Novabase: full year results. What now?

First of all the disappointing points:

1)      Dividend: 0,15€/sh.

2)      EBITDA guidance: >10M

3)      2016 EBITDA impacted by a 7M unexpected cost in a single project

About them:

About 1 and 2) I expected either an higher dividend or an higher guidance (since cash investment should result in an higher guidance). Unless this guidance is relative to attributable EBITDA (I don’t think it is), this should mean they expect the small growth in sales to be accompanied by a fall in EBITDA (excluding that 7M cost).

About 3) Since what matters to me is actual cash generation (see the positive points below) this charge should make no difference. It is a one off. The only thing I find strange is how can they have an unexpected 7M cost in a single project? Somebody must have screwed up big.

And finally, the positives:

1)      Net cash (as reported, I know it includes African debt) of 25,7M, which does not include the 44M received of the IMS sale. Actual cash generation was 14,4M. As such, net cash including the IMS should be about 69,7M. Which is 12,6 M above what I expected

2)      They totally froze the problem of African debt. As such, held to maturity investments already fell 1,5M since June, and are now at 9,3M, 4,4M to be received in the following 12 months. Things are improving in this point. I will quote from:

http://www.mynetpress.com/mailsystem/notician.asp?ref4=gn&ID=%7b885F2589-5CF0-490B-911F-ABCE468D7679%7d

"Deixou de ser possível comprar equipamentos a parceiros, pagá-los em dólares e depois receber em kwanzas ou em meticais", diz o gestor, confirmando que a empresa irá continuar a ter presença direta nestes países lusófonos "quando o pagamento é feito em euros ou dólares". "Já recusámos projetos no valor de €20 milhões porque não havia garantias. Não vamos trabalhar para perder dinheiro"

In English (loose translation by myself): no more Kwanza or metical payments. Presence in Angola and Mozambique will continue when payment is made in euro or dolar. 20M in projects was already refused due to lack of guarantees. No working to lose money.

And the updated math:

Market cap 84M

Net cash: 69,7M

Enterprise value: 14,3M

EV/EBITDA guidance: 14,3/over 10= under 1.43

Disclaimer: I own Novabase shares. I am and will be wrong. Always do your own research. Always read the introduction post.

Novabase: another good special situation?

Novabase is a Portuguese Information Technologies company. Up until now their business included three divisions: business services (BS); infrastructure managed services (IMS) and venture capital. As we will see, venture capital is a very small component of the company and they have just sold the IMS division. So what did they sell and keep?

EBITDA IMS:

2011: 7,7 M

2012: 6,3 M

2013: 4,1 M

2014: 4,6 M

2015: 2,9 M

5yr average: 5,1; 3yr average: 3.9; Median: 4,6

EBITDA Business Solutions:

2011: 10,9 M

2012: 12,7 M

2013: 11,2 M

2014: 8,6 M

2015: 11,5 M

5yraverage: 11.0; 3yraverage: 10.4; Median: 11,2

EBITDA  Venture capital 2015:0,5M

So they sold about somewhere between 20% and 40% of the business. The sale value initially was 38,365M, subject to adjustments, but was concluded this month by 44,0M (subject to final working capital and net debt adjustments). So basically, it seems they sold IMS for a 44,0M enterprise value (9,6x median EBITDA)
.

In June 2016, they had 8,2M net cash. In the last 6 months of 2015 they generated 4,9M net cash. If we assume they did the same in the 2^nd half 2016, then present net cash is: 8,2+4,9+44= 57,1M (or 1,82€/share).

Estimated present position:

If I am right, Novabase now consists in:

57,1M in net cash

A 11,5M EBITDA business

A small venture capital business (0,5M EBITDA in 2015)

And what does the market say?

Market cap (at 2,677): 84 M

Enterprise value (estimated): 26,9 M

What will they do with the money? – part one

 Historically:

At the end of 2012 they had 37,5M (1,19€/share) net cash (up from 14,7M in 2011). They distributed 0,8 €/share (25,1M ) in two year’s time and ended 2014 with 6,9M net cash. This means they consumed 5,5M cash in those two years despite having sold (net of cash and acquisitions) businesses worth 4,25M (so they consumed 9,75M). It is important to note that a good part of net cash generated in 2012 was likely the result of a reduction in working capital, which was reversed in the following two years (and there were restructuring costs in 2014). 

What they say:

“This is another step towards Novabase’s repositioning that has been carried out in the past few years, allowing us to accelerate internationalization with stronger means.”

Going back to previous reports:

“Novabase has defined as a priority for 2016 the continuity of the strategic focus on internationalization, adjusting the focus on the risks of the current global macroeconomic situation. Therefore, Novabase will limit its exposure to emerging markets, given the volatility in some of the economies where it operates.” – 2015 Annual report

“Novabase has defined as a priority for 2016 the continuity of the strategic focus on internationalization, adjusting the focus on the risks of the current global macroeconomic situation. Therefore, Novabase will limit its exposure to emerging markets, given the volatility in some of the economies where it operates.

“as a result of discontinuation of some offers that added lower value and our policy to limit the exposure to emerging markets Turnover and EBITDA decreased BY 6% and 7%, respectively”– 6months 2016 report.

This means they have been holding back in 2016. Despite that, business solutions international sales were 41% in 2014 and 60% in 1H2016. It is reasonable to expect that some of the cash from the sale will be reinvested. However, since 60% of total sales are already international, it is likely that most of the investment is already in place, and as such this investment might have an higher impact in profits than previous investments (probably mostly working capital investment).

What will they do with the money? – part two – what do I expect?

This time the increase in net cash is due to completely different causes than in 2012 and as such I would expect that:
a) Any working capital investment is growth investment (instead of just going back to normal levels)
b) Distributable cash is higher (in % of net cash), because growth investment is already taken care of;

Most likely they will distribute most cash as dividends (maybe 1€/share), reinvest about 20M and still keep almost 6M in net cash (they have always kept net cash so it would be foul to assume they would change to a more balanced net position). The 20M reinvestment should be enough (or more than enough) for substituting IMS EBITDA and keep profits levels, while allowing room for an higher payout of future earnings.

What valuation do I get to?

31,5M dividend plus a 15M EBITDA business with 6M net cash. At 7 times EBITDA (which seems a conservative multiple) that would mean a 142,5M (4,54€/share). At 5 times EBITDA it would mean 112.5M (3,58€/share ). Any cash generated in the meantime should be added to returns since I expect an higher payout ratio.  

Disclaimer: I own shares of Novabase. This is not an investment advice and I am not a professional adviser. Always do your own research. I am and will be wrong about many things, it is possible that this is one of those. Always read the introduction post.

SAPEC (or looking for 75% return in less than a year)

A few weeks ago SAPEC announced the sale of their main business (agriculture business – AB):

 At 03/11/2016 they announced they were considering offers to sell that business for “an amount equal to 11 to 12 times its recurring EBITDA” of 39.5M and four days later they announced  the sale to Bridgepoint for 456 million enterprise value (11,55 x EBITDA).

To quote “The sale of AB was made on the condition of obtaining the approval of the Portuguese and Spanish competition authorities” “ there are no overlappings between the activities of Bridgepoint’s subsidiaries and those carried out by the Sapec’s AB sector, and a clearing is expected within two months of submitting the dossier, which will take place by the end of November”.

So the likelihood of the deal closing seems very high (it is a small deal to Bridgepoint).

What if?

The 03/11 announcement is somewhat reassuring. In my interpretation it is implied that there was more than one offer between 11 and 12 times recurring EBITDA. The deal can fall anyway, but I would guess the likelihood of no deal happening is very low.

What will they do with the money?

“Sapec intends to strengthen its other activities in Portugal and Spain and, once the transaction has been completed, to distribute to its shareholders a substantial part of the cash received, under specific terms and timing still to be considered.”

So here come the numbers:

SAPEC net debt as of 06/2016: 162,5M (according to the statement 137,6 M in AB)

Cash to receive + debt assumed from AB: 456M

SAPEC after closure:

Net cash: 293,5M

Industrial chemicals (2015 EBITDA: 1,059 k€)

Environment 2015 EBITDA: -29k€ (they are planning the sale, negotiations were underway for a management buyout)

Agro commodities distribution (2015 EBITDA: 969K€)

Logistics (2015 EBITDA: 1389 k€)

Assets held for sale: liquid bulk terminal in Cadiz (at the books for net 7M)

Real estate:

-          100 hectares of the industrial park in Setubal (www.blueatlantic.pt)

-          100 hectares for tourism in Lousal  

Other positions: ENERGIA LIMPIA INV., THARSIS AND NATURENER: they explain extensively in the annual report (note 14 a pages 70-72). SAPEC guarantees 36M of debt to a bank, so in the worst case they lose 36M

To be conservative I would argue that all these assets are at worst canceled by the 36M guarantee, but they are probably worth a few millions more, at least.

CONSERVATIVE EQUITY VALUATION

Net cash after closure of 293,5M (which I believe will mostly be distributed to shareholders)

MARKET CAP: 168M (124€/share)

Conservative upside: 75%

Expected period of realization: 6 to 12 months

Disclaimer: I own shares of SAPEC. This is not an investment advice and I am not a professional adviser. Always do your own research. I am and will be wrong about many things, it is possible that this is one of those.

Berkshire Hathaway: update after the annual report

On the previous post on Berkshire Hathaway, I pointed my view on BRK valuation under the two-column method and the return it implied. Under that calculation, the expected return is somewhere around 10% a year. Taking into account that I expected year end 2015 intrinsic value under this formula to be about 181,5$ per B share. Now we have definite results:

Earnings (excluding underwriting gains): 11.186$ per A share

Investments:  159.794$ per A share

Which result in 271.654 per A share or 181,1 per B share

It seems I wasn't that far.

But this year Warren Buffett proceeded to update on his view of intrinsic value:

1- Underwriting gains are now fairly stable and should be considered for intrinsic value purposes. He event told us that while this year underwriting result was 1.118$ per A share the average result for the last 10 years was 1.434$ per share (telling us the normalized underwriting gains)

2- As happened before he excluded some intangible write off from the earnings, but he also told us that since BNSF implied spending in excess of depreciation at all times, we should consider BNSF earnings to be lower than they actually are (6.775 million pre-tax earnings or 4123.6 per A share with depreciation of 1,932 and capex of 5,651)

About this:

1-  The purpose of excluding underwriting gains for me was

a) how stable are those in case of catastrophe? Since for 13 years they have been positive I was inclined to believe that they were to be expected on average (negative underwriting income in a year should give them the possibility of raising prices which would compensate on the following years). Warren Buffett just confirmed that and since he has a better understanding of their exposures I believe I should confirm my prior belief

b) Investment deferred taxes and float were not being discounted and BNSF earnings in excess of depreciation (point 2) were not being discounted also. So excluding underwriting gains was an overly simplified way to do that. However, that was (knowingly) incorrect because it is inaccurate. 

2- He mentions spending in excess of depreciation but doesn't mention:

a) BRK is able to defer taxes to compensate (at least in a big part) for that, as long as he keeps spending in excess of depreciation  (which he tells us is forever)

b) A big part of that spending is growth capex be it to: create new routes, to increase existing routes capacity or to maximize efficiency and thus get better pricing than competition and steal business (about this last point he does mention the difference in prices versus the competition: under 3c per ton mile versus 4.2-5.3c; a huge difference)

To make the calculation more accurate I should instead of ignoring underwriting gains:

1-Take them into account

2- Discount the excess value of float. However:

a) float is growing, which simultaneously further reduces the chance of it having to be paid back and if it grows a lot we should, instead of discounting it, increase its value due to its growing ability

b) Float implies excess cash (point 3) and implies fixed income investments (instead of more equity investments).

3- Discount the excess cash needed: float implies at least a 20 billion cash cushion (which Warren has stated he views as at least 25 billion since going under 20 would make him take emergency measures to sell). It actually doesn't. He proceeded to explain that part of it was because of the financing method at Clayton Homes. In addition at least part of it is needed for other businesses regular working. But these 20 billion whatever they are needed for they should be discounted. However.

a) They should not be discounted in full because: the cash still belongs to Berkshire and gives a cushion to the investor that most other equity investments don't by allowing survival to 1 in 100 year events;  

4- Discount excess debt: not applicable

5- Discount investment deferred taxes: a good part of it might never be repaid because he views it as businesses purchased (just like BNSF). However taking them as nonexistent is somewhat aggressive

6- Discount BNSF earnings (which as explained before is quite complicated, or impossible).

1- Plus 14.340 per A share (23.560 million or 9.56$ per B share)

2 and 3- Probably 2 a) nets with 2 b) and 3 on zero, but it could go to either side

4- not applicable, the business could take some more debt (in fact we could assign a positive value to the capacity to increase leverage but they do not intend to increase it much so it is more conservative not to)

5 and 6- Are very hard to discount. The appropriate discount might be much lower than the value in 1, but I always found it more conservative to simply ignore, but I am probably being too conservative

However by changing the provided values Warren in fact updated his estimate of current intrinsic value, stating it to be higher than the standard two column method would say. Most likely he is the one who is right. Anyway, the price is still much lower than the two-column price, why should I worry if the intrinsic value is higher 9,5$/B share? And anyways, even if I took that into account that would probably change the 10% price to the 9,5% price or something similar.

ps: the share repurchase value has increased to 124.4$ per B share (very near the price it was trading at the time of my first post a month ago)

Disclaimer: I own BRK-b shares. This is not investment recommendation. Always do your own research. Always read the introduction post.

Berkshire Hathaway at 68% of fair value?

Warren Buffett proposes the two column method to value Berkshire Hathaway. He seems to believe it is appropriate to gauge the intrinsic value of the company. He seems to believe paying fair value is the same as getting a first day 10% pre-tax. Here is the table

	Per share investments	Per share pre tax earnings	Automatic IV	IV/B share
2007	90343	4093	131273	87
2010	94730	5926,04	153990,4	102
2011	98366	6990	168266	112
2012	113786	8085	194636	129
2013	129253	9116	220413	146
2014	140123	10847	248593	165

Peak to peak (not saying that 2014 was a peak) in these seven years this estimate of intrinsic value has risen at compounded rate of 9,6%. If we fast forward to 2015 it should go nearer the 10% compounded rate (the Heinz deal had a huge impact in per share investments since I believe it is appropriate to include Heinz there, even if he doesn't). So it seems he is approximately right in his intrinsic value estimate. So 165x110%=181,5$. It is trading at 124,1 meaning a 32% discount to the value where it would yield (theoretically) 10% peak to peak. Additionally, since they do not pay dividends this is an extremely tax efficient investment if we believe this is right (all numbers I have reached always go somewhere near this two column approach so I believe this right)

Disclaimer: I own BRK-B shares. This is not an investment recommendation. Do your  own due diligence. Always read the introduction post

A safe bond yielding 6% in less than 2 months: too good to be true?

First of all the link:

https://www.euronext.com/pt-pt/products/bonds/PTMENKOM0001-XLIS

As you can see this bonds yield 6,75% per annum and are trading at 95% of par value, and are to be repaid in 18 March 2016, the coupon is paid half yearly. Accrued interests are currently 2,436%. So, you would pay 97.436€ today to receive 103.375€ in less than two months (54 days), approximately 6,1% (approximately 49% compounded annualized yield).

So the return is great. What about the safety?

This is a Mota Engil SGPS bond. They are a construction company with lots of sub-companies.

They have about 1600M in debt with parent company warranty. This emission represents only a very small part of their total debt.

They have loads of short term debt that are part of their normal activity.

They have a huge business in Latin America and Africa (especially in Angola), since it is a construction business they might have difficulty collecting.

However, they released a statement last week saying:

1- Their collections were positive in last quarter 2015 in most countries where they have activity, resulting in a significant debt reduction

" the receivables flow was positive in the three regions (Europe, Africa and Latin America), which allowed for a significant decrease of the consolidated debt level between the period ending in September 2015 and the period ending in December 2015"

and

" it is important to highlight that almost all countries have contributed to this trend, mainly Mozambique, Mexico, Poland, but also Angola, Czech Republic and Portugal."

2- They have continued with their policy to extend maturities and reduce debt cost

"Mota-Engil has been executing the refinancing of its debt in line with its plan and strategy, having closed several operations during the fourth quarter of 2015 and during the first days of 2016. Accordingly, Mota-Engil financial strategy mainly focuses at decreasing the debt cost and extending the debt maturity."

3- They maintain their strategic objectives

"from a strategic standpoint and as previously stated, it is worth mentioning that the focus on the waste collection and treatment businesses will allow the segment to grow and to expand in the international markets (namely with new operations in Latin America and in Oman). Besides, the disposal of highly mature assets (namely in transportation concessions and ports) has been proceeding successfully."

a) It is important to mention that this waste collection business was acquired in Q2 2015 and has already been paid for (and is included in the debt mentioned above, a good part of the non guaranteed debt is also in this company)

b) The mature businesses are

       i) transportation and ports business: sale to Yildirim agreed. Will result in a debt reduction of 330M (275 equity + 55 debt)

       ii) Ascendi: An investment of 300M for 50% of some concessions by Ardian is expected to close this month. Additionally, they are in negotiations to sell Ascendi final proposals planed for the end of this month and a conclusion reached in February. Mota Engil owns 60%, expects to sell at least 40% (and ideally maintain the remaining 20% as a strategic partnership for their construction business). Santander apparently values Ascendi at 326M, and BPI values it at over 600M€. If they were cash starved they would agree to sell the 60% which would mean approximately 200M (according to portuguese newspapers)

       ii) Indaqua: said to be in advanced negotiations with closing expected to the end of this month. They own 50,06% (a control position) which are seeking to sell. (according to portuguese newspapers). The non controlling half is held by Falanx (german), which bought it in 2014 for 52M. Obtaining the same 52M for the controlling 50% seems reasonable

So the say they reduced debt last quarter and they are selling assets which should result in a near term cash receival 585M to be used in reducing debt. So the likelihood of missing payment on this bond seems reduced.

risks:

a) New government in Portugal says they are monitoring Yildirim transaction. It is hard to believe they would interfere but not impossible

b) New government in Portugal is canceling some deals by the last government. One of them involves a Mexican company which is arguing their investment is contemplated in bilateral deals between the two countries. Mexico is a key market for Mota Engil

c) New government in Portugal and general investment feeling globally is weak this month. The proposals for Indaqua and Ascendi might be lower than expected or deemed inappropriate

d) They might have difficulty in collecting receivables

It seems unlikely all this risks would pose a problem for a small bond due in 55 days

Disclaimer: I could not buy this bond. Asked for it and was informed that my broker did not currently trade bonds. So I have no positions. This is not an investment recommendation. Do your own due diligence. Always read the introduction post

edit: spelling

Toyota Caetano an errata and 1H2015

Toyota Caetano: an errata

As I previously stated I am and will be wrong so you should always do your own research. My mistakes have been mostly when analyzing the renting unit before. In fact, I was under the impression that their fleet was renewed less often than it actually is. In fact, in August last year the following statement in 1H2014

“In June 210 units were acquired for RACs segment, the impact of which in Turnover will only have effects in the next half of the year. We have good perspectives for the second half of the year, as the sale of about 560 RAC's vehicles is expected.”

lead me to the belief that they were preparing a global divestment in the rent-a-car business of 350 units.  Since they ended the year with only 592 units that seemed to be pretty accurate. However, they did a similar statement in 1H2015

“For the RAC segment, 250 units were acquired in June, whose impact on turnover will only be reflected in the following semester. We have good prospects for the 2nd half, as the sale of about 465 RAC vehicles is expected”

but the number of RAC units rose to 1137 (a 545 growth since year end ). So they actually renew their fleet much more often, which means a bigger chunk of the unit profit comes from vehicle sales at a profit after depreciation instead of coming from the renting itself.

In addition, since I assume those units to be mostly Toyota (and I still need to confirm that), an important role of the rental unit might be to help the company achieve new vehicles sales volume for Toyota. That could mean the rental unit might bring profit to other units while roughly breaking-even by itself.

And this leads me to another point, which I was writing some time ago:

a.       which is the return on equity of the renting units?

                                                              i.      Auto renting equity at year end 2013/2012: 1.740k/1.523k generated a net income of 263k/368k at year end 2014/2013, which would mean a ROE of 15,1%/24.2%. However net income in 2012 was marginally positive and it was  negative in 2011/2010.

                                                            ii.      Industrial equipment renting unit equity at year end 2013/2012: 21.725k/24.532k generated a net income of 1142k/860k at year end 2014/2013, which would mean a ROE of 5,2%/3.5%

                                                          iii.      The ROE of the industrial equipment renting unit is quite low. I did not have that idea which means I might have posted somewhere on previous posts a different number due to some miscalculation (fortunately you all read my disclaimers where I state that I am and will be wrong).

                                                          iv.      Recent ROE in the auto renting unit is high but that might be due to a fleet reduction at above book prices. Past ROE was negative. If we look at the full cycle returns might be even worse than the industrial equipment renting unit ROE.

So on the one side this units seems to help increase Toyota/BT volumes and as such contribute to firm profits but on the other side individually their ROE is quite low. So low in fact that if there is no indirect profit it might not make much sense to have that money invested.

Toyota Caetano: 1H2015

A few key quotes from the first half report:

“The main landmark in the first semester was the end of production of the Dyna model,and the preparations for starting the production of the Land Cruiser series 70 (LC70).”

“The forecast is that by the end of the year 1,250 units of this model will be

manufactured exclusively for exporting.”

This forecast is important since this was released at the end of August so they should get it approximately right. One year ago the forecast was:

“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”

And the real number was:  903 and 2019, respectively. So they seem to get it right when it comes to Physical units. Conversions are dependent on auto sales it is harder to predict. So 1250 it is.

“In the PPO/PDI activity (Transformed /Prepared Physical Units), there was a 78% increase over the same period last year.”

This partially countered the fact that they only assembled vehicles in two months of the semester. The results were, unsurprisingly poor: a 2322K€ net income loss.

The company earned 1059k€. However they previously mentioned they expected to break even in the industrial unit in 2H2015. So what would the result have been at break even? 3381k€ (0,097€/share).What if second half is equal to last year’s (quite conservative estimate) but with a break even in the industrial unit? They lost 1017k€ on the industrial unit and had a net profit of 2154k, which would mean a net profit of 3171k€ (0.091€/sh). That would make  0,188€/year if things were to stay flat after that. I still think these assumptions are conservative for normal earnings but since all earnings are paid out that would be a nice dividend yield at current prices (1,07€).

Other quotes:

“For the second half of the year, the outlook is quite favorable, namely with the

expected good performance of hybrid vehicles and of the aforementioned models -Aygo, Yaris, Hilux and Dyna -, as well as with the expected increased sales of Auris and Avensis, which were the object of strong product renewals.”

“This was mainly due to the materialization of a large fleet business in the Warehouse Equipment segment that significantly influenced both the market as well as BT sales.” (a BT Business of 349 units.)

And at Caetano Auto:

“As for depreciations, and keeping the criteria of applying the maximum rates allowed for tax purposes, this item still represents more than 1 million euros per semester, significantly influencing pre-tax profit.” – for some reason I like this statement.

Disclaimer: read my previous disclaimers in Toyota Caetano. I am and will be wrong, do your own research, I own shares