Tuesday 9 December 2014

Toyota caetano- 3rd quarter- better than it seems?

Third quarter results were not what I expected. In fact, since I had published before my expectations by segment, it is fairly easy to understand where I missed:

Production -626k             IN LINE
Commerce 48k                                MISS BY 500k
Auto services -62k          IN LINE
Auto renting 225k           MISS BY 500k
Industrial sales 39k  MISS BY 30k
Industrial services 410k BETTER THAN EXPECTED BY 110k
Industrial renting 378k BETTER THAN EXPECTED BY 78k
International auto commerce 28 k


Eliminations  -784k          MISS BY 180k

So, it turns out I expected too much from the auto renting sector. Since I had done a direct comparison with same quarter last year there are three explanations I can remember:
1- 3Q was a bad quarter for the rent-a-car business
2- The reduction in RACs in comparison to last year had a bigger impact than I expected
3- There might be one off results (in sales of RACs) in last year's 3Q, that were delayed to 4Q this year (the announced 560 RACs sale)

Since this Summer was significatively better for portuguese tourism than last year's I believe option 1 is unlikely. In fact, if the RACs usage was higher (less vehicles more demand) it could explain that RACs sales could have been delayed - option 3). If that is the case, it is possible that it was not a true result reduction. Option 2 is harder to guess: last year the fleet contained 1383 units at the beggining of 3Q, which included 254 industrial machines. This year total fleet was 1226 units (88%) but segment composition is not disclosed. I had guessed 90% of net income but went wrong. I believe option 2 had an impact both because of a bigger reduction in the passenger segment than the global number implies and because fixed costs might have stayed...fixed.

And then there was also a much worse result in the auto commerce segment. In fact, net profit in this segment was marginal despite the increase in units sold. What happened?
1- Gross margins were squeezed
2- Sales increased above the general market (the company had been losing some market share), which means there was an increase in market share in addition to the general market sales increase  - July to November (yes it continued in the 4Q) Toyota light vehicles (Lexus not included but also increased, I believe) market share was 5.60, 4.95, 5.5, 5.28 and 5.56% respectively versus 4.8, 3.4, 3.94, 4.65 and 4.82 last year)

So the company is increasing sales and market share to get no profit. That sounds scary and the fact that net debt has increased to finance the working capital increase makes it scarier. But is it really that bad or is it the correct option by the company? (here I must say I am not absolutely sure of the answer, but read on). I believe we should go to the industrial vehicles divisions now, and maybe that sheds some light on this question.

So the industrial vehicles sales also had slightly worse net and operational results than I had predicted... in addition sales were 3989k in the quarter, almost as much as in the whole first semester (4476k). So here we seem to have the same problem, sales increase (a lot, I should add here) but profits are almost non existent. But then, industrial services had better than expected results. In fact, together with industrial machines renting (whose results were also better than I expected), industrial services are bringing in most of the company's profit (and it was the same last year). So it seems that at least in the industrial machines division what we want is sales to increase as long as there are no associated losses, and profits will come through the services segment. Are these profits enough? Commerce+services assets are 4,6M equity is 2,8M and net profits in the first 9 months were 1,16M. I believe that is more than enough and as such I will be very happy if commerce sales continue to increase with no immediate profit increase (importantly,  from the data I gathered it seems this sales increase happened in a stable forklift market, which would mean a market share increase).

So back to the auto commerce segment. it is possible that their plan is similar here. I do not expect results here to be similar to those in the industrial segment since competition is much higher (and most of it does not declare most sales and as such pays neither consumption taxes nor profit taxes). As such, here they will mostly get that business in the first years after the car sale, since after that the car warranty expires and most car owners go to the cheaper market. Costumers will migrate to the cheaper market quicker in recessionary times. How do historical results play in this thesis: 2011 to date net loss was 2897k, 2009+2010 net profit was 8713k. So it seems this segment has potential and as such maybe management deserves the benefit of doubt here for increasing sales to get no immediate profit, but i have no way of being sure...

And then we have the auto production segment, in line with expectations but still burning money... the good news is that they seem to lose less when they increase volume and that volume seems to be increasing (they produced 354 units in the whole 3Q and produced 213 just in October). I do not like these losses but the trith is that they are included in the baseline thesis for Toyota. Have a look at the historical data:
(pre tax results/depretiations/capex/ caetano components EBIT)
2007 -3.273.049/......./......../949.133
2008 -4.133.630/3.630.014/4.130.798/ 48.050
2009 -5.315.770/4.083.537/2.374.603/-432.374
2010 -3.073.873/2.093.932/199.276/
2011 -5.454.267/2.007.533/924.667
2012 -4.320.757/1.836.275/432.411/ -419.753
2013 -4.029.575/1.551.136/(613.559)/-717.812
2014(9M) -1.928.611/787.032/1.032.202
About these data: before 2007 data is not comparable. Up to 2013 caetano components results were likely included in this segment so I present that data whenever available, but since they had to be closed down the actual production division results were likely to be a bit better than they seem. But the negative (big negative) results were constant, and as such they are already included in the baseline scenario. Recent results actually make it seem that the crisis and needed cost cutting were actually a way to reduce those losses (we are likely to get a record low in losses in 2014)


As I mentioned and explained above, net debt increased. Current net debt is at 35,75M, which they explain with inventory. They also mention that debt is now cheaper  (which is normal, I think, but it also might mean they are playing that sales increasing game to explore the lower cost of leverage, which is not bad). This also means that debt is mainly tied to the 62.6M in inventory, thus reducing risk since sales are much higher than inventory (implying high rotation).


In conclusion, results seem bad at first sight but it is reasonably possible (and maybe probable) that this is the correct long term strategy. However, read the disclaimer

Disclaimer: I own a sizable position in Toyota Caetano. To be honest, I must mention that today I placed an order to sell a small part of that position (10k shares) at 1,07€ (my last buying price) since I found another very cheap investment and would welcome the diversification. Those shares were not sold yet, and that is also why I will not talk about my new idea yet (despite being much more liquid than this one), since I have not built the position. I am not recomending you to buy or sell any of the securities mentioned. I might and will buy or sell shares in Toyota Caetano without prior disclosure. Read all previous disclosures and always do your own research.

Tuesday 4 November 2014

Toyota Caetano: related parties exposure and some other points raised

Following a discussion in a Portuguese forum I decided to share my point of view on the subject. Since what goes around comes around I did get some extra data sources that gave me some answers I was seeking and some I was not seeking but are still useful (that is the motive I ask you to comment on my articles, discussing brings us all to an higher level).
So, on his first post on that Portuguese forum (most people there are into charting so it is no wonder he was not posting before), Random Walker raised the following questions (and helped answering them):
1-      With little debt:
a.        the main risk might come from the links to the remaining group (as we learned recently with BES and GES)
b.      The value of the real estate investments could be manipulated if the rents came from related parties. Do we know if the rents do come from related parties?
2-      Who is selling?
3-      The debt reduction in recent years is a relief, especially if we compare to SAG Gest (the other quoted Portuguese auto selling company) whose current liabilities are higher than current assets and equity is very low.

I have answered it partly there but will try to answer again. Let’s go from bottom to top:

3) SAG Gest (as well as the remaining Salvador Caetano group) is involved with different brands. But since they do sell and rent cars they are competition. As such it is good news if they are burdened with debt: interest costs are higher and must be passed on to the costumer. SAG has about 7.8M in tangible equity, about 274.6M in net debt and if we annualize their 1S2014 EBITDA we get about 15.3M. This numbers are interesting, especially if we take into account that interest is no longer fully deductible for tax purposes in Portugal (to incentive deleveraging) and the amount deductible is planned to continue reducing in the following years: from a net interest/EBITDA ratio of 70% in 2013 to 30% in 2017 (or 3M€ in interest cost if that is higher than the % of EBITDA).
As I stated above if the competition must pass interest costs to costumers that allows those with little debt to charge higher prices and keep the difference as profits.
2) Very little trades have been done recently. However, not too long ago BCP (Banco Comercial Português) investment funds sold a big chunk of their shares (most of my position was likely bought either from them or from someone who had recently bought from them and took a quick profit). Random Walker did go check their fillings and posted them (http://web3.cmvm.pt/sdi2004/fundos/app/res_cart_dtl.cfm?num_fun=%23%23%24_T%0A&cod_grp=%21%220%20%20%0A&numcar=%23%23TSZ%0A&car=%24%3ERJ%23%23P%20%20%0A). Since their previous position was of 1.226.935 shares, it seems that even after their selling more than half their position they still hold 604.091 shares. The number is still high enough to make it by far their most illiquid position in the table since they could sell all their remaining holdings in a few days and could take months (or more) to sell their Toyota Caetano position. A quick check from prior annual meetings does show us that they complained about the lack of liquidity both in April 2010 and 2012. They also complained about the real estate investments being carried at historical value instead of marked value, which they thought was too conservative. In April 2014 they had already started selling their position and missed the annual meeting, which might indicate they still were reducing their position or wanted to continue reducing.
Liquidity is a problem if you own 604k shares and want might be forced to dispose of them quickly. So I understand their selling. The fact that they wanted real estate to be carried at an higher value on the books gives us two important give aways:
a)      They wanted the company to realize some accounting gains that changed nothing economically. If we join this information with the liquidity problem we might realize that it is no wonder they sell while we buy: our incentives are different.
b)      They do believe the real estate is worth more on the books. And this reassures us in the next point:
1)      b. I do believe most (if not all) rents are with related parties, namely Salvador Caetano Group. I have no way of checking it but if you continue reading you might understand why I believe so. But if they own about 100% of capital in one side and 60% on the other, I do believe that if they manipulated the rents it would be downwards instead of upwards. As such, I do believe we can conservatively calculate the investment real estate value if we use the rents as a base point
a.       What about the links to the remaining group?
This answer is not easy. There are many related parties and there is at least one that is counter intuitive. I believe this relations can be described in three main groups:
1-      Meaningful operating debts from related parties
2-      Recurrent spending with related parties of meaningful amounts
3-      Meaningful debts from related parties that are declared as other debt (so probably not operational)
1-      What comes to my mind is Caetanobus: the net debt from them is about 9,4 M. This seems to appear on balance sheet as operational, which might make sense since with the crisis Toyota Caetano, if I understood correctly, has transferred bus production (and some other smaller units) to Caetanobus. This number is roughly stable since 2012 but increased from 1,6M in 2010. I believe it credible that this is operational but think monitoring is important here.
2-      Two promptly jump to my eyes: Caetsu SA and Rigor Consultoria e Gestão SA. Between 2M and 3M are spent annually with each of them, but both numbers area down from over 4M in 2011. Caetsu seems to be a publicity company with some important national clients disclosed on their site. Rigor management and consulting services seems to be exactly what its name implies. The problem being: is it justified to pay these amounts annually for these services? A check in Salvador Caetano Group 2012 annual report shows us that both companies are theirs.  That would be a good incentive to overcharge (at least Rigor is 100% owned). The good news is that Toyota Caetano already had business (more than now) with these two companies in the last decade so our base case historical profits already included business with these two companies. Since it was higher back them maybe these are also operational expenses. They do state: "Goods and services purchased and sales to related parties were made at market prices."
3-      I will quote from the latest report:
“The caption “Other credits” includes the amount of, approximately, 3,4 Million Euros (3,4 Million Euros as of December 31, 2012) in referring to advance payments made by the Group related with leasehold improvements in commercial facilities for automotive retail, which were fully invoiced in previous years, being that the remaining amount is expected to be supported in the short term by third parties.
Additionally, this caption includes, as of June 30, 2014, the amount of, approximately, 800.000 Euros (800.000 Euros as of December 31, 2013) to be received from Salvador Caetano Auto África, SGPS, S.A..
Finally, it is noted that this amount also includes an account receivable in the amount of 957.989 Euros from the related party Fundação Salvador Caetano (937.500 Euros on December 31, 2013).”
Initially I read this and disregarded the first paragraph from related parties. I will show later that would be incorrect. Which does not mean there is any problem with it since it is down from 5.2M in 2010 through 2012 (they mistyped since it was still 5.2 in 2010, they were referring to December 31, 2013) and since I will later refer to that position.

The second and third paragraphs are undoubtedly related party loans. It is worth noting that the 800k loan is reported since 2011 when they state it is stable compared to 2010. It might be a remaining from previous corporate structure but as long as it continues stable it is negligible. It is also worth noting that the loan to Fundação Salvador Caetano is lower compared to 2012  (1.430.696€), so maybe the money will eventually be recovered.


And now the part that seems most important to me:
“Cimóvel - Real Estate Investment Fund: the amount of 3.313.299 Euros corresponding to 580.476  shares which are recorded at its fair value as of June 30, 2014. It should be noted that the acquisition cost of those shares amounted to 3.013.947 Euros” --- “As of December 31, 2013, (…) of 3.274.639 Euros”

AND (from the pension fund portfolio allocation – in the annual report):
“Cimóvel - Fundo de Investimento Imobiliário Fechado 37,7% 10.878.417”

So some high grade math: 3.274.639 is for 580.476 shares as 10.878.417 is for 1928353 shares. And this totals 2.508.829 shares in direct and indirect exposition. Repeating the high grade math gives us a June 2014 total exposition of 14.320.145€. But that is not everything. After reading Cimovel report I understand that the previously mentioned loan seems to be a real estate development done with cimovel (from what I understand they lent cimovel to build some facilities and now pay rent to cimovel, that sounds ugly but maybe we should not be too quick judging so read on)

Now 14.3M +3.4M= 17.7M – that is meaningful. So we should understand what Cimovel is and the conditions of the loan.
Loan: interest at Euribor 3 months +1.5% spread, no reimburment defined date.
Rents paid by Toyota Caetano (2012 numbers): 1.060k (6% ROA) and 89k (ROA).
Rents divided between Toyota Caetano and other entities(2012 numbers): 196k and 157k
Total rents paid to the fund(2012 numbers): 3.338k (meaning Toyota Caetano pays about 40% of the rents of the fund; I believe these numbers should be adjusted due to some one off effects to 3148k; total rents in 2013 were 3621k (it is important to note that 2012 numbers include two rents of only 10 and 20 days) -Toyota Caetano representing about 36%).
Total shares: 8.250.695 
Direct and indirect ownership of Toyota Caetano: 30.4%
Debt: a small credit line from Barclays + debt to Toyota Caetano previously mentioned


Rents were all between: 6 e 8.9% of the asset value in 2012
Previous disclosed property deals between Toyota Caetano and the fund:
Inception was in 2006. I have no information on those deals.
2009: Toyota Caetano sold property for 2M +83k of legal costs, which was then rented to Caetano Formula for 6.5% on assets –Maia, Gemunde
2010: Toyota Caetano bought a 1.81M property (the profit for the fund was 331€) –Quinta da Relva
2012: CAISB sold two assets for 7100k ( plus costs incurred of 495k by the fund). If my guesses were correct they would be receiving 473k as rent from a third company (Caetano Drive). The fund has the option of selling  these assets at total incurred costs to Auto Partner Imobiliária (which I initially confused with the company belonging to Toyota Caetano) – Alcabideche. Since CAISB was acquired by Toyota Caetano in 2012, I cannot be sure if this deal was made prior or after the acquisition. CAISB was already declared has a related party prior to 2012. Details of the acquisition were not disclosed.

Owners of CIMOVEL (adapted by me, may be incorrect):
Other Salvador Caetano pension funds 2.186.072 units 26.50%
Toyota Caetano pension fund 1928353 units 23.37%
Salvador Fernandes Caetano 13.76%
Caetano Auto 7.04 %
CARTEIRA OUTROS SEGUROS 6.8 % (
Multiforma open pension fund 3.85
GES open pension fund 3.36
Salvador acacio martins caetano 2.42
Eng Jose Reis silva ramos 2.42
Portuguese BP pension fund 1.93
PPR DINAMICO 55+ 1.61 (PPR are usually voluntary pension savings with some kind of tax benefits)
Miguel pedro caetano ramos 1.21
Others 5.73

It is relevant to state that there was a capital raise in 2012. From what I understand almost all subscriptions were from outsiders who now own about 17,5% of the fund. The direct individual ownership by some majority shareholders likely means they see it as a safe investment. The fact that there are so many outsiders has diluted the ownership both of Toyota Caetano and of  Salvador Caetano group. Outsider participation in the capital raise gives credibility to the fund.

CONCLUSIONS:
CIMOVEL: The problem with exposition to this fund is not excessive exposure, contrarily to what I would first guess, but seems to be the opposite. In fact, since they own 30.4% of the fund but pay about 35% of the rents then the ideal exposure would probably be 35% (so that they ended up owning their own real estate but in a diversified way). Prior to the capital raise the exposure was likely over that value. A relatively strong outsider presence makes it less likely that the fund would be used against Toyota Caetano. Deals have been minor. The only thing I do not like is that I cannot find information on Toyota Caetano annual reports about the deals between Toyota Caetano and CIMOVEL (if you find, please tell me where since it might be only a problem with my interpretation of the annual reports). Anyway (aside from the fact that I had to do this analysis by searching the information outside the annual reports) I am quite satisfied that I found no sign of excessive exposure to the parent group. I do not like commissions paid: 0,175% e 0,10%. (...) monthly and quarterly, respectively.

CONSULTING AND PUBLICITY: an average of 6M are spent annually with just two companies. I cannot be sure if this is justified spending and I most certainly do not like it since the company profits annually much less than what it spends with these two companies. I would rather all this expenses were done with totally unrelated parties because at least I could be sure that everything was done to minimize this spending but as I mentioned before they already had this business relations when the profits were higher and as such a reduction in this spending would be a bonus over the base case I used to decide investing in Toyota Caetano. 

CAETANOBUS: I mostly regard it as operational debt. I might be wrong though.

FUNDAÇÃO SALVADOR CAETANO: I find it difficult to understand what can be the pure business relationship between Toyota Caetano and a foundation. It is a smaller 1M exposition that I believe worth mentioning because I do not know how to explain it.


ps1: October auto sales are out: 760 units sold versus 509 units one year ago.
ps2: I was worried with the amount they would invest in their factory if the deal with Toyota to increase production was signed. They mentioned 10M in an annual meeting but subject to changes. With this amount and taking into account the current losses on that unit (that would at least disappear) I now just worry they might not get that deal signed


Disclaimer: read prior Toyota Caetano disclaimers. Always read the introduction post. I am and will be incorrect in some things I post (but I try to be correct) so always do your own research. This is mostly my interpretation of public data that you can easily get access to so you might get a more accurate picture by reading that data. I added shares very recently at current price (1.07€). If there is something you disagree or where I am wrong, please comment – I would rather be corrected than stay mistaken, in fact I would be glad to edit my posts to make them more accurate.

Tuesday 28 October 2014

Toyota Caetano: Third trimester relevant info summed up:

Toyota Caetano: Third trimester relevant info summed up:
Vehicles produced:217+0+137=354 units ( 278 in 4T2013, 248 in 1T and 513 in 2T)
Vehicles sold: 1417+669= 2086 units (2123 units in 2T2014, which seem to include 210 RACs, so external sales actually increased)
Renting number of units: 1226 units  vs 1383 units before 3T2013 (1129 auto and 254 industrial)
Industrial machines forklift market: 302 units  (1T 2014 324 units and 2T 2014 377 units


Segmental results:
Auto production in 4T2013: -900k --- Expect -600k
Auto commerce in 2T2014: 535 k Expect 550k
Auto renting in 3T2013: 685k Expect 620k
Auto services small loss Expect -50k
Industrial machines sales in 1T2014: 80K Expect 70k
Industrial services: stable in 300-400k Expect 300K
Industrial renting: about 200-400K Expect 300k
Eliminations 2T2014: 600k

So will guess:  720k profit in 3T2014, about 0.02€/share

ps: the promised post about related parties is written but I want to re-check it when I am less tired. In the meanwhile, and since Q3 results should be out soon, I decided to do this post

disclaimer: read previous Toyota Caetano disclaimers and the introduction post. I will be wrong so do your own research

Friday 17 October 2014

A follow up in BES and OI-PT merger

A follow up in BES and OI-PT merger
Most likely everybody already knows the follow up in both these situations.  Basically, Warren Buffett says that if a management lacks integrity, intelligence and energy will kill you. It seems there was at least one very energetic and intelligent person on this whole situation.

First the BES situation:
-As it has turned out, it seems there were “some” extra weak links besides those previously reported.
-In addition, this was a bank and banks are dependent on clients, if clients are fearful the bank explodes. And this last part is one of my main motives to keep banking outside my circle of competence. As I said back then : “I could try to learn it but I doubt it would be useful in this particular case”. That survival risk is also the problem in distressed investing, which I also said is out of my circle of competence (distressed investing is not the same as an all or nothing investing situation, this last one I would do).
- This last part lead to government intervention separating the bank in a bad bank and a good bank. Shareholders and junior unsecured debt went to the bad bank, deposits and senior debt went to the good bank. Shareholders and junior debt did not get screwed in this situation since they will kept the higher between liquidation value or the profit of the good bank sale. Up to now it seems the mistake was not including senior debt on the bad bank and most likely there will be little to nothing for prior shareholders (they were already screwed when the government intervened).
- A mention to the “ESFG has had to establish an "unconditional and irrevocable guarantee of EUR 700 million". Whatever that is it might mean that part of the problem might be covered”. It seems it was secured by the insurance company of ESFG. It is said that after that guarantee was given the insurance company was used to finance other GES companies and as such very little remained. It is hard to know yet where the truth lies but at least it seems that the insurance company is now worth way less than what it was supposed to secure.

And the OI-PT merger:
-          On my last post I said “ It seems likely that the merger will happen anyway but it also seems likely that (if PT isn't paid back in full in due time) the terms will be changed and maybe PT shareholders will receive a worse ratio than expected.” The terms were changed.
-          Basically the ratio was changed but PT shareholders will receive the Corpco Shares in the newly stated ratio PLUS the Corpco shares that can be bought with the recovered money (discounted for the time value of money as decided at the time of the new deal).
-          The thing is that despite some good news on the Rio Forte side (they already sold two businesses, one for an undisclosed amount and the other on a disputed public acquisition- Espirito Santo Saude is a quoted company- that seems to have lead to a nice price) the responsible Luxembourg court decided that anyway controlled gestion was not possible and liquidation should ensue. That basically means that despite these good news there might not be much there to be recovered. 
-          Taking into account these last two points and since I have been told the gap between Oi and PT prices is still huge, the arbitrage is most likely on again. The problem here is that there is no defined duration for the arbitrage and there is the risk that things turn out a lot better than expected in Rio Forte. As such maybe it is not worth the effort, but if you are interested to a quick check, you might find it is worth it.


PS: in a few days I might do a post about related party deals in Toyota Caetano. I have already written about it in a Portuguese forum but it is in Portuguese. As a spoiler I would say that I still have not sold any shares (but if the market crashes and Toyota Caetano does not I might sell some shares to increase diversification)

Disclaimer: I own Toyota Caetano shares. I have no position in the other stocks mentioned, I have no other knowledge than what goes on the news but since most of you are not Portuguese and do not follow Portuguese news this post might have some use. There might be some mistakes on this post so do your homework. Feel free to comment on any of my posts, I do not mind feedback. Always read the introduction post.

Wednesday 3 September 2014

Why I think Toyota Caetano is cheap: bullet points

Why I think Toyota Caetano is cheap: bullet points - as promised in the last post

1-They operate in Portugal: starting a recovery from the worst recession in the last 40 years (after the dictatorship fell). Still 14% unemployment (official numbers, as understated as they were when it was 17%).  – plenty of upside for consumption.
2- They have paid out as dividends 90% of net income since 2006: expected to continue. Likely to be well paid to wait.
3-  Big debt reduction, divestment and restructuring efforts since the crisis: divestment apparently is still in progress. Debt is currently low. Costs have been trimmed.
4- Parent company has higher debt and has had to negotiate with banks: pressure on the parent should mean high pressure on costs, debt reduction to progress and dividends to shareholders/parent company should be high as profits increase
5- Accompanying the recovery seems to be possible with little fixed asset investment, working capital investment should accompany sales. Investment in the improvement of the industrial unit is expected if new models are received (under negotiation with Toyota): such an investment would likely be on the currently active factory and as such I would expect it to be low in comparison with the profits added – it should be a kicker and not bad news.
6- Despite the depressed environment, they trade (at 1.3€) at around 35% of book value, at 12,5x first semester annualized net income (8% earnings yield, expected to be paid out) and at an annualized EV/EBITDA of 3,9.

And a few new data (as also promised in the last post):
August car sales are out:
- Toyota+Lexus 473 vehicles (298 last year, a 58.7% increase YOY in line with the 56% increase in July), totaling 1417 vehicles in two months and with a substantial market share increase to around 5% .

And I finally found some data on industrial machines sales:
-July forklift sales (global market) seem to have increased 225% YOY. This number most likely includes some areas where Toyota Caetano does not operate (and vice versa) but it is always better to see a substantial rise than a substantial fall.


Disclaimer: read my previous disclaimers in Toyota Caetano posts

Monday 1 September 2014

Toyota Caetano Q2 results are out

Toyota Caetano Q2 results are out. This post is mostly going to be a bullet points style post. I will post in the following days a 5 or 6 bullet points thesis explaining why I believe Toyota Caetano is so cheap and adding some recent sales data, some of which I still do not have. So let’s start:
-          Remember that in June I mentioned that the big gap in monthly car sales between April and May could (in a not so farfetched scene) be due to acquisitions for the rent a car business of Toyota Caetano? It seems it actually happened but in June (210 RAC vehicles where acquired to total 1226). So sales did not increase as much.
-          Net debt increased in Q2 compared to Q1: mostly explained by the increase in transportation equipment, most likely in the renting division both auto and industrial equipment. The good news is that they are selling 560 RAC vehicles until yearend and most likely the difference in timing is justified by business seasonality, so I expect:
o   The 210 RACs investment will only have effects in the second half results, as stated
o   Bigger profits from renting due to the increased number of vehicles in the Summer season
o   Continued divesting (with a 350 RAC vehicle reduction to 666 vehicles) in a less profitable business that requires substantial capital invested
o   A onetime profit in the sale of the 560 RACs (“This sale will give rise to significant gains”)
o   Net debt will decrease
o   Remaining debt will be structured mostly either in lease contracts or in mortgage contracts, with substantial reduction in short term debt. Leasing contracts have seen a 2579k increase despite 513k payments in 1S.
-          The net debt increase is also partially explained by both an inventory and accounts receivable increase. Relevant here is:
o   Non-cash working capital (excluding both short term debt and cash) increased to 56M from 50.65M (a 5.35M increase versus Q1). This 5.35M increase is due to the increase in sales (increased 21% or 13.8M).
o   Operating income has stayed mostly flat despite a  21% increase in sales: as such the extra 5.35M tied up in working capital generated almost no additional profits (only 28K pre tax).
-          Gross margin has fallen substantially in Q2 compared to Q1:
o   This explains the absence of change in operating income
o   The extra working capital needs will only generate earnings if margins recover
o   They state: this reduction “may be justified by the change of product mix traded, particularly with the increase in car sales.” This explanation makes sense since car sales have a lower margin than the remaining businesses the firm is involved with. Other explanation could be a pricing effort to sustain or recover market share. Market share is important not only because of scale in car sales but also because of future services revenue for the firm. In such situation, this investment (5.35M) could end up bringing future profits or at least avoiding a future reduction.
-          Net income increased in Q2 but a different effective tax rate was the main responsible
o   The funny thing is that the use of deferred tax assets was in Q1 but the tax was lower in Q2
o   Net income is what usually determines the dividend chosen, so in what comes to dividends it does not seem to matter where the net income came from

-          My 0.06€/ share 1S profit prediction failed by 0.008€/share. This is not meaningful and I do not overly rely on quarterly fluctuations but I will explain what generated the miss:
o   “a 40% increase in sales (assuming a fixed sales mix)” – a change in sales mix might have changed margins. The sales increase in a consolidated level was lower than 40% because of the 210 RACs deal. It seems I made a mistake in the numbers in the previous post. I assumed a 3638 Toyota+Lexus sales and it seems that number was only for the Toyota sales. Anyway those 210 vehicles are about one third of the increase. The commerce unit had a 33% profit reduction despite the sales increase.
o   The industrial unit had a 505k operating loss in Q2 versus an 802k loss in Q1 (a 300k reduction). I had guess-estimated a bigger reduction in losses. I have no comparison between quarters for auto transformation but they have reduced substantially in the semester. What I do not like about the industrial unit is that not only operating income is negative but also EBITDA is substantially negative. The good news is that an increase in production reduced losses. The bad news is that the company needed to use overtime work in May and June and as such new increases will require higher wages. The other good news is that there might be a lag between production spending increase and sales and maybe the some of the profits (or lower losses) will come in Q3.
o   Except for industrial equipment services all remaining units performed worse than in Q1.
o   Taxes were lower than estimated

-          Other bullet points:
o   Auto industrial unit: “In the meanwhile and as an estimate of the activity to be developed for the 2nd half of the current financial year, over 900 Toyota physical units and about 1,000 conversions are expected to be assembled, thus achieving levels of productive occupation which will enable a significant improve in income for this plant.”
o   Toyota auto commercial unit: “For the second half of the year, the outlook is favourable due to the launch of new products, which we see as core products: - Aygo (new generation); - Yaris (restlyling).”
o   Lexus auto commercial unit: “For the second half of the year, a even more favourable development is expected for the make's sales performance due to the launch of a new model: the new SUV Lexus NX 300h.”
o   Industrial equipment sales: At a global level, Toyota / BT sales grew by 41.9%, above the market, enabling to keep and strengthen Toyota + BT leadership with a market share of 27.8%.” – industrial services is the most profitable unit of the company and increased market share allows future services revenue
o   Costs have remained low despite the sales increase: the increase in payroll expenses in Q2 were more than offset by a reduction in external services



Disclaimer: read my previous disclaimers in Toyota Caetano posts, nothing has changed since the last one.

Tuesday 5 August 2014

Toyota Caetano: 2nd quarter preview and some more data

I have not posted for some time about Toyota Caetano. I have been adding to my position so I did not feel posting about it would be a good idea. 

So what more do we now know?
Q2 Toyota+Lexus auto sales were 2123 units, a 40 % increase over Q1 (1515 units).
Q2 Toyota auto production were 513 units, a 107% increase over Q1 (248 units)

Why do I compare with Q1 instead of comparing with the previous year? Because we have the Q1 results to compare and we know that the cost structure was similar. So what happened in Q1?

Industrial unit:
Q1 sales were 3916k and operational loss was 802k. So we know this is the lagging unit on the company. Industrial sales are composed of auto production + auto transformations. Auto production numbers are readily accessible. Auto transformations we can only know by reading the quarterly reports. It seems plausible however that auto transformations should be closely related with national auto sales. In fact in most years auto units transformed have been around 40% of domestic auto units sold (I can be wrong here), but in some years they have been higher. If this is true, then we can deduce that industrial sales will increase at a pace somewhere between the 40% auto sales and the 107% auto production increases. Unfortunately gross margin and fixed costs are not available on a segmental basis, making  accurate predictions impossible. We know however that due to the mostly fixed nature of  depreciation, wages and some other costs, the sales increase should be much lower than the earnings increase. Earnings might continue negative, but since 350k is 0.01€/share, if operational losses were reduced to 100K that would be 0.02€/share increase in operational earnings in the quarter (0.08€ annualized).
Domestic marked auto sales- Commerce unit:
Q1 sales were 69.396k and operational profit was 795k. So a 40% increase in sales (assuming a fixed sales mix) would mean about 97M in sales in Q2. A disproportional increase in operational profits should be expected, and a double might be reasonable. I will assume a 700k increase in operational profit (0.02€/share).

Auto services and renting, Industrial equipment and international commerce (Cape Verde)
Auto services sales, in the long term, should benefit from increased auto sales. However in the short term I do not expect much change. I have no new data to add here, neither on the auto renting unit. However, it is interesting to look at Q1 data:
-auto services operational loss was 80k on 3786k sales
-auto renting unit operational loss was 24k on 1587k sales
- industrial equipment operational profit was 940k on 4183k sales
As long as the economic environment keeps increasing the industrial equipment sales and profit should also continue increasing. The increase in profit should exceed the increase in sales due to the unused capacity (just like in the remaining divisions of Toyota Caetano)


Segmental data are subject to eliminations (since there is much integration between units global profit change should be much lower than the sum of the individual parts). However, after a 1411k Q1 operational profit (721k net income to shareholders), the results should see a reasonable increase in Q2. In fact, I would expect (on a very light and maybe optimistic analysis) a near double of both operational profit and net income, which would mean 0.06€/share net income in the first semester (0.12€/share annualized, slightly above my projection some months ago).

BONUS:
July Toyota+Lexus auto sales were 944 units, a 56% increase YoY  (606 units), equivalent to 62% of Q1 sales in a single month. This is especially important because auto sales were already in recovery mode in July 2013 (the company's operational profit in 3Q 2013 was about 130k, translating to a 30k net income). However August and September are typically weak months. The August effect is probably also true for the industrial unit, although I have no data on that. However, with this information maybe we can expect a 3Q2014 similar to 1Q2014 in what comes to results.

In conclusion, Toyota Caetano sales seem to be recovering faster than I expected. If the increase continues, maybe de 0.10€/share net income I wrote about some months ago will be too conservative. Since the shares are trading at 1.20€, a 0.12€/share net income (which should translate to a 0.12€/share dividend) would represent a 10% (dividend) yield. Not bad for a still subnormal year.

2Q2014 results should be out by the end of the month and by then I will be able to check if I am modeling the results properly.


Disclaimer: I own shares off Toyota Caetano. I have added to my position at current price and at higher prices, but my average price is still below current price. This is no investment recommendation. I might (and will be) wrong in some instances. Do your own diligence. Always read the introduction post.

Tuesday 15 July 2014

Banco Espirito Santo - risk, reward, circle of competence and coattailing

For a day last week the international markets went crazy on the reported falling of the a main portuguese bank. The problem was that some people didn't understand the difference between Banco (bank) Espirito Santo -BES- and Grupo (group) Espirito Santo - GES.

Today that has already become reasonably clear to everybody: GES belongs (partially) to the Espirito Santo family and GES owned 25% of BES (through Espirito Santo financial group, ESFG, this is quite an holding cascade). However, if look deeper we might notice that today GES owns (most likely) only 0,1% of BES. In fact Nomura  margin called them and aquired 4.9% (or 5%, I'm not exactly sure) of BES. Additionally, ESFG sold some debt which it can elect to pay with shares equivalent to 20% of BES valued at a price of €1.3129 (it currently trades at 0.38€). If ESFG bankrupts it is likely that those 20% will automatically settle the loan. So they actually own 20.1% of BES but are highly likely to soon own only 0.1%.

So we have the difference reasonably settled: the espirito santo family owns a holding that holds a holding that holds a holding (...) that holds 40 something% of a holding that owns 20.1% of BES, that actually are likely to be 0.1% in the future (maybe a not so distant one). In addition the management of BES change yesterday and the new managers not only aren't related to the Espirito Santo family, but actually are unlikely to be very sympathetic to them (they have a good reputation and most likely want to keep it clean, in fact they wanted to wait until the results are out to enter the group so that they wouldn't launch results they didn't have the opportunity to check). So basically GES and BES are almost totally independent right? Not so fast.

The problem is that only some months ago they were in charge of the bank:
- it has already been disclosed a significant direct exposition of BES to GES: since it is quite complicated I leave the link http://web3.cmvm.pt/sdi2004/emitentes/docs/FR51236.pdf
- there are fears that there might be further exposition either direct or indirect
- there are fears that the quality of management that led to the current GES situation might show up also in BES
- in a related note it seems that BES Angola (which belongs to BES) is in a distressed position. That would imply no further problem if BES couldn't be called to cover a part of the hole there (it is said that BES might have to put up to 2000-3000 million there). This is one of the big question marks. Actual exposition doesn't seem clear, but it is worth noting that the Angola government warrants about 4000 million of the about 6000 million credits there and it is said that BES Angola might be nationalized there. Here I can had no insight, I haven't studied this situation.

However, it is not all bad news:
Banco de Portugal (the regulator) has been all over this situation for months. They have been trying to insulate BES from the group:
- As you can read on the link, ESFG has had to establish an"unconditional and irrevocable guarantee of EUR 700 million". Whatever that is it might mean that part of the problem might be covered (as long as ESFG can cover it, they say they can)
- BES exposition to GES was already known by BP and as such BES had to make a capital increase of over 1000M€ last month at 0.65€, after which the bank traded around 1€
- the new independent management most likely was chosen under pressure from Banco de Portugal and they had to start their work there before their chosen date
-the new management is said to have asked today an audit to the company numbers
-today the previous CFO (if I'm not mistaken), who the family had initially proposed to CEO instead of the current management seems to have left the BES management.
- Seth Klarman, through Baupost, disclosed a position in BES last week, when the bank was trading around 0.5-0.6€ (today closed at 0.38€).


So what should I do?
1- Banking is out of my circle of competence. I could try to learn it but I doubt it would be useful in this particular case.
2- Distressed investing is out of my circle of competence. It isn't however outside Seth Klarman's circle and I believe I read/heard some years ago that Klarman was at the time the only fund manager he recomended (from those he could promptly remember).
3- I like coattailing but only to get ideas, I don't coattail blindly
4- I am not an high risk/high reward type of investor. Taking my circle of competence into account this is a very high risk situation for me

As such, I'm out and I won't regret not getting rich with this one. But if Klarman paid much more than you could pay today it might be worth your attention

disclosure: no position. I might have got something wrong on the info above. I believe it to be reasonably accurate but ALWAYS do your own due diligence.

Thursday 3 July 2014

The Oi PT merger and the price collapse

This merger is getting much more interesting than I expected in the beggining.

As mentioned on precious posts, I never entered the arbitrage situation but I did point out to the price gap getting thinner on the following week suggesting a closing of the arbitrage. But this is also a case to remind us that the most unexpected sometimes happens. The good news is that the arbitrage implied going short PT and long Oi common ADR and that the gap actually reduced a lot and might even invert (if it hasn't yet, I'm not going to the the calculation here - it is fairly easy to do and was already exemplified on the initial post). But let's go back a little:

So we had a situation of a merger where the terms had been settled and there seemed to be no way it was going to be canceled. A price gap of 18% allowed a decent arbitrage situation. But some months latter we find out that previously to the settlement PT administration decided to lend 897M€ to a shareholder (or related parties to that shareholder, it isn't important) in financial distress. It was a short term loan but (as it happens when you are in financial distress-- Don't go into debt) it is currently seeming likely that those shareholders will not be able to pay back on time (and even to pay back the full amount ever).

Since 897M€ is a decent amount of money to PT this might be a gamechanger. It seems likely that the merger will happen anyway but it also seems likely that (if PT isn't paid back in full in due time) the terms will be changed and maybe PT shareholders will receive a worse ratio than expected. Oi shareholders would get less diluted, PT's management image gets a "little" burned (and so easier to substitute), Corpco would have "some" millions less (and would have to find a way around it, which is hard for a leveraged company), but still the merger will probably go through. All this led to a price collapse of both PT and Oi, bigger on the PT side.

Anyway, the arbitrage situation, despite having been profitable should be turned off until new information arrives even if the gap re-opens. It could happen that everything stayed the same and this was just a lump but it seems wise to recalculate the odds.

Disclaimer: no positions for the moment, I have no idea if I will do something about this all situation at the moment. Most of the things  I write on this post are just a rationalization attempt and it is perfectly possible that I am wrong - do your own research. This isn't an investment advice (it never is - read the introduction post).

Wednesday 4 June 2014

Toyota caetano update

Both the auto data for May as well as the Toyota Caetano’s interin report are out.
First of all I have no insights as to why light vehicle sales were so off base in May. I would add however that both Lexus sales and commercial vehicle sales continued growing pretty fast. Taking everything into account the volume decrease of 7 units is negligible in terms of sales. However, it still is a totally off-base month. On the other hand an off-base month on the negative side after an off-base month on the positive side makes me think that maybe both were "sample errors" and the baseline sales should be somewhere in the middle. Sitting and waiting is the most important job for an investor and as such here I wait for June's results.
Market share loss is the most preoccupying factor that is implicit on the results. On a rising sales market it could mean that mindshare might have been lost. On the positive side what I like in Toyota Caetano are both the balance sheet and I would be happy with the cashflows even if they stayed flat yoy.
First three months results are out and in line with expectations.
Last three months 2013 volume was about 1730 Toyota light vehicles, 31 heavy commercial vehicles (so 1761 Toyota vehicles) and 61 Lexus. First three months 2014:“ Toyota sales increased from 1063 to 1515 (42.5%). Lexus sales increased from 37 to 62 (67.6%).”
Since the volumes are not comparable due to seasonality, the useful comparison here is to search for profits evolution. So (on a rolling base) a 13.5% decrease in volume resulted in an EBITDA decrease to 4139k€ from 4479k€ (7.5%). Net income decreased from 954k€ to 721k€ (24.5%), which is expectable since despite lower debt depreciation is a fixed expense. For that motive, and knowing that sales are not comparable, I believe the EBITDA evolution to be the most important on the comparison and would be above expectations IF the only profit driver where Portuguese car sales, which actually is not the case. As such, I would not go as far as saying that the results were above what should expected but instead they seem to be roughly in line with expectations

Both mensal sales and interim reports are more important to value trends than results meaning nothing if not into context. For example, investment in the auto renting unit from January through March was 1177K€. At 15k€ per unit that would amount to 78 units. If we imagine that the company wanted to increased their auto renting fleet for the Summer and decided that May was too near and June too late it would be perfectly logical that the company decided to buy themselves 100 units in April and none in May, which averaged out would mean that maybe normalized sales should have risen without such effect. This example, despite plausible, comes straight from fantasy land, but shows how little this results mean in an isolated way. With that said, I would rather have seen rising sales and higher profits but it changes very little in my thesis.

Disclaimer: I own Toyota Caetano shares. I WILL buy and/or sell shares without prior notice if I believe appropriate. Always do your own research. See my other disclaimers.

Tuesday 6 May 2014

Toyota Caetano: an update on sales and what will determine investment success

In my post about Toyota Caetano I rambled a lot around what I think is important but I might not have stated it appropriately.

In my opinion what truly can make the investment an homerun (or not) is:

1-The evolution of the portuguese economy in the form of car sales (more specifically Toyota an Lexus car sales) and, to a lesser extent, real estate market (because the company as both directly and indirectly a significant real estate position)

2-Toyota Motor Corporation long term resiliency (basically, if they stopped manufacturing cars or if their cars lost interest this investment would have little if any upside)

So, I must monitor these factors closely. Factor number two is both unlikely and very long term, meaning that monitoring has little use. The portuguese real estate market is less meaningful for the company and less objective to monitor. However car sales are easy to monitor.

And April (provisory) car sales are out:
-In April 2014, total national car sales were up 54.2% year over year, totaling a January to April increase of 46.4% yoy.
-In April, Toyota light vehicles sales increased 68.5% yoy totaling a 49.9% yoy 4 month increase.
-In April, Lexus light vehicles sales increased 475% yoy (only 4 units sold in April 2013) totaling a 107.3% yoy 4 month increase.
-In April, Toyota heavy commercial vehicles sales increased 500% yoy (only 2 units in April 2013) totaling a 83.3% yoy 4 month increase.

These data seem great but are less meaningful than they seem at first sight. The truth is that the first 4-5 months last year were very weak and April was one of the worst months (if we adjust for seasonality). Since the economy slowly improved throughout 2013 yoy growth should also decrease through 2014. However, it is likely that the pace continues for some months and, since car sales are still very low in comparison to historical levels, that could mean that this increase might be on the worst case a new normal but likely still below normal.

More importantly, what do current numbers mean in comparison to company projections?
In 2013 Toyota sold 5876 units and Lexus sold 156 units. They propose an increase of 16% in Toyota sales and 80% increase in Lexus sales. This would imply an increase of 940 Toyota units and 125 Lexus units. Until April 2014 the increase has been of 749 Toyota units and 44 Lexus units.

As such, it seems that very little growth is required to hit the full year objective for Toyota vehicles and Lexus objective is still on track. A flat second semester would probably be enough to reach Toyota sales objectives. Second semester last year represented about 1 million in net income (which is what they usually translate into dividends). Lower leverage however would most likely add a bit to that income and, in that case, the first semester would most likely be better than the second.

Taking everything into account I would not be surprised if, conservatively speaking, 2014 net income neared 3.5 million (0.10€/share) and if the company ended the year with little or no net debt (depending on the evolution of investment cashflows).


Also interesting will be comparing 2011 to 2014. Up to now sales have been inferior but it does not seem impossible that either in June or in September unit sales will be similar. That would allow us to confirm if the company's efficiency truly increased and to quantify the increase (however, special workforce reduction costs in 2011 will have to be taken into account in the comparison). I am looking forward to that exercise and hope it is reached already in the first semester.

disclosure: read previous posts disclosures and the introduction post. I own Toyota Caetano shares