Following a
discussion in a Portuguese forum I decided to share my point of view on the
subject. Since what goes around comes around I did get some extra data sources
that gave me some answers I was seeking and some I was not seeking but are
still useful (that is the motive I ask you to comment on my articles,
discussing brings us all to an higher level).
So, on his first
post on that Portuguese forum (most people there are into charting so it is no
wonder he was not posting before), Random Walker raised the following questions
(and helped answering them):
1-
With
little debt:
a.
the main risk might come from the links to the
remaining group (as we learned recently with BES and GES)
b.
The
value of the real estate investments could be manipulated if the rents came
from related parties. Do we know if the rents do come from related parties?
2-
Who
is selling?
3-
The
debt reduction in recent years is a relief, especially if we compare to SAG
Gest (the other quoted Portuguese auto selling company) whose current
liabilities are higher than current assets and equity is very low.
I
have answered it partly there but will try to answer again. Let’s go from
bottom to top:
3)
SAG Gest (as well as the remaining Salvador Caetano group) is involved with
different brands. But since they do sell and rent cars they are competition. As
such it is good news if they are burdened with debt: interest costs are higher
and must be passed on to the costumer. SAG has about 7.8M in tangible equity,
about 274.6M in net debt and if we annualize their 1S2014 EBITDA we get about
15.3M. This numbers are interesting, especially if we take into account that
interest is no longer fully deductible for tax purposes in Portugal (to
incentive deleveraging) and the amount deductible is planned to continue
reducing in the following years: from a net interest/EBITDA ratio of 70% in
2013 to 30% in 2017 (or 3M€ in interest cost if that is higher than the % of
EBITDA).
As
I stated above if the competition must pass interest costs to costumers that
allows those with little debt to charge higher prices and keep the difference
as profits.
2)
Very little trades have been done recently. However, not too long ago BCP
(Banco Comercial Português) investment funds sold a big chunk of their shares
(most of my position was likely bought either from them or from someone who had
recently bought from them and took a quick profit). Random Walker did go check
their fillings and posted them (http://web3.cmvm.pt/sdi2004/fundos/app/res_cart_dtl.cfm?num_fun=%23%23%24_T%0A&cod_grp=%21%220%20%20%0A&numcar=%23%23TSZ%0A&car=%24%3ERJ%23%23P%20%20%0A). Since their previous position was of 1.226.935
shares, it seems that even after their selling more than half their position
they still hold 604.091 shares. The number is still high enough to make it by
far their most illiquid position in the table since they could sell all their
remaining holdings in a few days and could take months (or more) to sell their
Toyota Caetano position. A quick check from prior annual meetings does show us
that they complained about the lack of liquidity both in April 2010 and 2012.
They also complained about the real estate investments being carried at
historical value instead of marked value, which they thought was too
conservative. In April 2014 they had already started selling their position and
missed the annual meeting, which might indicate they still were reducing their
position or wanted to continue reducing.
Liquidity
is a problem if you own 604k shares and want might be forced to dispose of them
quickly. So I understand their selling. The fact that they wanted real estate
to be carried at an higher value on the books gives us two important give
aways:
a)
They
wanted the company to realize some accounting gains that changed nothing
economically. If we join this information with the liquidity problem we might
realize that it is no wonder they sell while we buy: our incentives are
different.
b)
They
do believe the real estate is worth more on the books. And this reassures us in
the next point:
1)
b.
I do believe most (if not all) rents are with related parties, namely Salvador
Caetano Group. I have no way of checking it but if you continue reading you
might understand why I believe so. But if they own about 100% of capital in one
side and 60% on the other, I do believe that if they manipulated the rents it
would be downwards instead of upwards. As such, I do believe we can
conservatively calculate the investment real estate value if we use the rents
as a base point
a.
What
about the links to the remaining group?
This answer is not easy. There are many related
parties and there is at least one that is counter intuitive. I believe this
relations can be described in three main groups:
1-
Meaningful
operating debts from related parties
2-
Recurrent
spending with related parties of meaningful amounts
3-
Meaningful
debts from related parties that are declared as other debt (so probably not
operational)
1-
What
comes to my mind is Caetanobus: the net debt from them is about 9,4 M. This
seems to appear on balance sheet as operational, which might make sense since
with the crisis Toyota Caetano, if I understood correctly, has transferred bus
production (and some other smaller units) to Caetanobus. This number is roughly
stable since 2012 but increased from 1,6M in 2010. I believe it credible that
this is operational but think monitoring is important here.
2-
Two
promptly jump to my eyes: Caetsu SA and Rigor Consultoria e Gestão SA. Between
2M and 3M are spent annually with each of them, but both numbers area down from
over 4M in 2011. Caetsu seems to be a publicity company with some important
national clients disclosed on their site. Rigor management and consulting
services seems to be exactly what its name implies. The problem being: is it
justified to pay these amounts annually for these services? A check in Salvador
Caetano Group 2012 annual report shows us that both companies are theirs. That would be a good incentive to overcharge
(at least Rigor is 100% owned). The good news is that Toyota Caetano already
had business (more than now) with these two companies in the last decade so our
base case historical profits already included business with these two
companies. Since it was higher back them maybe these are also operational
expenses. They do state: "Goods and services purchased and sales to related parties were made at market prices."
3-
I
will quote from the latest report:
“The caption “Other credits” includes the amount of, approximately, 3,4
Million Euros (3,4 Million Euros as of December 31, 2012) in referring to
advance payments made by the Group related with leasehold improvements in
commercial facilities for automotive retail, which were fully invoiced in
previous years, being that the remaining amount is expected to be supported in
the short term by third parties.
Additionally, this caption includes, as of June 30, 2014, the amount of,
approximately, 800.000 Euros (800.000 Euros as of December 31, 2013) to be
received from Salvador Caetano Auto África, SGPS, S.A..
Finally, it is noted that this amount also includes an account
receivable in the amount of 957.989 Euros from the related party Fundação
Salvador Caetano (937.500 Euros on December 31, 2013).”
Initially I read this and disregarded the first paragraph from related
parties. I will show later that would be incorrect. Which does not mean there
is any problem with it since it is down from 5.2M in 2010 through 2012 (they mistyped
since it was still 5.2 in 2010, they were referring to December 31, 2013) and
since I will later refer to that position.
The second and third paragraphs are undoubtedly related party loans. It
is worth noting that the 800k loan is reported since 2011 when they state it is
stable compared to 2010. It might be a remaining from previous corporate structure
but as long as it continues stable it is negligible. It is also worth noting
that the loan to Fundação Salvador Caetano is lower compared to 2012 (1.430.696€), so maybe the money will
eventually be recovered.
And now the part that seems most important to me:
“Cimóvel - Real Estate Investment Fund: the amount of 3.313.299 Euros
corresponding to 580.476 shares which
are recorded at its fair value as of June 30, 2014. It should be noted that the
acquisition cost of those shares amounted to 3.013.947 Euros” --- “As of December
31, 2013, (…) of 3.274.639 Euros”
AND (from the pension fund portfolio allocation – in the annual report):
“Cimóvel - Fundo de Investimento
Imobiliário Fechado 37,7% 10.878.417”
So some high grade math: 3.274.639 is for 580.476 shares as 10.878.417
is for 1928353 shares. And this totals 2.508.829 shares in direct and indirect
exposition. Repeating the high grade math gives us a June 2014 total exposition
of 14.320.145€. But that is not everything. After reading Cimovel report I
understand that the previously mentioned loan seems to be a real estate
development done with cimovel (from what I understand they lent cimovel to
build some facilities and now pay rent to cimovel, that sounds ugly but maybe
we should not be too quick judging so read on)
Now 14.3M +3.4M= 17.7M – that is meaningful. So we should understand
what Cimovel is and the conditions of the loan.
Loan: interest at Euribor 3 months +1.5% spread, no reimburment defined
date.
Rents paid by Toyota Caetano (2012 numbers): 1.060k (6% ROA) and 89k
(ROA).
Rents divided between Toyota Caetano and other entities(2012 numbers):
196k and 157k
Total rents paid to the fund(2012 numbers): 3.338k (meaning Toyota
Caetano pays about 40% of the rents of the fund; I believe these numbers should
be adjusted due to some one off effects to 3148k; total rents in 2013 were
3621k (it is important to note that 2012 numbers include two rents of only 10
and 20 days) -Toyota Caetano representing about 36%).
Total shares: 8.250.695
Direct and indirect ownership of Toyota Caetano: 30.4%
Debt: a small
credit line from Barclays + debt to Toyota Caetano previously mentioned
Rents were all between: 6 e 8.9% of the asset value in 2012
Previous disclosed property deals between Toyota Caetano and the fund:
Inception was in 2006. I have no information on those deals.
2009: Toyota Caetano sold property for 2M +83k of legal costs, which was
then rented to Caetano Formula for 6.5% on assets –Maia, Gemunde
2010: Toyota Caetano bought a 1.81M property (the profit for the fund
was 331€) –Quinta da Relva
2012: CAISB sold two assets for 7100k ( plus costs incurred of 495k by
the fund). If my guesses were correct they would be receiving 473k as rent from
a third company (Caetano Drive). The fund has the option of selling these assets at total incurred costs to Auto
Partner Imobiliária (which I initially confused with the company belonging to
Toyota Caetano) – Alcabideche. Since CAISB was acquired by Toyota Caetano in
2012, I cannot be sure if this deal was made prior or after the acquisition.
CAISB was already declared has a related party prior to 2012. Details of the
acquisition were not disclosed.
Owners of CIMOVEL (adapted by me, may be incorrect):
Other Salvador Caetano pension funds 2.186.072 units 26.50%
Toyota Caetano
pension fund 1928353 units 23.37%
Salvador Fernandes Caetano 13.76%
Caetano Auto 7.04 %
CARTEIRA OUTROS SEGUROS 6.8 % (
Multiforma open pension fund 3.85
GES open pension fund 3.36
Salvador acacio martins caetano 2.42
Eng Jose Reis silva ramos 2.42
Portuguese BP pension fund 1.93
PPR DINAMICO 55+ 1.61 (PPR are usually voluntary pension savings with some kind
of tax benefits)
Miguel pedro caetano ramos 1.21
Others 5.73
It is relevant to state that there was a capital raise in 2012. From
what I understand almost all subscriptions were from outsiders who now own
about 17,5% of the fund. The direct individual ownership by some majority
shareholders likely means they see it as a safe investment. The fact that there
are so many outsiders has diluted the ownership both of Toyota Caetano and
of Salvador Caetano group. Outsider
participation in the capital raise gives credibility to the fund.
CONCLUSIONS:
CIMOVEL: The problem with exposition to this fund is not excessive
exposure, contrarily to what I would first guess, but seems to be the opposite.
In fact, since they own 30.4% of the fund but pay about 35% of the rents then
the ideal exposure would probably be 35% (so that they ended up owning their
own real estate but in a diversified way). Prior to the capital raise the
exposure was likely over that value. A relatively strong outsider presence
makes it less likely that the fund would be used against Toyota Caetano. Deals
have been minor. The only thing I do not like is that I cannot find information
on Toyota Caetano annual reports about the deals between Toyota Caetano and
CIMOVEL (if you find, please tell me where since it might be only a problem
with my interpretation of the annual reports). Anyway (aside from the fact that
I had to do this analysis by searching the information outside the annual
reports) I am quite satisfied that I found no sign of excessive exposure to the
parent group. I do not like commissions paid: 0,175%
e 0,10%. (...) monthly and quarterly, respectively.
CONSULTING AND PUBLICITY: an average of 6M are spent annually with just
two companies. I cannot be sure if this is justified spending and I most
certainly do not like it since the company profits annually much less than what
it spends with these two companies. I would rather all this expenses were done
with totally unrelated parties because at least I could be sure that everything
was done to minimize this spending but as I mentioned before they already had
this business relations when the profits were higher and as such a reduction in
this spending would be a bonus over the base case I used to decide investing in
Toyota Caetano.
CAETANOBUS: I mostly regard it as operational debt. I might be wrong
though.
FUNDAÇÃO SALVADOR CAETANO: I find it difficult to understand what can be
the pure business relationship between Toyota Caetano and a foundation. It is a
smaller 1M exposition that I believe worth mentioning because I do not know how
to explain it.
ps1: October auto sales are out: 760 units sold versus 509 units one year ago.
ps2: I was worried with the amount they would invest in their factory if the deal with Toyota to increase production was signed. They mentioned 10M in an annual meeting but subject to changes. With this amount and taking into account the current losses on that unit (that would at least disappear) I now just worry they might not get that deal signed
Disclaimer: read prior Toyota Caetano disclaimers. Always read the
introduction post. I am and will be incorrect in some things I post (but I try
to be correct) so always do your own research. This is mostly my interpretation of public data that you can easily get access to so you might get a more accurate picture by reading that data. I added shares very recently at
current price (1.07€). If there is something you disagree or where I am wrong, please comment – I
would rather be corrected than stay mistaken, in fact I would be glad to edit my posts to make them more accurate.
