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SOLID CASH FLOWS STRESS LESS -               TWO OF OUR HOLDINGSDon Fitzgerald, CFA                 Sebastien Lemonnierdfi...
« ROBUST CASHFLOW DESPITE TURBULENCE »     Airline Catering and Related Services       Listed: Zurich       Market Cap: CH...
GATEGROUP IS...            AIRLINE CATERING                               3
GATEGROUP IS...           PROVISIONING & LOGISTICS       …                                      4
GATEGROUP IS...  AIRPORT HOSPITALITY & ON-BOARD RETAIL                                          5
GATEGROUP – WHERE THEY MAKE MONEY         Revenue by Region                                   Revenue by Activity         ...
GATEGROUP – WHAT IS THE BUSINESS? Industry Leader Locations - global Hubs & regional airports Manages Complexity - 10k fli...
GATEGROUP – THE AIRLINE CONTRACTS     3 to 7 years:              Visibility - 90% 2010 sales - contracts valid            ...
GATEGROUP – DOES IT HAVE A MOAT?    Location at Hubs    Local Economies of Scale at Hubs    Client Switching Costs    Repu...
GATEGROUP – IN GROWTH OR DECLINE?Global Passenger Volumes - Gravitational Growth Pull Source: Gategroup, ICAO (Internation...
GATEGROUP – GROWTH HEADWINDS HEADWIND                    MITIGANTDe-contenting          Largely played outLow Cost Model  ...
GATEGROUP – END OF DE-CONTENTING?      $ / pax            FOOD SPEND PER PASSENGER BY US AIRLINES   $4,50   $4,00   $3,50 ...
GATEGROUP – A GOOD BUSINESS?Has MoatContracts Assure VisibilityShould GrowFlexible Cost StructureDecent Returns on Capital...
GATEGROUP – A GOOD BUSINESS?  BUT... Clients are Airlines Concentrated Client Base     Top 5 – ca. 45% of sales Volatility...
GATEGROUP – WHAT CAN GO WRONG?Contract Loss / Client FailureWaste the CHF 500m War-ChestEconomic Environment     Oil price...
GATEGROUP – WHAT CAN GO RIGHT? Airlines Invest in Capacity & Service Value-creative M+A Pays Dividend                     ...
GATEGROUP MEETS……MR. MARKET                                                                                               ...
GATEGROUP – STILL UNDER-EARNING                                                              Underlying growth to         ...
GATEGROUP – MR. MARKET’S PRICE                                                                Assume no cash              ...
GATEGROUP – IS IT CHEAP?                                                2009   2010   2011E FCF Yield to Firm             ...
GATEGROUP – WHY WE OWN IT? Reasonable Business Cash Generator Still Under-Earning Modest Valuation                        ...
Commercial Break – Tocqueville Value Europe  Don Fitzgerald  Sébastien LemonnierCitywire – Category European Equities     ...
« A stress less stock »Home furnishing manufacturer - Norway€ 565m market cap (30/06/11 - €/NOK 7.78)Isin: NO0003035305Fre...
EKORNES          24
EKORNES                    1971……………………………………..1981…………….   1991……………………………….2001……………………………………..2011                     ...
EKORNES          26
EKORNES          27
EKORNES – BUSINESS BREAKDOWN Revenue by activity 2010                          Revenue by region 2010             4%      ...
EKORNES – WHAT IS THE BUSINESS?     Ergonomic furniture     Stressless brand     All production in Norway     2,500 partne...
EKORNES – OVER LAST 10 YEARS      Av. annual turnover growth > 5%      19.2% av. EBIT margin      Net profit margin > 12% ...
EKORNES - Does it have a moat?                    Niche focus                    Efficient production                    L...
EKORNES - Does it have a moat?   Niche focus: ergonomic design          Patented innovation: comfort focus          Brand ...
EKORNES - DOES IT HAVE A MOAT?  Efficient production:  Automated production  In-house components                          ...
EKORNES - DOES IT HAVE A MOAT? Loyal partners:  Most profitable per sqm  Exclusivity / Most effective display  Commitment ...
EKORNES - DOES IT HAVE A MOAT? Strong corporate culture: Disciplined management High staff loyalty Bonus scheme (> 1 month...
EKORNES – GROWTH OR JUSTCYCLICAL?Grow distribution network         50 net new stores / annumGrow product portfolio        ...
EKORNES – A COMFORTABLE BUSINESS? Industry winner Hard to duplicate Proven growth Good returns on capital Disciplined mana...
EKORNES – FINANCIALS                                                                                              Below ma...
EKORNES – IS IT CHEAP?   Stock price @ NOK 122 (as of June 30th, 2011)  Valuation multiples                               ...
EKORNES – IS IT CHEAP?   Stock price @ NOK 122 (as of June 30th, 2011)  8.9x hist. EV/EBIT                                ...
Q&A
WHY WE OWN EKORNES?  Unique business model  Industry gainer  Robust cash generator  Attractive dividend yield  Good risk /...
Disclaimer    • This document is strictly confidential and for the use of intended recipients only. It may not be reproduc...
TRANIun GRAN POSTO, un GRANDE EVENTO      GRAZIE CICCIO & TEAM                                  44
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Investment Case Gategroup & Ekornes Vis Italy 2011

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2 stock ideas presented at Value Seminar Italy Summer 2011

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Investment Case Gategroup & Ekornes Vis Italy 2011

  1. 1. SOLID CASH FLOWS STRESS LESS - TWO OF OUR HOLDINGSDon Fitzgerald, CFA Sebastien Lemonnierdfitzgerald@tocquevillefinance.fr slemonnier@tocquevillefinance.fr 8th Value Investing Seminar Trani, Italy, July 2011
  2. 2. « ROBUST CASHFLOW DESPITE TURBULENCE » Airline Catering and Related Services Listed: Zurich Market Cap: CHF 950m ISIN: CH0100185955 Free Float: 100% - Daily Volume – CHF 3m
  3. 3. GATEGROUP IS... AIRLINE CATERING 3
  4. 4. GATEGROUP IS... PROVISIONING & LOGISTICS … 4
  5. 5. GATEGROUP IS... AIRPORT HOSPITALITY & ON-BOARD RETAIL 5
  6. 6. GATEGROUP – WHERE THEY MAKE MONEY Revenue by Region Revenue by Activity 2010 2010 North America 27%Europe 54% Other 20% Catering & Provisioning 80 %% Asia-Pacific 13% Other 6% Source: Company data 6
  7. 7. GATEGROUP – WHAT IS THE BUSINESS? Industry Leader Locations - global Hubs & regional airports Manages Complexity - 10k flights daily Costs - Raw Materials + Staff Economics - Ca. 5% EBIT Margin, 15% ROIC Source: Company data & Tocqueville estimates 7
  8. 8. GATEGROUP – THE AIRLINE CONTRACTS 3 to 7 years: Visibility - 90% 2010 sales - contracts valid through 2012 75% Renewal rate Fee Structure Fixed Cost Recovery Handling per Plane Consumption per Passenger Minimum Contract Revenues Cover Fixed Costs Cost-plus – materials & labour Source: Company data & Tocqueville estimates 8
  9. 9. GATEGROUP – DOES IT HAVE A MOAT? Location at Hubs Local Economies of Scale at Hubs Client Switching Costs Reputation Global NetworkExample – Swissair (Lufthansa Group)recently preferred to renew hub contractwith Gategroup at Zurich rather than switch to itssister company Lufthansa Skychefs. 9
  10. 10. GATEGROUP – IN GROWTH OR DECLINE?Global Passenger Volumes - Gravitational Growth Pull Source: Gategroup, ICAO (International Civil Aviation Organization), IATA, World Bank, IMF Note: 2010-2012 based on management and IATA estimates 10
  11. 11. GATEGROUP – GROWTH HEADWINDS HEADWIND MITIGANTDe-contenting Largely played outLow Cost Model On Board Retail Solutions Adjacent sectors – e.g. trains Cross-sell non-catering linesGeographic Footprint Selective Acquisitions 11
  12. 12. GATEGROUP – END OF DE-CONTENTING? $ / pax FOOD SPEND PER PASSENGER BY US AIRLINES $4,50 $4,00 $3,50 $3,00 $2,50 $2,00 $1,50 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: U.S. Department of Transportation (US DOT), UBS Research 12
  13. 13. GATEGROUP – A GOOD BUSINESS?Has MoatContracts Assure VisibilityShould GrowFlexible Cost StructureDecent Returns on Capital 13
  14. 14. GATEGROUP – A GOOD BUSINESS? BUT... Clients are Airlines Concentrated Client Base Top 5 – ca. 45% of sales Volatility - Event Risk & Cycle 14
  15. 15. GATEGROUP – WHAT CAN GO WRONG?Contract Loss / Client FailureWaste the CHF 500m War-ChestEconomic Environment Oil price Load factorsLabour DisputeEvent Risk 15
  16. 16. GATEGROUP – WHAT CAN GO RIGHT? Airlines Invest in Capacity & Service Value-creative M+A Pays Dividend 16
  17. 17. GATEGROUP MEETS……MR. MARKET Japan tragedy Broker coverage Oil at $ 115CHF Extensive Investor Relations Fraud Raises CHF 240m at 43 CHF 55 CEO resigns 50 CLOUD ASH 45 Company unknown Motivated Sellers 40 No Listed Peers EXIT 35 30 BUY 25 BUY 20 BUILD POSITION 15 10 May-09 August-09 November-09 February-10 May-10 August-10 November-10 February-11 May-11 Source: Bloomberg 17
  18. 18. GATEGROUP – STILL UNDER-EARNING Underlying growth to continue despite CHF CHF m 2009A 2010A 2011E translation effect Sales 2712 2700 2800 EBITDA 189 217 225 EBITDA Margin 7,0% 8,0% 8,0% Effects of: Adjusted EBIT 123 157 163 Recession, volcano ash Capex -58 -47 -45 , fraud, japan quake….. Normative margins – ca 9% less taxes -21 -15 -15 FCF to Firm 110 155 165 Reported EBIT understates earnings power due to: Ca. 25m p.a. Share-based payments in 09 / 10 (since vested) Ca. 15m p.a. Amortization of customer relationships Modest operating working capital requirements Low cash Tax rate - Swiss HQ; CHF 600m tax loss carry-forwards Maintenance Capex 1,5% of sales Source: Company data & Tocqueville estimates 18
  19. 19. GATEGROUP – MR. MARKET’S PRICE Assume no cash generation in seasonally Market Cap 985 weak H1. Cash balance largely CHF Cash -460 Debt 570 Pension Liabilities 40 60% EUR, 40% USD Minorities 24 Estimate EV per June 30 1159 Share Price June 30 (CHF) 37 Shares Outstanding (m) 27 985 Note : Mid Year is seasonal weak-point in cash generation Source: Company data & Tocqueville estimates 19
  20. 20. GATEGROUP – IS IT CHEAP? 2009 2010 2011E FCF Yield to Firm 9% 13% 14% Current EV / EBITDA 6,1 5,3 5,2 Current EV / Adjusted EBIT 9,4 7,4 7,1 Source: Company data & Tocqueville estimates 20
  21. 21. GATEGROUP – WHY WE OWN IT? Reasonable Business Cash Generator Still Under-Earning Modest Valuation 21
  22. 22. Commercial Break – Tocqueville Value Europe Don Fitzgerald Sébastien LemonnierCitywire – Category European Equities Europerformance Ranked 5th/114 in category since inception (from 31/03/00 to 30/06/2011)
  23. 23. « A stress less stock »Home furnishing manufacturer - Norway€ 565m market cap (30/06/11 - €/NOK 7.78)Isin: NO0003035305Free float 82% - Daily liquidity €300k
  24. 24. EKORNES 24
  25. 25. EKORNES 1971……………………………………..1981……………. 1991……………………………….2001……………………………………..2011 25
  26. 26. EKORNES 26
  27. 27. EKORNES 27
  28. 28. EKORNES – BUSINESS BREAKDOWN Revenue by activity 2010 Revenue by region 2010 4% 8% 9% 21% Stressless chairs 19% Nordic Sofa Europe28% 59% Mattresses US-Canada Foam, tables, etc… 53% ROW Source: Company data 28
  29. 29. EKORNES – WHAT IS THE BUSINESS? Ergonomic furniture Stressless brand All production in Norway 2,500 partner outlets €230k sales per employee Source: Company data 29
  30. 30. EKORNES – OVER LAST 10 YEARS Av. annual turnover growth > 5% 19.2% av. EBIT margin Net profit margin > 12% Annual ROCE > 25% Source: Company data 30
  31. 31. EKORNES - Does it have a moat? Niche focus Efficient production Loyal partners Loyal partners Strong corporate culture Strong corporate culture 31
  32. 32. EKORNES - Does it have a moat? Niche focus: ergonomic design Patented innovation: comfort focus Brand building + + 32
  33. 33. EKORNES - DOES IT HAVE A MOAT? Efficient production: Automated production In-house components 33
  34. 34. EKORNES - DOES IT HAVE A MOAT? Loyal partners: Most profitable per sqm Exclusivity / Most effective display Commitment to share marketing costs 34
  35. 35. EKORNES - DOES IT HAVE A MOAT? Strong corporate culture: Disciplined management High staff loyalty Bonus scheme (> 1 month salary) 35
  36. 36. EKORNES – GROWTH OR JUSTCYCLICAL?Grow distribution network 50 net new stores / annumGrow product portfolio Expand Stressless businessGrow in emerging countries Strict criteria 36
  37. 37. EKORNES – A COMFORTABLE BUSINESS? Industry winner Hard to duplicate Proven growth Good returns on capital Disciplined management 37
  38. 38. EKORNES – FINANCIALS Below management targetsNOK - millions 2000-2010 av. 2007 2008 2009 2010 2011e 2012eSales 2574 2673 2588 2869 2969 3103 growth % 6,5% 9,4% 3,9% -3,2% 10,9% 3,5% 4,5% Material cost 647 676 620 663 Gross profit % 75% 75% 76% 77% Salaries 701 677 686 775 Others 665 751 673 780 Depreciation 96 106 110 116EBIT 465 463 500 534 543 590 % 19,2% 18,1% 17,3% 19,3% 18,6% 18,3% 19,0%NOPAT 326 324 350 374 380 413Capex 191 191 103 117 120 120FCF 231 239 356 373 380 413ROCE - after tax 27,9% 29,1% 31,3% 28,4% 27,3% 26,8% 28,0% NOPAT: EBIT – (1 -Tax rate) Operating CF: NOPAT + Depreciation FCF (after tax): Op. CF – Capex Source: Company data & Tocqueville estimates 38
  39. 39. EKORNES – IS IT CHEAP? Stock price @ NOK 122 (as of June 30th, 2011) Valuation multiples 2010 2011e 2012e EV/EBIT 7,7 7,6 7,0 FCF yield % 9,1% 9,2% 10,0% Div yield 5,7% 6,6% 7,4% Top line: 3.5-4.5% / year – below management aim 2011 EBIT @ 18.3% - raw mat. + MKT temporary increase 2012 EBIT @ 19% - below historical av. Capex @ NOK 120m (management guidance) Net cash, post dividend payment Source: Company data & Tocqueville estimates 39
  40. 40. EKORNES – IS IT CHEAP? Stock price @ NOK 122 (as of June 30th, 2011) 8.9x hist. EV/EBIT 10x EV/EBIT Sales av 2010-12 2980 Sales av 2010-12 2980 EBIT % 19,2% EBIT % 19,2% Entreprise Value 5093 Entreprise Value 5722 Market cap. 5638 Market cap. 6267 Implied stock price 153 Implied stock price 170 Source: Company data & Tocqueville estimates 40
  41. 41. Q&A
  42. 42. WHY WE OWN EKORNES? Unique business model Industry gainer Robust cash generator Attractive dividend yield Good risk / reward – Margin of safety 42
  43. 43. Disclaimer • This document is strictly confidential and for the use of intended recipients only. It may not be reproduced, communicated or published in its entirety or in part, without the prior written authorisation of Tocqueville Finance S.A. • This commercial document should not be interpreted as a contractual or pre-contractual commitment on the part of Tocqueville Finance S.A. It is produced purely for illustrative purposes and may be amended at any time without previous notice. • The information/analyses contained in this document, particularly figures, have come partly from external sources considered to be trustworthy. However, Tocqueville Finance SA cannot guarantee that the information/analyses are complete, accurate and up-to-date. • Tocqueville Finance S.A. draws investors’ attention to the fact that past performances are presented on the basis of figures relating to previous years and are not an indication of future performance. • Moreover, Tocqueville Finance S.A. in no way guarantees the current or future performances of funds cited in this document • Investors are reminded that any financial investment includes risks (market risks, capital risk, foreign exchange risk) that may result in financial losses. Therefore, Tocqueville Finance S.A. recommends that prior to any investment, the recipient of this document carefully reads the prospectuses of the cited funds which are available free of charge at its head office located 8 rue Lamennais, Paris 75008 or on its website www.tocquevillefinance.fr and ensures that they have the experience and knowledge needed to make an investment decision, particularly with regard to the legal and tax implications.
  44. 44. TRANIun GRAN POSTO, un GRANDE EVENTO GRAZIE CICCIO & TEAM 44

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