We continue to be disappointed with how much time we are actually spending on security selection and the blog which is reflected in the fact that 9 months into the blog we have only deployed 12.5% of our assets.
In the quarter we monetised Genterra Capital Inc after the owners made a combined take private and spin-off bid for the company. Whilst we were very disappointed with the clear undervalue the take private offer represented we were able to exit in the secondary market at an implied valuation of SpinCo that was ludicrously high and generated a profit of 72.8% / 1.72x MoM and an IRR of 162.3%.
Despite only deploying 17.5% of our portfolio at the peak we are up 2.8% net of costs for the first nine months against (1.8)% for the passive portfolio which is 95% invested.
Jubii Europe has reached the buy price we set in our previous article and we intend to revisit that security in the near future. In the meantime we have summarised developments during the quarter for our holdings below
Emerson Radio (MSN US)
We increased our position in Emerson to 7.5% of the portfolio post the late release of their 10K as: (i) the major risk of a negative outcome on the IRS tax investigation had been removed with Emerson achieving a positive outcome vs our case, and; (ii) the stock was trading below our entry price despite this positive news. Emerson’s main issues remain the underperformance of their white goods business and the resolution of the restructuring / liquidation of Emerson’s major shareholder, Grande Holdings, couples with the potential for bad acts by the controlling shareholder.
Since increasing our position Emerson released its June 2015 quarterly results in August which highlighted two areas of concern. The first relates to the profitability of their white goods business post revenue decline of 26.4% in the quarter which was in excess of management’s expected 15.0% decline due to discontinued lines by their customers. We had previously highlighted a concern that with lower customer orders Emerson may not benefit from the same competitive pricing from their suppliers that they were able to achieve on a higher order volume. This concern would appear to be being borne out by the fact that gross margin declined to 7.0% which is the lowest level since Q1 2014.
However, a much larger concern around the white good business is that Emerson management have actually increased their SG&A vs Q2 2014 by 11.2%. This is absolutely staggering and really needs to be addressed as the business is clearly in decline and now EBITDA negative. We remain of the view that the company should sell its white goods business or at the very least cut costs to the bone.
The second issue that is concerning us is that despite a large decrease in revenues trade receivables actually increased by $5m. It is also surprising that inventories have remained flat. We have stated in the past that the Emerson white goods business has a significant positive working capital balance (now $22.1m) and we would expect to see cash released as the white goods business declined. We hope this is just a timing issue as if not it would further point to the poor management of the business by FTI, the board and the executive management team.
Looking at the filings of the Grande Holdings liquidation they are still in the same dance of a perpetually delayed publication of their restructuring circular which is concerning as the restructuring is supposed to be wrapped up by December 2015 (seems very unlikely). As discussed before the process is very opaque and the controlling creditor / shareholder has engaged in questionable dealings both with Emerson and Grande so we will just have to keep close eye on developments.
Our updated fair value range for Emerson is $2.38 to $2.95 which ascribes no value to the white goods business and assumes the full $4.8m of dividend tax liabilities. Acquiring the stock today at $1.23 you are getting the valuable licensing business for free as the estate trades below cash. Furthermore even if you run rate Q2 2015 negative EBITDA from the white goods business and assume no working capital benefit the operating free cash flow yield would be c. 12.5%. We believe the investment thesis remains intact but will closely monitor developments at Grande as well as management actions at Emerson.
Caltagirone SpA (CALT IM)
The only major update in this story is that FCG Finanziaria, a holding company of Francesco Gaetano Caltagirone, made a takeout offer at €6.8 per share for the remaining shares of Vianini Lavori not owned by the connected parties of the Caltagirone Group. It has been recently confirmed that they have got to the 90% threshold in order to delist the company and will proceed to do so.
FCG’s offer represented a 16.5% premium to the last three months trading price but is still a 41.9% discount to our view of fair value (which does not give any value to their construction business).
Included below is our valuation of the Caltagirone complex both at investment date and as of Q3 2015 which shows that the only meaningful moves in valuation have been: (i) the increased market price of Vianini Lavori, and; (ii) the share price of Caltagirone SpA.
Caltagirone Editore SpA (CED IM)
Since our investment the CED IM’s discount to fair value has increased by 3.3% despite the underlying performance of the business significantly improving. In Q2 2015 the business posted positive EBITDA of €1.3m vs a loss of €0.4m in Q2 2014 representing an overall profitability improvement of €1.7m vs a similar improvement of €1.2m in Q1 2015. These improvements have meant that the business has moved from a €3.7m cash burn in H1 2014 to a €1.9m cash generation in H1 2015 which is a sterling effort.
The negative is clearly that revenues continue to decline with the positive performance in EBITDA being driven by continued cost cutting. Whilst CED IM’s online revenues are increasing strongly (11.5% increase in the quarter) we expect the need to see revenue stabilisation to see a real re-rating in the stock.
Hopefully the Caltagirone family will look to take advantage of the clear mispricing of CED IM in a similar way to Vianini Lavori although obviously we would hope it is at a price which more closely reflects fair market value.
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