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

Toyota Caetano 2014 part 1- highlights

This is the first post of a series about Toyota Caetano. This first one just highlights what I found most relevant on the annual report with only a few comments. On the following ones I will try to dig a little deeper (in fact I am dividing this because it would be too much information on a single post). It should be something like this but it is still under construction (comments and suggestions will be taken into account):
Toyota Caetano 2014 part 1- highlights
Toyota Caetano 2014 part 2- inventory, working capital, debt, dividends, another valuation method and perspectives
Toyota Caetano 2014 part 3- segmental and quarterly results
Toyota Caetano 2014 part 4- new model for Ovar, perpectives and revisiting my first post on Toyota Caetano to see if things are going as expected at the time

 

OVAR MANUFACTURING UNIT

“We should highlight that the year is also marked by the end of Dyna for the export market (September).”

“The Transformation and PDI (Pre-Delivery Inspection) activity prepared 3,271 vehicles, which corresponds to a 40% increase”  ---- in line with auto sales increase

Total employees reduced once again from 181 to 170

Agreement with TMC to assemble LC70 units intended for export:

“In the second semester of 2015 we will witness the beginning of the LC70 production process, and we are already estimating a volume of assembly for that activity that will be able to absorb all the manufacturing costs and, subsequently, reach the economic balance in this Unit.” – in Portuguese they mention economic balance for that period (2^nd semester).

Auto commerce unit:

“In 2014, we should highlight the performance of the Toyota and Lexus hybrid models, which showed a 149% increase when compared to 2013, corresponding to a 56.1% (+14.8 p.p.) share in the hybrid vehicle market. In 2014, hybrid vehicles were already 16.6% of the sales of Toyota and Lexus light passenger vehicles.” – this is important because in 2015 there are incentives for plug-in hybrid vehicles, especially relevant for enterprise clients (where I would classify the incentives as huge (reduction in vehicle taxes, all 23% of consumption taxes can be deducted, totaling together over 7300 €/vehicle benefit and additionally a bigger percentage of depreciation can be used for taxes), which could further increase sales.

Toyota's commercial models: “We should highlight the performance of the Hilux and Dyna models, which increased their market share once again and ended the year as sales leaders in the corresponding segments. In the case of the Dyna model, manufactured locally at the Ovar assembly unit, it retained its leadership for the 8th consecutive year in the Chassis-Cab segment” – as long as the Dyna model production for domestic consumption stays in Ovar this leadership is important.

Industrial machines:

Increase in sales of 36.9% with a market share increase from 23.4% to 28.6% (the second in the ranking had 17.4% market share): added profits but also future service revenue increased.

Renting:

“The company ended the fiscal year of 2014 with a fleet of 836 units, distributed as follows:

Light Commercial / Passenger Vehicles: 592 units (70.81%)

Cleaning/Sweeping Machines: 244 units (29.19%)

Throughout the year, the fleet had an average number of 1013 units, approximately 5.9% less than during the same period of the previous fiscal year.”

So they are still reducing their fleet.

“Following a strategy for increased inroads in the automotive market, and taking into account the sector's growth period, the increased turnover was achieved through some sacrifice in the profit margin via more aggressive promotional campaigns” – at first sight I do not like this. The only reasons I see as positive in increasing sales are:

-       achieving paid objectives and/or

-       increasing future earnings in the service sector (this is important and may justify the margin sacrifice since they say “Toyota's Official Assistance network is the main client of the After-Sales Division. This client represented 91% of 2014's overall turnover, which corresponds to around 30 million euros.”)

“In order to efficiently respond to market needs, the Group boosted its investment in inventories, since, as a distributor of the Toyota brand name, its policy includes concentrating inventories at the parent company. The latter, via customer-oriented logistics (COL), provides real-time availability of the list of vehicles for sale, to every dealership, hereby releasing them from the added strain of putting together their own inventory.” – we could see and guess that, but it is better to see it written

“For 2015, the Group expects to maintain the growth rate of its operations, confirmed both by the ACAP estimates, which forecasts an increase of around 11% in vehicle sales, and by the improvement in family and business confidence index, which will inevitably lead to better results.” – From what I see around me I would expect the same, and thus far it has been going as expected (Toyota+Lexus 1T auto sales increased to 2319 units from 1577 last year – a 47% increase).

“Relevant facts after the end of the Fiscal Year

Since the end of 2014 to the present date, and in terms of relevant facts, we should state that it is the belief of the Board of Directors of Toyota Caetano Portugal that the incident that occurred on March 3rd, 2015, caused by a fire, which completely destroyed one of our properties located in the so-called Carregado Industrial Complex, will not have any significant economic or financial impacts on this Company, due to the appropriate coverage of the existing insurance policies for this type of assets and incidents.” – what do we know about this?

Industrial Facilities Carregado: carrying value (2014) 6.002.898€; appraisal value 23.828.000€

From what I know, usually insurance companies rebuild everything instead of paying (to avoid owners setting fire to their properties when they cannot sell them, which used to happen over here). That is probably what we should expect. It was the most valuable property in the investment properties portfolio so it is important to hear the management expectation of an absence of losses.

Investment properties:

Income of 2.765.899 Euros vs 3.246.319 Euros in 2013. Asset value on the books 17.3M. Asset value appraisals (see previous point): 53.9M. Not much new to add since prior year.

Cimovel: 3.052.897 Euros (2013: 3.274.639 Euros). So it lost 6.8% in value this year. This is more important in the pension unit. Assets most likely stayed similar but appraisals lowered so it might be of lesser relevance, but his also means that on the pension assets we should subtract to calculate the gains on the remaining portfolio. So…

LIABILITIES FOR RETIREMENT PENSION COMPLEMENTS

Return on plan assets was 1.309.229 €. They “lost” 573k in their Cimovel stake. So the return of the remaining portfolio was actually better.

Additionally they did the same cleansing that as happened through the corporate world last year. After estimated taxes they subtracted 3.9M from the firm equity due to actuarial tables and discount rate actualization (if I understood it right). Well, the liability is the same as it was last year but now the data is more conservative.

Disclaimer: read previous disclaimers on Toyota Caetano. I have added a little bit more at prices much lower than current price. This is not and investment advice (it never is). I am and will be wrong so do your own research.

Toyota Caetano 2014Q4 summed up

Fourth quarter 2014 relevant info summed up:

Vehicles produced: 213+178+158=549 (278 in 2013Q4, 248 in Q1, 513 in Q2 and 354 units in Q3)

Vehicles sold: 793+825+1227=2848 (2086 units in Q3)

Industrial machines forklift market: 89+133+221=443  (324 units Q1, 377 units Q2 and 302 units Q3)

Production:  there was a 36 units (7%) increase in production compared to Q2. As such, I would expect slightly better results

Commerce: 2848 vehicles (2086 in Q3, a 36,5% increase). I would expect gross margins to stay low, but the higher volume with fixed remaining costs should lead to an asymmetric increase in profitability. In addition, the market share objective by Toyota was finally achieved in December (the unit sales increase was already almost certain before). I cannot be sure if it is the case here but sometimes auto companies give incentives if objectives are achieved, which would lead to a bigger profit increase.

The industrial machines commerce unit relevance for short term profits is little, but it is important in the long term, as mentioned in previous posts.

Segmental results: I was modeling my predictions  using the same model I used in previous quarters. This obviously is not the most accurate way to do it, but since quarterly profits are not that important (and predicting them is not important at all) I was using it. However, I believe that could be leading me to some mistakes in my analysis to business performance. Looking at operational profit seems to be a better way to do it, and the difference between operational profit and net profit in some cases explains some of the doubts I had previously. I will not present an estimate this time since I believe I would be even less accurate than on previous quarters and there is no need to make a fool of myself, I will have plenty of opportunities in the future. 

Disclaimer: my selling offer at 1.07 was not fulfilled. Unfortunaly since my opportunity window disappeared with a more than 40% gain on the target stock while Toyota Caetano price has fallen. Not that I believe that this fall in price is of any importance but the 40% gain I did not achieve together with the opportunity lost to switch back to Toyota Caetano is relevant. In fact, since the price had fallen so much I ended up adding some Toyota Caetano shares at 0.84€. I should remember you that you should read all previous disclaimers on Toyota Caetano and the introduction post.

Oi PT merger arbitrage is it safe?

The Oi-PT merger day by day looks like a more fascinating story. Since my last post the following has happened:

1- The merger terms have been revised with a smaller position in Oi being attributed to PT shareholders and a PT SGPS carrying that smaller Oi position plus the Rio Forte debt plus options on Oi (which are the only destination possible for any recovered cash)

2- Oi has decided to give up on the idea of a big international telecom and sell the portuguese assets to Altice, signing a deal

3- Much more is now known about why and when was the Rio Forte investment decided and who knew about it

4- The portuguese CMVM decided to intervene by stopping PT trading until the PT SGPS administration decided to give information to the market about the possible cancelation of the deal

5- According to today's news, former PT chairman Henrique Granadeiro  has sent a letter to CMVM suggesting that the deal can be canceled (or changed) since the Oi Vice president was also PT SGPS CFO and since  at the time Oi CEO was also CEO of PT Portugal. He also mentions that since they are not divisible then Oi had to know about the Rio Forte application. 

So, yes the spread as widened but also the arbitrage as turned riskier. And as such maybe the stay out idea I mentioned in the previous post is more than ever a good idea.

So the arbitrage might be a mine if the deal goes through on current terms. Let alone the arbitrage, if the deal goes through maybe only going long Oi would be a good idea since the possibility of both the merger not working and the PT Portugal sale to Altice (for more than 7000M euros) not going through might already be partially discounted on Oi share price.

The problem is will the deal and the merger go through on current terms? The argument for the cancelation is: some minutes ago PT has just disclosed so I will stop explaning and just leave the link

http://web3.cmvm.pt/sdi2004/emitentes/docs/FR53601.pdf

disclosure: no position and I am still reading the file above so I can not really know what I will decide at the end but most likely it will continue that way

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.