TESB.BR - Tessenderlo Group

[skanjete]

My best idea (and actually my only one) so far this year is Tessenderlo Group.

 

It's a Belgian specialty chemical group, listed on Euronext.

 

The idea is a combination of

1) an cheaply valued stock

2) a great capital allocator and owner/operator

 

To keep things a little clear, in a second post, I'll concentrate on 2) and in a third post, I'll elaborate on 1)

[skanjete]

I'll start with the capital allocator/owner/operator : Mr. Luc Tack

 

Until a few years ago, mr. Tack concentrated on his privately held businesses, and so is not a very known public figure.

 

But if you talk to people who were involved with him from the very beginning, each time you hear the same message : he's a terribly focused hard worker and above all a great enterpreneur.

When he was 18 years old, he applied with the government to get "legal adult status" (in those days one was considered adult only at 21) in order to be able to start in business.

 

So he started at 18 with basically nothing. He always worked with industrial businesses in sectors as textile, timber, textile, truck cleaning,... Not exactly sectors with a lot of back wind. Each business he took grew to a success and with the generated cash he bought something new.

 

Then fast forward to 2009. That's the year he entered the public market. He had a limited investment in a company called Picanol. Picanol is a producer of weaving machines and operated in a nice niche. However, the company had been badly managed for years by the controlling family and operated in a notoriously cyclical sector.

So in 2009 they almost went belly up and had to organise an equity issue through rights issue to survive. Tack invested in the operation and bought out part of the controlling family for about 15m euro and this way controlled about 85% of the company. Since then he has bought some more shares so that his current position must be about 89%.

 

He assumed the CEO role without any pay and got to work. Most of the old management had to go and he brought in his right hand man, Haspeslagh.

Fast forward again : In the four years since he assumed control of the company, he squeezed out a cool 230m euro from the company. Mind you : this is not cash flow, (partly) reinvested in the company. This is free cash flow, neatly stashed away in a money account.

 

So for his 15m investment, after 4 years he got 90% of 230m cash and a company that generates about 70m euro free cash flow a year. I won't even bother to calculate his annual return, it's clear it's in the "exceptional" range.

 

And this in a down to earth sector of textile machine manufacturing.

 

Picanol is still listed on the Euronext, and they have no intention to delist, mainly because of commercial reasons. However one has to consider this a privately held company with a stock quote. The stock is still not expensive, but the efficiencies have been attained, and the very small free float is a negative.

 

At the last annual meeting, there were only 12 people and most of the specific business questions were neatly dodged.

So in my view, the stock quotation has to be considered as pro forma and just as they say for commercial reasons only (it seams to opens some doors in Asia).

 

So the story of Picanol is interesting and tells something about Tack and Haspeslagh.

Doubly so because in 2013, they took the cash stash (192,4m) of Picanol and invested it completely to buy 27,5% of Tessenderlo Group.

[skanjete]

Now we get to Tessenderlo Group.

 

In july 2013 Picanol bought 27,5% of Tessenderlo Group for 192,4 m euro.

If you know that at that time, the book value of Picanol was 261m euro, this is a major investment.

 

So knowing Tack & Co and seeing him make such a major move, it pays to pay attention.

 

Tessenderlo is an old Belgian chemical company that tried to move away from the old mass chemicals to specialty chemicals over the last say 5 years.

The main shareholder was the French government and these were not very "business minded", to put it mildly.

Though they were interested in the dividend, so over the last few years Tessenderlo had to borrow in order to be able to pay a nice dividend.

Management was terrible and over the last five years managed to evaporate 2/3 of book value.

You can imagine the stock performance : almost an exact inversion of Picanol's.

 

So but when things got so bad that it got clear that a dividend in 2013 would be difficult, the French government suddenly was prepared to sell to the only buyer, Picanol. FYI : picanol bought at 22€ a share.

 

Since then, the story is almost an exact copy of the Picanol turnaround. After a few months, Tack assumed the CEO role, recently Haspeslagh was appointed chairman, the old management was ousted, and they got to work again.

Also telling is the new director remuneration policy : the noble board directors recently got a pay reduction of about 2/3 to 4/5. Can you imagine the discussion at the last board meeting with the proud counts and barons at the table?

 

So it's clear there was a lot of fat to be cut, and Tack has an extremely sharp knife.

 

But what about the valuation?

 

If I made a sum of the parts analysis, based on the normalised earnings of the different segments of the company, I come to a value of 27€/share. That's with all the fat included and the last few years were a real crisis for some divisions of the company. So 27€ is my base value in case they manage to stabilise the company, and thus basically my downside.

 

But I realistically expect more of course.

An EBITDA margin of 10% is realistic. Some of activities suggest even more. Up to 14% could even be possible. So an EBITDA of  6-8€/sh should be possible in a few years.

Net debt should be about 7,5€/sh at the moment, so E.V. is say 30€. Comparable companies are valued at 6-8 times EBITDA,

so taking into account the cash that will be generated in the coming years, a stock price of 36-64 seems possible in a few years time.

This assumes no growth at all, only efficiencies. If one dares to assume some growth (I do), the potential is of course higher.

 

I know, most turnarounds are difficult to turn around. But Tessenderlo didn't get into trouble because of secular headwinds. Mostly it was a matter of wrong priorities (French government) and inept management. So in conclusion I see a combination of low risk (cfr. base case), huge potential and great, motivated management. Also the free float is better than with Picanol. 27,5% gives Tack enough control to change things, but no absolute control...

 

 

[skanjete]

PS the annual meeting of Tessenderlo a few weeks ago was also very interesting

It was the day that the former chairman had to go and Haspeslagh got in.

It was clear there was a new wind blowing in the company and that the old guard and it's ways had to go.

 

One older shareholder longingly told me a story about the days the annual meeting were an event. In the old days, all the shareholders were invited to a first class restaurant were they organised a free-for-all lunch and party until the late hours.

Maybe that was a reason that there were more shareholders present than on the Picanol annual meeting.

 

However they got disappointed if they expected a great feast. Now things got rather sober. Tack didn't even bother to come (he is co-CEO with Mel De Vogue) and Haspeslagh didn't join the other directors, but sat on the last line. If you didn't know him, you wouldn't have known the new chairman was in the room.

For me it made him quite a bit more accessible afterwards because few people knew him...

[rjstc]

Good story so far. Keep it going. How did your discussion with Haspeslagh go?

[giofranchi]

So knowing Tack & Co and seeing him make such a major move, it pays to pay attention.

 

Thank you very much for the idea! :)

Where is it possible to find more information about Tack & Co?

 

Cheers,

 

Gio

[skanjete]

Good story so far. Keep it going. How did your discussion with Haspeslagh go?

 

Great. My confidence in them grew considerably.

 

I saw him twice. First time at Picanol he was a bit reserved.

Second time at Tessenderlo he loosened up a bit and talked some more.

 

Basically, now that they manage the company for 6 months and start to get acquainted with the company, things at Tessenderlo appear to be as expected when they first invested in the company.

There evidently is a lot more to be done, but things are moving in the right direction he says.

 

Asked about their investment at 22€/sh a year ago, the potential and the expectations about that investment, he just smiled. When I told him that I supposed they wouldn't have invested at 22€ a year ago if they didn't value the company a lot higher, he smiled some more. Remember, one has to consider this investment in the context of Picanol.

 

As a pleasant aside, it actually appeared our families are distantly related, although I previously didn't know him.

[skanjete]

So knowing Tack & Co and seeing him make such a major move, it pays to pay attention.

 

Thank you very much for the idea! :)

Where is it possible to find more information about Tack & Co?

 

Cheers,

 

Gio

 

It's not very easy to get a lot of information.

 

He is rather public shy and prefers to work instead of sociolising or giving interviews. But, when there is a commercial interest, he isn't shy at all. He even arranged a meeting with Xi Jinping of China when he was in Brussels, just because a picture of a businessman with the president makes that businessman credible and trustworthy in China. That picture alone opened a lot of doors in China he told.

 

My first information came from the newspapers.

Then I started scuttlebutt and tried to reconstruct a bit his business past before his public investments.

 

I talked to employees, talked to colleagues, business relations, I met a neighbour, talked to family,...

And then of course the annual meetings. At the Picanol meeting he was present and since there were only 12 people, contact was somewhat easier.

[giofranchi]

He is rather public shy and prefers to work instead of sociolising or giving interviews.

 

Yeah! I know communication with shareholders might be time-consuming, probably a waste of time, someone would even say a promotional activity… Yet, I think that as a shareholder it is of great usefulness to me!

How could I come to understand whether I want to partner with you and to make business with you, if you don’t make the effort of explaining your strategy to me, and your means to create value for both of us? … That’s basically what I have just said in the BH thread… ;)

 

Gio

 

[moody202]

At the last annual meeting, there were only 12 people and most of the specific business questions were neatly dodged.

 

Is this not concerning? Why would they not want to answer business questions?

[skanjete]

He is rather public shy and prefers to work instead of sociolising or giving interviews.

 

Yeah! I know communication with shareholders might be time-consuming, probably a waste of time, someone would even say a promotional activity… Yet, I think that as a shareholder it is of great usefulness to me!

How could I come to understand whether I want to partner with you and to make business with you, if you don’t make the effort to explaining your strategy to me, and your means to create value for both of us? … That’s basically what I have just said in the BH thread… ;)

 

Gio

 

Well, Tack of course is in a luxury position. He doesn't need you to partner with him. So he doesn't see any need to promote himself or even the company. He just lets results speak for themselves. And people who trust him or do the extra work to get the necessary information can get rewarded for it. He has a habit of underpromising and over-delivering. Reading all the info and news on Picanol over the last 5 years can be illuminating in this regard.

 

In the case of Tack, there is no promotional activity, quite to the contrary.

Actually, one of the first things to go when he took control of Tessenderlo was the investor relations department. Next, the quarterly reporting. In Belgium, it's quite common for small to midcaps to report just 2 times a year, just as in the UK.

 

Of course, a lot of institutional shareholders, from the days Tessenderlo still was considered a big cap for Belgian standards, are uneasy with these new policies and quite a bit protested at the annual meeting.

But the sobering remark came from management : "it's no use to focus on quarter by quarter progress. A company doesn't work like that. We, as management, focus on the long term, thus you as a shareholder bettter do the same."

 

A shareholder asked some specific goals they wanted to achieve over the coming periods in terms of efficiencies and restructuring. The answer : "the idea that a company can take a set of measures and restructure itself in one go into an efficient operation is an idiocy. Restructuring in our case is a continuing process. Every day we need to think how we can do things more efficiently. We need to change the mindset of the company so that we can gradually evolve into an efficient operation. Therefore we can't and won't give you any specific goals. You'll read the progress from our half yearly and yearly figures and reports." Of course the investor was frustrated with the answer, also the press didn't like it, but to me, it sounded like music in my ears.

 

So it's true : they won't give you the investment thesis on a silver platter (although I seem to do it here). But for those who want to do the extra work, there is an abundance of direct and indirect information (public records of his private companies, Picanol, newspapers,...)  available so that one can form a balanced view.

Without Tack I wouldn't touch Tessenderlo with a bargepole. But maybe Tack can provide the necessary kiss to the frog.

 

[ukvalueinvestment]

Very interesting.  This actually popped up on a screen and I thought I should look into it, but never did.

 

How well known is this guy in Belgium and how well known is this situation?  Is it discussed much in the Belgian press?

[skanjete]

Very interesting.  This actually popped up on a screen and I thought I should look into it, but never did.

 

How well known is this guy in Belgium and how well known is this situation?  Is it discussed much in the Belgian press?

 

A few years ago he was not known.

But now he's getting gradually getting more and more credit for what he has done at Picanol. But that is only in the Flemish press (the Dutch part of Belgium). 

The story at Tessenderlo is being followed, but there is far from any hype around his person. He wouldn't let it happen either.

 

The press and investment world knows of course of the Tessenderlo story, but most are very sceptical because Tessenderlo is still being associated with the fiasco's of the past.

 

Besides, I think a big part of the shareholder base in Tessenderlo is based abroad and I am pretty sure Tack is hardly known in the investment world outside of the Flemish part of Belgium.

 

As an aside : as with many things in Belgium, there is also a communal discussion. Tessenderlo is based in the Flemish (Dutch) part of the country, and Tack and Haspeslagh are Flemisch as well.

But the previous main shareholder was French as well as the previous management. So the reporting used to be in Dutch/French/English and the annual meeting mainly in French.

 

The new management decided to simplify some things, and from now on, there's only reporting in Dutch and English. I also heard some rumour that next year the annual meeting will simply be in Dutch, maybe with simultanious English translation. So you can imagine the reaction of some French shareholders. Some less English fluent French will simply be unable to understand what the company is doing.

 

So everything taken together : I know some people who invested in the situation, but I wouldn't label it well-known or much discussed.

[Patmo]

Very compelling story, thanks for sharing. Too bad my broker doesn't let me invest overseas or I would look into it :'(

[giofranchi]

Well, Tack of course is in a luxury position. He doesn't need you to partner with him. So he doesn't see any need to promote himself or even the company. He just lets results speak for themselves. And people who trust him or do the extra work to get the necessary information can get rewarded for it. He has a habit of underpromising and over-delivering. Reading all the info and news on Picanol over the last 5 years can be illuminating in this regard.

 

In the case of Tack, there is no promotional activity, quite to the contrary.

Actually, one of the first things to go when he took control of Tessenderlo was the investor relations department. Next, the quarterly reporting. In Belgium, it's quite common for small to midcaps to report just 2 times a year, just as in the UK.

 

Of course, a lot of institutional shareholders, from the days Tessenderlo still was considered a big cap for Belgian standards, are uneasy with these new policies and quite a bit protested at the annual meeting.

But the sobering remark came from management : "it's no use to focus on quarter by quarter progress. A company doesn't work like that. We, as management, focus on the long term, thus you as a shareholder bettter do the same."

 

A shareholder asked some specific goals they wanted to achieve over the coming periods in terms of efficiencies and restructuring. The answer : "the idea that a company can take a set of measures and restructure itself in one go into an efficient operation is an idiocy. Restructuring in our case is a continuing process. Every day we need to think how we can do things more efficiently. We need to change the mindset of the company so that we can gradually evolve into an efficient operation. Therefore we can't and won't give you any specific goals. You'll read the progress from our half yearly and yearly figures and reports." Of course the investor was frustrated with the answer, also the press didn't like it, but to me, it sounded like music in my ears.

 

So it's true : they won't give you the investment thesis on a silver platter (although I seem to do it here). But for those who want to do the extra work, there is an abundance of direct and indirect information (public records of his private companies, Picanol, newspapers,...)  available so that one can form a balanced view.

Without Tack I wouldn't touch Tessenderlo with a bargepole. But maybe Tack can provide the necessary kiss to the frog.

 

Of course, it is not Mr. Tack who needs me… It is just the other way around: I need him to let me know and understand what he intends to do and how, before results speak for themselves… because by then it is usually too late!

 

Anyway, yes!! What you are writing about this new investment thesis is just wonderful! I agree 100%. And those quotes from the AM are just music to my ears too!

 

Very interesting investment opportunity! The sort of thing I really like. ;)

 

Gio

 

[skanjete]

Gio,

I know you like owner/operators. I was actually thinking of you when I wrote it.  ;)

 

Another one I think you would like is Goodwin plc. Although at current prices, it's not as interesting anymore as some years ago (currently 15 times earnings I would guess).

 

But this is a small British owner/operator (the family owns 55%) with a simple steel engineering operation. Since current management took over they multiplied the value of the company by about 130x in 21 years, for a compound interest of about 26%/year over 21 years!

 

And this is no facebook or Uber, but the same operation as when the predessors of the Goodwin family started it more than 130 years ago : steel casting. I have great admiration for this company and it's management.

Maybe I'll start a new topic on it if there is any interest from board members.

[giofranchi]

Gio,

I know you like owner/operators. I was actually thinking of you when I wrote it.  ;)

 

Another one I think you would like is Goodwin plc. Although at current prices, it's not as interesting anymore as some years ago (currently 15 times earnings I would guess).

 

But this is a small British owner/operator (the family owns 55%) with a simple steel engineering operation. Since current management took over they multiplied the value of the company by about 130x in 21 years, for a compound interest of about 26%/year over 21 years!

 

And this is no facebook or Uber, but the same operation as when the predessors of the Goodwin family started it more than 130 years ago : steel casting. I have great admiration for this company and it's management.

Maybe I'll start a new topic on it if there is any interest from board members.

 

Of course you should start a new topic on Goodwin!!

 

skanjete… where have you been all my life??!! ;D ;D ;D

 

Gio

 

[peter1234]

Thank you for a very thoughtful write-up!

Reminds me a bit of Einhorn's investments in Arkema, Lanxess and most recently Evonik.

:)

 

I was wondering if you found any risks, potential flags when you were researching the company?

 

Which is the closest competitor?

[skanjete]

Thank you for a very thoughtful write-up!

Reminds me a bit of Einhorn's investments in Arkema, Lanxess and most recently Evonik.

:)

 

I was wondering if you found any risks, potential flags when you were researching the company?

 

Which is the closest competitor?

 

Well, I actually researched Lanxess as well last year (there is a cyclical dip going on), but when the opportunity of Tessenderlo came up, I switched.

The competitors depend on the type of activity. Tessenderlo has 4 main activities, and thus different competitors.

I compared to Croda, Lanxess, DSM, Arkema, Solvay, Nutreco, Macdermid (taken over by Platform Specialty products),...

 

Of course there are risks. There always are risks, but I think they are contained in this case because of the margin of safety (cfr. quantification of the the sum-of-the-parts value).

 

The first main risk I thought of was, "what is an enterpreneur from the textile sector trying to do in the chemical sector?". It's not that the chemical sector is such a great sector and I suppose the dynamics are not the same.

 

Then it appeared he had some activities and experience in other sectors as well. And his modus operandi in other businesses clarified some things. And further, Tessenderlo is no longer mass chemicals, but more some specialised activities. 

 

When I talked to them, it's not like they have any new revolutionary strategic ideas linked to the chemical part  of the story. It's more that they have some strong views on how to make the total operation more efficient. Basically as they did with Picanol.

 

At Picanol as well, they didn't touch the core of the business, but merely made it more efficient and cash generative. I believe they have the same game plan with Tessenderlo : operate more efficiently, and start producing tons of cash.

[giofranchi]

skanjete,

I wasn't able to find Mr. Tack's age anywhere... Do you happen to know it? ;)

 

Thank you,

 

Gio

[Christopher1]

Ciao Gio,

if my translation is correct Tack is 52 years old.

 

http://trends.knack.be/economie/nieuws/dossiers/manager-van-het-jaar-2013/luc-tack-ceo-picanol-er-zijn-hier-betere-managers-dan-ik/article-4000455327744.htm

 

 

[skanjete]

skanjete,

I wasn't able to find Mr. Tack's age anywhere... Do you happen to know it? ;)

 

Thank you,

 

Gio

 

Gio,

 

I believe he's about 52.

So hopefully, he has some years ahead of him.

[skanjete]

Ciao Gio,

if my translation is correct Tack is 52 years old.

 

http://trends.knack.be/economie/nieuws/dossiers/manager-van-het-jaar-2013/luc-tack-ceo-picanol-er-zijn-hier-betere-managers-dan-ik/article-4000455327744.htm

 

I'm sorry Christopher.

I hadn't seen your post and answer.

 

The interview that you posted is quite telling.

 

It's an interview because Tack was nominated for manager of the year.

 

The first paragraph states :

"Saying that Luc Tack received us with enthousiasm is quite an overstatement. Tack : "I would have preferred not to receive the nomination as manager of the year. I would much prefer to be able to continue working without being bothered. Anyways, I'll help you."

[writser]

Please forgive me for asking a question while barely having looked at both companies in depth. But if you like the manager, why not invest in Picanol instead? You still have the Tessenderlo upside as well as the chance of buying the future Belgshire.

[giofranchi]

Please forgive me for asking a question while barely having looked at both companies in depth. But if you like the manager, why not invest in Picanol instead? You still have the Tessenderlo upside as well as the chance of buying the future Belgshire.

 

I guess it is something like this: do you prefer to invest in BH, or in CBRL, or whatever company Mr. Biglari is targeting?

Some prefer the latter, because the effect of thoughtful restructuring doesn’t get diluted inside a company with many other assets.

 

Gio