Investment memos

Caltagirone Group Initiation

INITIATION – BUY Caltagirone Spa (CALT IM) @ €2.27

INITIATION – BUY Caltagirone Editore (CED IM) @ €1.00

I wanted to post on the Caltagirone group which is a conglomerate of mainly Italian businesses owned by Francesco Gaetano Caltagirone an Italian billionaire ranked number 258 on the Forbes list.

The collection of companies is varied but broadly consists of (i) cement, (ii) Italian focused construction / concession businesses, (iii) newspapers and (iv) stakes in listed companies (mainly financials). Also the inter-related nature of ownership is pretty complicated and I have attached a corporate structure chart for ease of reference (took me some time to pick it apart).

Would be interested to hear from anyone who has looked at the group, particularly Cementir (cement business) where I have spent less time/have less knowledge. There are multiple potential investments across the group all trading at substantial discounts to fair value but I have decided to initiate a 2.5% position in both Caltagirone (HoldCo) and Caltagirone Editore (newspapers) as explained below.

[one health warning is that I did the bulk of my work in Jan 2014 but have only just got round to writing it up so there might have been some changes to the below during Feb and March]

Caltagirone Spa

Share Price: €2.27

Market Cap: €230.6m

Free Float: 12.4%
Ave. Daily Traded Volume: $62,000

Discount to Fair Value: 63.8%

 

Caltagirone is the group holding company and trades at a 46.3% discount to current listed stake values and a 63.8% discount to my assessment of fair value

The main constituents of value are as follows:

Asset Market Value (€m) My Valuation (€)
  Vianini Lavori SpA 123.7 256.2
  Vianini Industria SpA 19.2 44.8
  Capitolium SpA 4.5 10.4
  Calt 2004 Srl 239.5 239.5
  Parted 1982 SpA 30.2 73.0
  Cementir Holding SpA 12.7 12.7
TOTAL 429.8 636.7
Caltagirone SpA Market Cap 230.6 230.6
Discount / (Premium) to FV 46.3% 63.8%

I will go through each constituent below but so that you can match up the table: Capitolium owns 12.6% of Vianini Industria, Calt 2004 owns 30.1% of Cementir and Parted 19982 owns 35.6% of Caltagirone Editore (also helpful to look at the attached corporate structure with reference to the table)

Vianini Lavori

Share Price: €6.01

Market Cap: €263.2m

Free Float: 33.1%
Ave. Daily Traded Volume: $143,099

Discount to Fair Value: 49.2%

Vianini Lavori has been listed on the Italian Stock Exchange since 1986 and was originally a pure play construction company but has since diversified into services, concessions and financial investments. The company has 40 employees an runs its construction interests through dedicated, project specific, JVs & SPVs

My valuation of Vianini L is as follows:

  • Investment Property – €3.0m, Dec 2014 balance sheet carrying value
  • Cementir Holdings – €273.5m, current market value of their 25.5% stake
  • SAT SpA – €27.5m, sale price of their stake in Feb 2015
  • Parted 1982 – €9.1m, value of their 3.6% indirect stake in Caltagirone Editore
  • Available for Sale Investments – €228.7m, current market value for stakes in ACEA, Generali and Unicredit
  • Cash – €46.6m, Dec 2014 balance sheet carrying value
  • Provisions – €(12.4)m, Dec 2014 balance sheet carrying value
  • Other Liabilities – €(48.9)m, Dec 2014 balance sheet carrying value
  • Financial Liabilities – €(9.0)m, Dec 2014 balance sheet carrying value
  • Net Value – €518.0m

In my valuation I have not given credit to the two material assets of the company

1. EuroStazioni SpA

  • A joint-stock investment company based in Rome that owns 32.7% of Grandi Stazioni SpA a company that manages and rehabilitates 13 major Italian railway stations
  • EuroStazioni has assets of €163.9m against virtually no liabilities for a book value of equity owned by Vianini L of €56.6m as of Dec 2013
  • Unfortunately there is no disclosure on Grandi Stazioni so you cannot tell how levered it is, the current performance of the business etc. The only solid sign in the reporting that things are ok is that EuroStazioni currently pays a dividend to Vianini L

2. Metro C Scpa

  • A consortium company responsible for the construction of the Line C of the Rome Metro System where Vianini L has a 34.5% stake
  • Metro C has a book value of equity of €51.7m and the group looks to have c. 60% debt to assets
  • Again very little data on this one but the first section of the Rome C metro line was opened in Nov 2014 and there are 9 additional stations still under construction. The company has communicated that the total project is worth €1.0bn to Vianini L

In addition to these assets the company has other concessions (e.g. Metro B) and for FY 2014 generated €5.2m of EBITDA (down from €9.1m) which effectively drops down to cash (excluding working capital fluctuations) as the company has no capex and little tax.

I have decided not to include these assets in my valuation underwrite for the following reasons: (i) disclosure is very poor so I have little confidence in the book values, (ii) I really do not like concession businesses as it is very difficult to tell if the contract is performing and you often only get stung right at the end. If these businesses continue to perform I think they could represent and additional 50% upside to this stock or 25% more margin of safety on the downside. What is also helpful is that all the companies are owned in separate entities which protects Vianini L from business failure contamination against the other assets

Vianini Industria

Share Price: €1.28

Market Cap: €38.5m

Free Float: 33.2%
Ave. Daily Traded Volume: $19,812

Discount to Fair Value: 55.4%

Vianini Industria is engaged in the production of cement focused on railway sleepers, blocks for tunnels, tanks for railway, large-diameter pipes for aqueducts and poles for power lines. Massive health warning that the company does not produce accounts in English so my comments below are the result of google translate and data from other parts of the group

My valuation of Vianini L is as follows:

  • Parted 1982 – €7.3m, value of 2.9% indirect stake in Caltagirone Editore
  • Generali Shares – €32.7m, 1.8m shares at current market value
  • Cementir Shares – €17.6m, 1.6% ownership stake at current market value
  • Cash / (Net Debt) – €28.8m
  • Net Value – €86.4m

Rightly or wrongly, as with Vianini L, for the purposes of my valuation I have ignored the operating business. In the case of Vianini I it is clearer cut as the total ascribable value is very small. For the 9 months to Sep 2014 the business did €8.9m of revenue, basically €0 EBITDA and had c. €1.0m of D&A which would imply the business is likely to burn a small amount of cash (assuming D&A is a good proxy for ongoing maintenance capex). As of Sep 2014 they currently have €12m of revenue backlog (excluding €9.0m of additional contract options) so it does not seem the business is dying, just nothing to write home about or value to “bank on”.

Caltagirone Editore

Share Price: €1.00

Market Cap: €123.9m

Free Float: 34.6%
Ave. Daily Traded Volume: $31,966

Discount to Fair Value: 50.6%

Caltagirone Editore was founded in 1999 (after the purchase of the newspaper Il Messaggero and Il Mattino) and has been listed since Dec 2000. Today it owns 6 newspaper titles, 1 TV station, an ad agency and a web portal.

My valuation of Caltagirone Editore is as follows:

  • Cash / (Net Debt) – €133.0m, Sep 14 balance sheet
  • Other Liabilities – €(30.0)m, Sep 14 balance sheet
  • Unicredit stake – €44.2m, current market value
  • Generali stake – €103.5m, current market value
  • Caltagirone Editore – €[?]m
  • Net Value – €250.6m

Unlike Vianini L & I, I have spent a good deal of time on the Caltagirone Editore business to assess whether it can (i) be profitable / valuable in the future, or; (ii) get to breakeven either of which I think will be the catalyst for a re-rating of the stock

Key points on the market and Caltagirone’s place in it are as follows:

  • Caltagirone is the second Italian newspaper group with c. 22.5% share of average daily readers behind Gruppo Editoriale Espresso and in front of RCF and Poligrafici Editoriale
  • It has the 4th most visited news website in Italy (almost the same size as number 3) with 475k users compared to leading website La Repubblica which has 1,225k average daily users
  • Caltagirone has strong regional leadership in Lazio (68% vs nearest competitor at 29.3%), Campania (70% vs 23%), Grande Salento (88.2% vs 32.8%) and Marche (74% vs 47.3%). In addition it holds number two positions in Veneto (31.2%) and Abruzzo & Molise (19.5%)
  • Pulling its six titles together Caltagirone commands reader leadership in Central Italy with a 61.4% share of average daily readers vs its nearest competitor, Gruppo Espresso, at 28.3%
  • It has been growing strongly online with daily users growing by 63% YoY and internet advertising growing by 35.9% YoY. All their major newspaper titles have an internet site as well as apps for both ipads and iphones
  • On a macro note Italy has the third lowest internet penetration in the European Union standing at 58.5% of total population, only Romania and Bulgaria are lower. This compares to countries such as the UK (89.8%), Germany (86.2%) and France (83.3%)
  • Also Italy has one of the highest number of small & medium enterprises (“SEMs”) in the European Union as well as low level of urbanisation (ranked 69th in the world)

My summary take away from work on the Italian newspaper market is: (i) Caltagirone has material presence and is a market leader in c. 1/3 to 1/2 of the country, (ii) the macroeconomics of Italy suggest that a regional newspaper business should have a reason to exist given the high number of SMEs (driving local advertising) and the relatively low level of urbanisation (significant population and readership value lives in the regions) and (iii) the low level of internet penetration should give the newspapers the time to retain market share and transition onto online vs countries where google etc. had eaten the newspapers lunch before they realised it.

Unfortunately the financials of the company tell a mixed story. Taking the key constituents in turn:

1. Revenues

  • Have been falling every year since a peak in 2008 of €326.9m to today Sep 14 LTM of €172.2m although the rate of decline has slowed significantly in the last two years
  • Average daily readers have also declined from a peak of 5,598 (Dec 2008) to 4,136 as of Dec 13. Most concerning is that there seems to have been an acceleration in the rate of decline from (2.1)% in 2010 to (6.5)% in 2012 to (12.2)% in 2013 (unfortunately I only have annual data and I can only get access to quarterly data by paying a meaningful subscription fee for a specific data set. If anyone has it I would love to see their average readership comped to their last three years of quarterly data to prove out the point later on that the decline rates are slowing)
  • Looking at circulation revenue per reader the business has been able to put through price increases and get it from a low of €40.7 per reader in 2010 to €50.1 in 2013 meaning that from peak to trough they have seen circulation revenues decline from €91.8m in Dec 2007 to €75.6m in Dec 2013 (17.6% total decline). The price rise in 2013 may also explain the jump in reader decline rate from 6% to 12%
  • Where the business has been getting absolutely drilled is in advertising revenue per reader which has declined from a high of €103.5 in Dec 2007 down to €65.1 in Dec 2013 which in total revenue terms is a decline from €210.6m to €98.3m (53.3% total decline)
  • What is encouraging / important is that it seems the advertising revenue per reader has stabalised at c. €65 as it was only down from €65.9 per reader in Dec 2012 vs €65.1 in Dec 13. Also if you compare advertising revenue decline for LTM Sep 14 like for like (“LforL”) vs Dec 2013 LforL it is a 5.3% decline vs 6.9% most of which will be driven by declining readership
  • Finally LTM Sep 14 circulation revenue is down 4.2% LforL vs an increase of 2.8% in Dec 2013 LforL which I think is explained by Catlagirone not increasing prices in 2014 compared to 17% increase in 2013. If I am correct in this assumption then 4.2% decline would be a proxy for lost readership which would be a good result for the business vs previous years

2. Costs

  • The management have done an excellent job of keeping costs at bay particularly when you consider that it is Italy where the employee has the upper hand vs the company
  • Management has attacked all cost areas and has achieved annualised savings since 2007 of 10.1% in raw materials, 5.2% in personnel and 6.9% in other operating costs
  • To put this in context personnel costs per reader were €54.8 in Dec 2013 vs €54.48 in Dec 2007 and they have reduced the workforce from 1,253 down to 940
  • They have also taken raw material costs per reader down to €13.7 from €18.1 from Dec 2007 to Dec 2013 and other operating costs to €52.3 down from €56.1
  • Looking at LTM Sep 14 LforL the group has reduced costs by 7.9% vs a revenue decline of 5.5% leading to an 68% improvement in EBITDA profitability (sadly it is still negative)

3. Cash flow

  • On an LTM Sep 14 basis the business is running at €(2.3)m negative EBITDA
  • Other consistent cash outflow items are employee provisions (e.g. libel litigation) which has run at c. €4.0m per year since 2007
  • The business has positive net working capital so it should release cash as the business shrinks (for the purpose of this exercise I have assumed 0 inflow)
  • Capex (tangible and intangible) has run at an average of €1.5m per year
  • Income taxes have been c. €3m per year (driven by the fact that some papers are profitable)
  • Net cash interest is positive about €3.5m per year due to large cash balance
  • Dividends from equity stakes of €2.0m per year
  • Expected net cash burn per year of c. €5.0m per year

In addition to the above it is worth noting that the group is structured such that each newspaper title sits in a separate corporate entity owned by a the TopCo (Caltagirone Editore SpA). Examining the unconsolidated parent accounts of Caltagirone Editore it shows that substantially all the cash sits at this entity as well as the Generali shares (I am not entirely sure where the unicredit shares sit but I think they are in one of the SPVs). I see this a material contributor to your margin of safety in this investment as it means that if one or all the newspapers are ultimately unviable they could be put into bankruptcy without impairing or creating an additional liability against the cash and equity investments held by Caltagirone Editore.

Finally this is a situation that I think will get worse before it gets better. Whilst on an LTM basis the business is outperforming on an EBITDA basis that is because Q1 2013 was a stinker (-ve €5.3m of EBITDA). Comparing 9M 14 vs 13 the business is down €1.1m of EBITDA vs last year due to poor performances in Q2 and Q3 and unless there is a material outperformance in Q4 FY 2014 will likely show a negative FY 14 result vs FY 2013. However, none of this justifies the enterprise trading at a 50.6% discount to net debt and available for sale assets whilst ascribing no value to the newspaper business.

Cementir Holdings

Share Price: €6.75

Market Cap: €1,073.3m

Free Float: 24.8%
Ave. Daily Traded Volume: $2,007,528

Discount to Fair Value: n.a.

Cementir Holding is an Italian multinational company that produces and distributes grey and white cement, ready-mix concrete, aggregates and concrete products and has been listed on the Italian exchange since 1955

This is the part of the Caltagirone empire that I have not done as much work as I would I would like due to (i) lack of spare time and (ii) the fact that it is a large company with a €1bn market cap so I somewhat trust the market to get it directionally right (famous last words)

Today Cementir has:

  • 15 Cement production plants of which 4 in Italy, 4 in Turkey, 1 in Denmark, 1 in Egypt, 2 in the USA (in jv with Heidelberg and Cemex), 1 in China and 1 in Malaysia
  • 15 (million/ton.) Cement production capacity
  • 2 State-of-the-art research and development centres in Italy and in Denmark and 1 laboratory in Turkey
  • 20 Terminals
  • 112 Ready-mix concrete plants of which 16 in Italy, 83 in Scandinavia and 13 in Turkey
  • 1 Cement products plant in the US
  • 3 Waste management plants of which 2 in Turkey and 1 in England

In the last ten years the group has grown significantly through acquisitions financed through cash flow and debt. Their EBITDA stands at €169.7 as of Dec 2013 vs a peak EBITDA of €274.1m in Dec 2007. Their current EBITDA margin is 17.2% and has been as high as c. 24% (bear in mind they have made a couple of small acquisitions since 2007).

Looking at their EBITDA contribution the two biggest regions are Denmark and Turkey which represent 80% of H1 2014 EBITDA with Italy as the only negative EBITDA contributor (vs €51.2m of EBITDA contribution in 2007). Cementir’s 2014-2016 business plan has them achieving €240m of EBITDA against €70-75m of capex with the majority of growth being driven from Scandinavia, Turkey and the Far East.

The business is 100% financed by bank loans and they have a very good maturity profile with c. 10% maturing each year and 25% after 7 years.

At Cementir’s current market cap the enterprise is trading at a TEV of €1,565m which equates to c. 7.5x EBITDA . There isn’t a great comp set for Cementir but here it goes:

  • Titan Cement – 13.3x
  • Vicat – 10.9x
  • Cimpor – 6.7x EBITDA (LTV based on market cap is 83%)
  • Cementos Portland – 16.1x EBITDA (fake number as this is a distressed debt case)

On balance I am happy to underwrite Cementir at the current market value given (a) reasonable valuation on current EBITDA, (b) significant growth prospects, (c) stable geographies (Turkey and Scandi) and, (d) low leverage. Interested to hear from anyone that has looked at the company in more depth than myself

Conclusion & Recommendation

 

Based on all of the above I think Caltagirone SpA is a compelling long at €2.27 given (i) material margin of safety across 3 of the 4 major subsidiaries, (ii) low or no leverage in each company and (iii) reasonable diversification away from Italy (cement, cash, equity investments etc.)

The drawback to the long Caltagirone is the lack of obvious catalyst as well as the very small free float at only 12.4% of the outstanding shares.

I also think that Caltagirone Editore is a long albeit much more risky that the Caltagirone SpA. As of today Editore’s market cap reflects half the value of cash and liquid equities which are uncorrelated to the performance of the newspaper group. The management of Editore have demonstrated exceptional talent in managing the costs of the business in the face of a relentless decline in advertising revenue which seems to be levelling off. Finally it does not make sense to me that the market is ascribing a negative value of €126.7m to the second largest newspaper group in Italy with a leading market share in the central Italian regions which although EBITDA negative is only burning c. €5.0m of cash a year.

Editore is a very tough equity story but I think at the current prices you are getting a multiple year option on the business breaking even / stemming the decline in an environment where the decline rates have substantially softened and with a management team that has a proven track record of cost cutting over the last 7 years. All of your downside protection (cash and listed equities) sits in a corporate box which should not be contaminated in a downside case of the failure of the 6 newspaper titles and even if the end result is a €0-5m EBITDA business the market should reflect the full value of the cash and listed equities which will yield a substantial return even over a long period.

In terms of sizing this trade in my portfolio I have decided to initiate a 2.5% position in both Caltagirone SpA and Caltagirone Editore. My sizing decision in Editore reflects the risky nature of the investment and the fact that FY 2014 results are likely to be poor and I want to have fire power if the share price becomes stupid in the future. I found it harder to size my exposure to Caltagirone SpA as the valuation discount is so compelling but I have kept it at 2.5% because of (i) liquidity / free float of the stock and (ii) lack of obvious catalyst to close the value gap vs Editore.

I have decided not to initiate long positions Vianini Lavori because of the opaque and volatile nature of large construction concessions and in Vianini Industria because of its size and the quality of the railway sleeper business. I feel that a stake in Caltagirone SpA gives me exposure to either of these companies “knocking it out of the park” whilst ensuring a margin of safety in case something goes wrong on the construction contracting end. I have not spent enough time on Cementir to initiate it as a conviction long in its own right plus it lacks the complexity / hair that makes me feel like I would be picking up an inefficiently priced security due to market over reaction

Where could I be wrong?

  • In buying both securities I am adding exposure to Italy which has a very weak macro outlook in my opinion and could certainly get worse from here
  • Cementir represents a material portion of the value in Caltagirone and I have not completely torn it apart to make sure there are absolutely no gremlins in the company
  • I view large ticket concession businesses as high risk (particularly if you add the fact that it is in Italy) and they could be the source of negative headlines / value destruction
  • Caltagirone Editore is a declining business and I am ascribing full value to the cash and equities it owns on the basis that management will be able to stem the decline without material cash burn. I am making a bet that (i) the slowing decline rate in advertising spend and customers continues and (ii) management can continue to cut costs out of the business to ultimately improve EBITDA. If either of these things change the cash burn at the business could materially increase from €5.0m per year
  • Caltagirone SpA lacks a defined catalyst that would act to close the substantial valuation discount that exists today

Caltagirone Group Memo (2015.03.15)

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