% of sales) Further EUR 50m cost savings announced in Q4 2008 - of which ca. EUR 20m relate to fixed costs => sustainable margin improvement of ca. 1% p.a. All in all we estimate these measures, ceteris paribus, relutive to margins by ca. 3% 25
  • 26. Case Study: Vicat Investment Programme – Capacity Additions Ca. 50% increase in capacity from 2006 to 2012. Biased towards emerging countries Estimate increase in sustainable earnings power from new capacity at existing sites at least EUR 130m of EBITDA p.a. Developing markets move from ca 25% to 35% of EBITDA CEMENT CAPACITIES (m tonnes) 2006 2007 2008 2009 2010 2011 2012 France 6,0 6,4 6,8 6,8 6,8 6,8 6,8 Switzerland 0,9 0,9 0,9 1,2 1,2 1,2 1,2 USA 2,1 2,1 2,1 2,1 2,1 2,1 2,1 Turkey 3,7 5,3 5,3 5,3 5,3 5,3 5,3 Kazahkstan 1,2 1,2 1,2 India 2,75 Egypt 2,1 2,1 3,5 3,5 3,5 3,5 3,5 Senegal 2,2 2,2 2,2 3,6 3,6 3,6 3,6 TOTAL 17,0 19,0 20,8 22,5 23,7 23,7 26,5 Growth 12% 9% 8% 5% 0% 12% % Capacity Developing 47% 51% 53% 55% 57% 57% 62% 26
  • 27. Case Study: Vicat Kazakhstan - 60% stake in JV 1.1Mt cement plant due to start operations in 2010 Country recently moved from deficit to surplus but long term growth prospects very promising India – 51% stake in JV 5.5Mt cement plant. 2.75Mt is due to start operations in 2012 Fragmented - MNCs already trying to begin move to consolidation We estimate the combined earnings power of the two JVs at ca. EUR 100m (Vicat share EUR 55m) 27
  • 28. Case Study: Vicat Valuation Earnings Peer Group Transaction multiples Balance sheet 28
  • 29. Case Study: Vicat Valuation - Earnings Current earnings • 9x 2009 net earnings and 5x EV / EBITDA which should represent trough in earnings cycle. In 2010 lagged benefit energy price deflation • Free Cash flow yield before expansionary capex ca. 15%. Peak 2007 earnings • 5.8x 2007 net profit; 4.3x 2007 EBITDA Earnings power in next cycle • We estimate mid-cycle EBITDA at ca. 600m comparable to 2007 levels (current EV EUR 2.6Bn). If mid-cycle 2012 – ca. 3.5x EBITDA • Peak earnings - next cycle 29
  • 30. Case Study: Vicat Valuation - Peer Group Trades at discount of ca. 20% to peer group despite better pricing power, stronger balance sheet, superior track record and better medium term growth Implied value of equity per share ca. EUR 60 EV EV/EBITDA EV/EBITDA 2009 2010 Cemex (USD) 23 307 7,1 6,8 CRH 14 837 6,7 6,6 Lafarge 29 655 7,5 7,3 Holcim (CHF) 35 039 7,9 7,5 Heidelberg Cement 15 433 6,9 6,7 Italcementi 5 533 5,6 5,2 Ciments Français 4 459 4,9 4,6 Cimpor 5 555 9,3 8,7 Titan 2 709 8,1 7,3 Cementir 845 5,6 4,9 Buzzi Unicem 3 193 5,3 4,8 Peers average 6,8 6,4 Vicat 2 623 5,7 5,2 30
  • 31. Case Study: Vicat Valuation - transaction multiples Industry average 8.7x EBITDA transactions over last 17 years (Source JP Morgan) Given family control & cyclical considerations a transaction is unlikely but implied value of equity is ca EUR 75 per share 31
  • 32. Case Study: Vicat Valuation – Balance Sheet Ca. 1x book value Replacement Value of industrial assets Cement Cost Replacement Capacity per tonne Value (EUR m) OECD 8,8 200 1764 Developing 11,8 100 1181 Value - cement capacity 2 945 Value - Aggs & RMC * 511 Implied EV 3456 Implied Value per share 61 * Eur 51M EBITx10 32
  • 33. Case Study: Vicat Key Risks Prolonged deeper recession Price Deflation – Mitigated by • Industry consolidation • Focus of geared players cash generation not market share • Capacity utilization comparable to 1990s • Capacity additions delayed / cancelled • Limited risk of falling prices for Vicat due to market mix Antitrust investigations / fines CO2 compliance costs 33
  • 34. Case Study: Vicat Where we diverge from consensus thinking Consensus concern industry-wide price deflation – Vicat largely protected Industry out-of-favour due to negative momentum Consensus focus on cyclical downturn not through the cycle earnings power. Next cycle’s earnings power for Vicat higher due to: • Efficiencies from industrial upgrades • Increased earnings from capacity additions & JVs • Possible acquisitions at bottom of cycle Liquidity Overexposed to France? Attractive market & diluted over time 34
  • 35. Case Study: Vicat Summary Cement - reasonable business in cyclical downturn Vicat: • Quality operator, proven management, interests aligned with shareholders, cautious growth strategy • Balanced portfolio, cash generative oligopolistic businesses & fast-growing markets • Underappreciated through the cycle earnings power and earnings growth • Stable balance sheet & option value to create value from acquiring assets at bottom of cycle Status change: Improved diversification & developed vs emerging mix Value exceeds price 35
  • 36. Grazie per la vostra attenzione Qualche domanda? ... in inglese per favore Contact: DON FITZGERALD, CFA Fund Manager, European Equities Tocqueville Finance S.A. Tel. :+33 (0)1 53 77 20 36 dfitzgerald@tocquevillefinance.fr 36