Warren Buffet,
Berkshire Hathaway Chairman and CEO, is famous for his "20 ticket punch
card", by which he meant that if each investor could only act upon 20
ideas in his lifetime he would do much better. Similarly, his mentor Benjamin
Graham said "you don't need to know a man's exact weight to know that he's
fat". When I started analyzing Toyota-Caetano I automatically remembered
both of this quotes and I will try to show you why. I will first present the
business, past results and dividend policy with brief comments, then I will
present some macroeconomic data and perspectives, ending with a valuation after
which I will show how that compares to current price and what can be expected
when buying at this levels.
Business description
This business
description is adapted from Reuters and their Annual Report:
Toyota Caetano
Portugal SA (Toyota Caetano) is a Portugal-based company involved in the
automotive industry. The Company is engaged in the import, assembly and sale of
passenger cars, heavy vehicles and industrial equipment, as well as in the sale
of spare parts for motor vehicles and provision of related technical
after-sales services. Toyota Caetano is active in the import and distribution
of products under brand names Toyota, Lexus and BT (the warehouse
equipment brand in the Toyota Material Handling family). It operates an industrial
plant involved in auto production, pre delivery
inspections and vehicle conversions. Additionally,
the Company is engaged in the rental of industrial equipment for cargo movement
(Light Passenger Vehicles, Light Commercial Vehicles and Industrial Machines).
Controlling shareholders:
- Grupo Salvador Caetano SGPS, S.A. 60,82%
- Toyota Motor
Europe NV/S.A. 27,00%
Historical results:
I assembled a
table with the company's results in the last 8 years, as presented by them in
the consolidated report. The motive I did not go further back was because I
wanted to present comparable numbers (values in thousand Euro €):
Year
|
2006
|
2007
|
2008
|
2009
|
2010
|
2011
|
2012
|
2013
|
Sales&other op income
|
516.491
|
576.983
|
561.818
|
438.074
|
463.265
|
323.974
|
245.043
|
254.219
|
EBITDA
|
42.132
|
36.722
|
29.680
|
34.134
|
32.054
|
15.580
|
15.227
|
15.383
|
cash flow from operations
|
5.242
|
-11.656
|
6.713
|
61.322
|
25.580
|
7.930
|
25.132
|
15.449
|
cash flow from investing
(net)
|
7.012
|
26.034
|
-2.138
|
-1.028
|
-4.735
|
-1.357
|
2.849
|
2.563
|
interest paid
|
7.816
|
5.095
|
5.574
|
3.873
|
3.041
|
3.724
|
3.917
|
2.838
|
Net financial expense
|
5.583
|
2.168
|
4.147
|
251
|
-1.411
|
-951
|
-2.904
|
-1.744
|
Net income
|
14.360
|
11.526
|
1.798
|
10.379
|
11.740
|
-2.218
|
-2.853
|
61
|
Net debt
|
105.850
|
93.566
|
102.773
|
50.543
|
41.622
|
53.756
|
32.927
|
19.046
|
Book value
|
134.536
|
139.220
|
125.817
|
134.344
|
139.746
|
131.066
|
128.423
|
127.750
|
Total Assets
|
390.667
|
338.351
|
342.621
|
291.189
|
291.171
|
261.293
|
213.981
|
202.147
|
Toyota market share
|
6,3%
|
6,6%
|
6,1%
|
6,1%
|
5,5%
|
4,2%
|
4,4%
|
4,6%
|
Employment
|
2936
|
2102
|
2110
|
1943
|
1898
|
1744
|
1571
|
1.478
|
Units sold (T+Lexus)
|
16960
|
18680
|
17015
|
12596
|
15367
|
8268
|
5040
|
6.032
|
Additionally, it
is worth noting that as of December 2013 over 90% of operational sales are
related to the auto business, which is why I will focus mostly on that
business.
So, we have a
company whose sales increased up to 2007, fell in 2008-2009 and recovered in
2010, which as we all know is expectable because of what happened to the world
economy in that period (the great recession). Also expectable is the sales
declining from 2010 until 2012 due to the Portuguese debt crisis and recession.
So, we have a cyclical company, strongly tied to macroeconomic performance
involved in the automotive industry. Interestingly sales slowly started to
increase in 2013, meaning that recovery might be underway. Toyota market share,
which fell significantly in 2011, has also started to recover partially. It is
possible that this market share reduction has not resulted from a real loss of
mind share but only from a less recession proof vehicle mix, specially because
of the progressive recovery that took place in the following 2 years. It could
also mean a real mind share loss and as such it is something to take into
account. About Toyota market share it is important to notice that in 2005 it
was 5.6% and that the company projects 4.8% to 2014.
In addition, Total
Assets have been declining with little interruption since 2006 and
simultaneously cash flows from investing have been mostly positive (so, this
company has been taking money out of the business instead of deploying more
money in). Simultaneously, despite some fluctuation, book value has stayed
roughly flat, which has resulted in the deleveraging of the company with net
debt reducing 82%.
Earnings have been
negative in 2011 and 2012 (approximately 2.2M and 2.9 M), however included
there are workforce reduction charges of about 3M€ (3 million Euros) and 1.5 M€
in 2011 and 2012, respectively. Also, the company has accumulated 2.871.892€ in
deferred tax assets, which should be translated into cash as the company
returns to profitability (this as already started as in 2012 this number stood
at 3.440.928€). In 2013 earnings have been near zero, meaning that the scaling
down of the company seems to have stopped the bleeding and maybe better days
lie ahead.
Moreover, since in
2013 sales increased a little it might be useful to look at current cash flow
from operations as a reasonable bottom number. At 15.4 M€, and with interest
expense falling due to the debt reduction, net debt of 19M€ could be fully paid
by the first semester 2015 and all cash flows could then flow to the equity. It
seems highly unlikely however taking into account the currently very low level
of debt, that they would keep reducing it much further.
Liquidity position and investment properties:
If the company is
to recover to their previous state it is likely they will need to re-leverage,
at least partially. Their debt position consists of:
1-Real estate
guaranteed bank loans:
Other than their
real estate properties included in their fixed assets, they hold on their
balance sheet 16.502.727€ of investment properties. The proceeds from these
assets of 3.246.319€ in 2013 (19.67% on assets). These assets have been
evaluated in 2011, 2012 and some of them in 2013 by American Appraisal. Their
fair value according to the company has been estimated at 52.967.400€ (6.1% on
assets) . Should this number appear on the balance sheet the equity would be 36.5
M€ higher (28.6% higher). As of December 2013 they had a used amount of
9.736.842€ in real estate guaranteed debt. This debt is due annual payments
(1.842.105€ in 2014) ending in June 2017.
2-Guaranteed
account: 10M€.
3- Leasing
contracts: related to the purchase of facilities and equipment. Total capital
to be paid: 6.167.509€. Total interests to be paid: 692.200€.
4- Refundable
subsidies: 818.034€
5- Credit lines:
51.7M€ unused credit lines that can be used for operational or financial
purposes without restrictions.
Consolidation perimeter changes and investment assets
Since the company
as clearly divested, it is important to know which areas the company totally
divested and its impact to profits, otherwise comparisons might be incorrect.
Similarly it is important to know if the company would have to re-increase
total assets (with either debt or equity) to 2006 level to go back to 2006
earnings. It also helps to understand better the company's capital allocation.
So the chronology of perimeter changes follows:
2006: no changes.
2007: focusing in
Toyota units by selling their financial participation in various companies for
14.541.000€and one industrial unit for 8.850.000€. This operation resulted in a
capital gain of 1.810.601€. In 2006 this companies had sales of 101.352.430€,
operating income 2.387.553€, net interest expense of 833.810€ and net income of
603.552€. Operating cash flows were 1.015.329€ and investment cash flows were -
947.593€. Total assets were 69.497.466€, net debt of 19.243.911€ and equity was
22.761.068€. So they sold at a small premium (3%) to book value a group of
companies with a combined leveraged ROE of 2.65%.
2008: acquisition
of Movicargo for 1.130.000€ whose book value was 518.003€ and cash acquired was
1.744.539€. It was responsible by BT industrial machines sales and was
integrated in the industrial equipment unit.
2009: no changes.
2010: Saltano
(99.98% owned) bought 5,21% more of Caetano Auto.
2011: liquidation
of Salvador Caetano UK, Ltd (no activity in 2010).
2012: acquisition of Caisb - Companhia
Administradora Imobiliária São Bernardo, SA as a Caetano Auto subsidiary.
2013: they have
liquidated Caetano Components (2012 total assets were 4.589.101€, book value
was 1.485.000€ and net income was a negative -318.000€ and the company faced a
6 month lay-off in 2012). This liquidation settled loans granted by Saltano
amounting to 1.99 M€. Additionally they bought the remaining 50% of Caetano
Retail Norte II and fused all Caetano Auto subsidiaries into Caetano Auto. This
four subsidiaries in 2012 had negative book value of -1.726.647€ and negative
net income of -623.085€. This had a negative impact in the company's book
value, but after the fusion there was an improvement in 2013 Caetano Auto's
sales (20.8%, 9.7% if all subsidiaries are included) and net income (-1.9M
versus -2.15M or -2.8M joint result).
So it seems that
most divestment was in negative earnings subsidiaries. Exception to the year
2007 when the biggest divestment took place implying a small reduction in
operating earnings (and a much bigger reduction in assets). Taking everything
into account the result was a big divestment in unprofitable subsidiaries.
The company also
had, and still has, some available for sale investments. The company had
invested 5.958.067€ Portuguese bank stocks valued at 15.698.383€ in 2006 which
were sold in 2010 for 5.305.021€ they partially rebought this stocks in 2010
spending 588.451€ which they sold in 2011 for 588.451€. They still have a
participation in a real estate fund bought in 2010 for 3.013.947 and valued in
2013 at 3.274.639€. Their pension plan also has a 10.878.417€ participation
(37.7% of the portfolio) in the same real estate fund. The movement with bank
stocks also explains a part (about 10M€) of the reduction in total assets since
2007.
Taking everything
into account I will treat earnings since 2006 as comparable but after having
read this it is up to the reader to decide if the scale is balanced. In
addition, asset sales in 2007 combined with the loss on bank shares between 2007
and 2010 account for almost 80 M€ of the reduction in total assets between 2006
and 2013 (42% of the 188.5M€ reduction). This means that to generate a similar
level of profitability the company now probably needs a smaller investment.
Macroeconomic data and 2014 targets:
Since April 2013
the Portuguese economy has steadily been recovering resulting in unemployment
rate going from 17.6% in February 2013 to 15.3% in January 2014. Auto units
sold increased 12% in 2013 and Toyota market share increased 0.2% to 4.6%.
Lexus sales increased 77%. A maintained market share also means that if
sustained they will end up mimicking the national context.
In 2013 annual
report they assume the national auto market will increase 13% in 2014 and
propose a 16% increase in Toyota sales (4.8% market share) and an 80% increase
in Lexus sales. About this objectives it is worth noting they propose "to
keep the growth pace of the activity, as substantiated in actual data from the
first quarter of the year." As a double check I searched for the first
trimester auto sales: total auto sales in Portugal increased from 28144 to
40460 units (43.8% ) versus the same period in 2013 (provisory data). Toyota
sales increased from 1063 to 1515 (42.5%). Lexus sales increased from 37 to 62
(67.6%).
Toyota Caetano
also sells industrial machines equipment (for which I did not find data for the
period), and has an industrial unit that at the moment is only manufacturing
Toyota Dyna. The industrial unit has been lagging in recent years, having started
to manufacture the new Dyna 200 model in the second half 2013. I have not found
credible information about future new models for the factory and as such I
would rather take the company's expectations. Their industrial unit has been
substantially reduced and their expectation is to "at least keep the
existing jobs as well as growing production volumes, expecting improvement in
Net Results."
Dividend policy and board alignment with shareholders:
From 2012 annual
report:
"In brief,
despite being always conditioned by its own payable net profits and by the
expectations thereby created for subsequent period(s), up until 2005 the
Company had been paying dividends within a percentage range of 30% to 50% of
the profits.
Taking into
account the level of equity achieved in the meanwhile, from 2006 the Company
has been paying dividends within a percentage range of 75% to 96% of payable
net profits obtained. In 2010 this percentage is around 82%.
In relation to
2011 and 2012, and given the income ascertained for the financial year, the
Board of Directors does not submit any proposal for the payment of
dividends."
So, since 2006 the
company has paid out most of its earnings because they had reached their
desired level of equity. As I have noted, despite some fluctuations equity has
stayed roughly flat since then. It seems to be expected that the company
returns to profitability, otherwise we would see equity distributions instead
of net income distributions to shareholders (meaning dividends in excess of net
income) - however, should the divestment continue at the same pace, net debt
would probably be paid quickly with the remaining flowing to shareholders, but
I see that as unlikely.
The board is
mostly composed of Caetano family members and Toyota representatives. The
majority of the capital (60.82%) is owned by Grupo Salvador Caetano SGPS, S.A.
whose interests are probably aligned with the shareholders. Toyota Caetano
however is only a part of their business with its total assets being
approximately 27% of their total assets in 2012. Grupo Salvador Caetano has
public reports available, where we read they make use of leverage at the parent
and have entered renegotiation with a bank in 2012 and accepted "certain
restructuring operations". In fact they had at the time some net
debt/EBITDA covenants (7.0X in 2012-2014) that were over the target but they
were ending a new deal. This would make us expect dividends to be paid by
Toyota Caetano if needed to reduce debt on the parent. A parent company
intention to deleverage could also explain the quick deleveraging that happened
at Toyota Caetano, which they consolidate. The liquidation and fusion of
subsidiaries, as well as the cost cutting, could also be related to some
efficiency driven restructuring. Some people say debt makes you operate more
efficiently, otherwise things go wrong: in this case we have the debt pressure
on the management but don't have the debt (since it belongs to the parent).
Moat:
This company does
not seem to have a classical moat, with pricing power and high return on
capital. However, I believe their shareholding structure gives them a decent
protection. In fact while the majority of the capital (60.82%) is owned by
Grupo Salvador Caetano SGPS, S.A., Toyota Motor also owns 27% of the company.
As such I see no motivation for Toyota to find another reseller. This results
in Toyota Caetano having their share of Toyota's Portuguese business relatively
guaranteed. As long as Portuguese people and companies buy Toyota's products,
Toyota-Caetano will probably keep selling, which makes up for a decently
protected niche.
Catalysts:
First quarter unit
sales increase in both Toyota and Lexus vehicles of 42.5% and 67.6% should
provide a significant increase on net income from break even.
The very low debt
achieved, together with the expected profits, should allow for dividend
distribution next year after two off years.
If the profits do
not recover, cash flows should continue similar (or better if restructuring
costs stop) and the company will probably be net debt free in about a year.
Valuation:
First of all, it is
important to note the shareholding structure: 35M shares, no dilutive shares,
no preferred shares, no options, no shares repurchased. It should be noted that
the defined benefit pension fund owns 623.626 shares of the company.
Since the company
distributes most earnings, I would say that a good way to value them is by
doing a discounted cash flows valuation of their net income. Estimating the net
income is the harder part. Seems to me that by averaging their 8-year net
income we get a conservative estimate of their earning power (it includes two
boom years but also the subprime crisis and the worst recession since the start
of Portuguese democracy in 1975 when the system changes induced recession) that
should be seen as a worst case (worst than liquidation in my opinion). At 5.6M€
(0.16€/ share) and using a discount rate
of 10% and a growth rate of 2% (inflation), fair value would be 55.63M€
(1.59€/share). If, however, we take into account the exceptional nature of the
period analyzed use only data from 2006-2010 (and still include the subprime
crisis), average earnings would be 9.96M€ (0.285€/share), which probably would
be a more accurate figure. Using the same assumptions we would reach a fair
value of 98.94M€ (2.83€/share) and still not being overly optimistic.
However,
discounted cash flows, as the name implies, would be more correctly used to the
cash flow statement. As I have showed above, cash flow from investments has
been mostly positive in analyzed period. Some of this positive cash flow from
investments is due to divestment, but an important factor at this level might
be the fact that their transportation equipment is stated at cost less
depreciation and they always report "Gains in the disposal Tangible Fixed
Assets" (trending down from 5.359.877€ in 2006 to 1.274.484€ in 2013). It
seems overly optimist to state that cash flow from investments will continue to
be positive (even if it has happened in most of the last 10 years, at least)
and as such I will assume it will net on zero (probably optimistic). Last 8
years average cash flow from operations less interest paid stays at 12.5M€
(0.357€/share), which includes above stated recessions, thus balancing my
optimistic assumptions about cash flow from investing. Using the same
assumptions fair value stays at 124.2M€ (3.55€/share).
Another way would
be to value the company at book: it is not a high quality company, but their
competitive position is relatively stable. Book value per share would be a
decent proxy. In fact, since there is a 36.5M difference between deemed fair
value of the investment properties and their valuation on the books, and since
the company states that their inventory (43.3M€) is below market value
("Goods, raw, subsidiary and consumable materials are stated at
acquisition average cost, which is lower than market value"), then book
value might actually be a conservative way to value the company. Book value was
127.75M€ (3.65€/share) at year end 2013.
My favorite way to
value, however, is to set a time horizon from 3-5 years (usually 3 years) and
try to do an educated guess of how much a company will be worth by then and
then calculate the rate of return. I like it probably because it allows me to
avoid false precision and use my subjective interpretation of everything I
read. So:
Will the company,
in three years' time, have returned to normal profits? Yes (otherwise autos and
equipment in the country would be so old by then that a new boom would be
needed). How much do I think those normal earnings will be? Around 10.5M€ -
0.30€/share - (2007, 2009 and 2010 approximate result, even if sales don't
recover to that level, recent cost cutting should allow for that). Will the
company have distributed dividends in the meantime? Most likely, around 7M€
(0.20/share) would probably be a conservative estimate. Which multiple would I
pay for then earnings? 10 would still be a conservative multiple since they pay
out most of their earnings. So 112M€ (3.20€/share) in 3 years would be the
value I would use to calculate a conservative rate of return, and I would still
leave space to recalculate as time passes by.
History of
stock market price, current market price and expectations
Here (https://europeanequities.nyx.com/en/products/equities/PTSCT0AP0018-XLIS/quotes) at Euronext
site you can see the stock quotes since 2003. It traded between 3.5€ and 4 € in
2004-2005, and appreciated from 4€ to 9€
in 2006-2007. In 2008 it traded around 9 but ended up hitting 10.00€ per share,
where it traded for some time. Since then value as come down hitting 0.53€ per
share on anecdotal volume. On decent volume the minimum was 0.70€ per share. It
currently trades at 1.25€. So, what does this mean?
|
Discount to
value
|
Expected rate
of return/implicit discount rate
|
Most
conservative DCF
|
21.4%
|
13.5%/year
|
Reasonable
DCF
|
55 %
|
24.5%/year
|
DCF
(operations-interest)
|
64.8%
|
31%/year
|
Book Value
|
65.8%
|
|
3 year
estimate
|
60.9% (in three
years)
|
36.8%/year
|
All time high
|
87.5%
|
|
This table gives us a reasonable estimate of expected
returns in Toyota-Caetano. I included the all time high because it doesn’t seem
impossible that the stock goes back to that value in some years time, if it did
and took 10 years to do it we’d be facing a 23.1%/year return for 10 years
(excluding dividends received), it is however unlikely. Unlikely on the negative side seems to me the
most conservative assumptions used for DCF purposes (but still a decent rate of
return). So the most likely (in my opinion) estimates propose a return over 25%
a year.
In face of
expected returns like this in the midst of a bull market we usually think it's
either a fraud or a company at risk of going bankrupt. Toyota Motor holds a
significant portion of the stock so it is unlikely it is a fraud. Also I have
heard about Grupo Salvador Caetano since I can remember . In their 2011 annual
report they state the following:
"Celebration
of 40 years of activity in October, attended by the Prime Minister, the
Minister of the Economy and Employment, the Executive Vice President of Toyota
Motor Corporation and the Vice President of Marketing and Sales for Toyota
Motor Europe."
In face of this
quote I would be surprised if it was a fraud.
About the risk of
bankruptcy, the company has paid down most of their debt and scaled down their
business reducing risk. It does not seem likely. In fact, a bankruptcy would
probably give equity holders a nice portion of their (said to be understated)
book value and, as I have mentioned above, the discount to book value is 56.4%.
Trading information:
This stock trades
in Euronext Lisbon which makes it easily accessible for trade. Since it is a
low liquidity stock it trades on double call auction. From the Euronext FAQ we
can see that "Unlike continuous trading, a call auction provides a
transaction that generates a price at a set time once or twice each day
(11:30am and 4.30pm for companies listed on NYSE Euronext)." "The
system then compares the totals of each order book side in order to determine
the limit that would allow the largest number of stocks to be traded. This
limit then becomes the stock's price, and all the stocks included in the total
are immediately traded at this price." After each of this moments, during
30 minutes the stock can be traded at the last price established.
If in a given year
there are more than 2500 trades the company is invited to switch to continuous
trading.
Conclusion:
Writing this
article has increased my expectations of return. While I was studying this
stock I knew this was a very fat pitch, even if I had not put a number on its
weight. Fat as it was, I considered that it deserved a place in my 20 ticket
punch-card. I still believe it does.
Disclaimer: a quick check
will show you that this company last trades have been slightly above the 1,25€
I used on my assumptions. I used this number because I am convinced that an
order placed at such price would be filled sooner rather than later, but I
might be wrong. I own shares in Toyota Caetano and will most likely sell before
it reaches my estimate of fair value since that would make it too big a portion
of my net worth. I do not intend to sell soon thought and might buy if I think
appropriate. I believe the numbers I post are correct, but always double check
(I leave the links below). Always read the blog introduction post.
Links:
