TESB.BR - Tessenderlo Group

[Libs]

I've put my bid at 22.50........

[matts]

I remember reading about this company when it first popped up here. There was some misalignment of interest between the 2 Luc Tuck vehicles? How's the capital allocation been at TESB last couple of years? Has Tuck made good decisions and treated minority shareholders well?

 

 

[skanjete]

In my opinion, capital allocation has been great.

 

But it was a great mistake of minority shareholders (thank you, Meryl Witmer...) to block the merger between Picanol and Tessenderlo.

 

Picanol is the better business in my opinion and since the merger blocked, Tack has been buying out minority shareholders of Tessenderlo at a steady pace. Because of the blocked merger the interest of Tack and minority shareholders were not aligned anymore. His interest is in a low share price so he can buy minorities out at a discount with the cash flow from Picanol.

 

 

Apart from this, the company itself is doing really fine. Look at EBITDA and free cash flow generation over the past few years. The question to be answered is if minority shareholders will benefit proportionally.

[Libs]

In my opinion, capital allocation has been great.

 

But it was a great mistake of minority shareholders (thank you, Meryl Witmer...) to block the merger between Picanol and Tessenderlo.

 

Picanol is the better business in my opinion and since the merger blocked, Tack has been buying out minority shareholders of Tessenderlo at a steady pace. Because of the blocked merger the interest of Tack and minority shareholders were not aligned anymore. His interest is in a low share price so he can buy minorities out at a discount with the cash flow from Picanol.

 

 

Apart from this, the company itself is doing really fine. Look at EBITDA and free cash flow generation over the past few years. The question to be answered is if minority shareholders will benefit proportionally.

 

Skanjete

 

Can you flesh this out a little - at what % of Teck's Tessenderlo ownership would the minority shareholders be at risk, in your view, and how could it play out? Thanks.

[skanjete]

Well, Tack already has absolute power. He owns/controls about 50% of the shares, but considerably more of the votes (about 60% I guess) because of the loyalty program.

 

So he can pretty much do as he likes. If you don't like the situation with Tessenderlo, you can always look to own Picanol. With Picanol, the minority interest are more aligned with the interest of Tack, because he wants to keep a stock market presence. However, the shares are hard to get and very illiquid.

 

Actually, it's possible he tries to merge again in a stock deal. A few weeks ago, there was a special meeting at Picanol to enact the loyalty votes. Tack really doesn't need it, because he already owns 90% of the shares, but if they ever want to merge with another company in a stock deal, the loyalty votes could make sense. Long term that would be the best solution for all parties involved.

[skanjete]

The interim results of Tessenderlo were really impressive, stunning actually.

Finally, the figures start to ressemble the underlying progress the company has been making over the past few years.

Bio valorisation in particular is starting to live up to expectations after years of investment.

 

EBITDA +25%, EBIT +45%, net profit almost doubles.

 

Also, look at the debt situation : from 356 to 240m€, cash balance from 154,5 to 230,8m€.

 

But in my view, the debt situation is far better than suggested. These figures include the lease liabilities they have to include since 2019.

They even didn't make a split up in the balance sheet between debt and lease liabilities.

 

Besides, this net debt number is consolidated.

T-power is a sizeable electric energy operation within this consolidation and it seems to me natural that this kind of activities are financed with a sizeable debt portion.

 

So their published debt situation is far worse than the industrial reality.

 

Thus the 230m€ cash on the balance sheet can for a great part be considered as surplus cash and available for new investments.

 

 

 

[jefke]

Impressive numbers.

 

Couple of questions/remarks, maybe someone here has more info.

 

I have the impression that TESB tries to focus on a more non-commoditized output - more asset light - better margins/ROIC. But they don't seem to clearly communicate that except for the occasional "increase in EBIT thanks to better product mix"

 

1) Agreement with Kemira for LT partnership: Kemira will produce premium SOP, Kerley will market. Scheduled to be operational in 2021

Would be interesting to hear more about the economics of this deal. Seems like Kerley has brand power & can outsource the production. Is this new for TESB & SOP? Is there a difference between the SOP & premium SOP?

I read in an older VIC writeup that for Novasource they have this asset light - outsourced production model. Was under the impression TESB produced their own SOP. Move to non-commodity output with outsourced production is probably a good sign?

 

2) Bio-Valorisation is PB Leiner & Akiolis. I was under the impression that PB Leiner has more of a non-commodity output than Akiolis. Nice to see the increased focus on collagen peptides (PB Leiner) with a new line in Sante Fe & upcoming JV in China for a new collagen peptides plant.

Part of the boost in EBIT(DA) for this segment is because of a better product mix. The focus & investment in the collagen peptides seems to be actively seeking up this better product mix?

 

It seems that TESB is making good investments that are now paying off. But imo there's a lack of clear shareholder communication that is a bit frustrating. They tell us the bare minimum of what they do, but not why or what their expectations are.

[jefke]

Conference call cliffs:

 

Their focus the past years was, and still is, a shift to "higher value add" products. Increased & more differentiated product offering so they can serve more demanding customers.

 

Agro: provide value to the customer by providing the right quality product at the right time

 

Bio-V: both PB Leiner & Akiolis contributed to the higher margin. (so what I wrote in an earlier post about PB Leiner being less commoditized isn't necessarily true)

They are very bullish in collagen peptides as a growing end market (examples of its usage were all in the food & drinks industry)

Better margins thanks to structural changes, but also because of favorable market conditions.

Goal is to valorize with maximum value (value for customer AND for Tessenderlo)

 

So their goal seems to be to shift away from non-differentiated low margin outputs, to differentiated higher margin products.

[A Dhandho Investor]

Tack is still buying: Last Friday 100k shares at 30€ (€3m) and Tuesday 325k shares at 31€ (€10m)

[skanjete]

Today the results from Tessenderlo and Picanol came out.

 

Results at Tessenderlo were despite COVID19 even better than expected :

EBITDA : +21%

net profit +43%

free cash flow : +58%

net debt reduced to 0,6x EBITDA. It is to be expected that at this rate and without extra investments this year they will reach net cash within a year.

 

The business has an EBITDA margin of 18,1% at the moment

This starts to look like a great business!

 

And still very cheap.

I mean, EV/EBITDA of 5,7 and marketvalue 8,4 times free cash flow for a growing business in the hand of a good capital allocator is really attractive.

 

Also some good investment opportunities for new Thio Sul plants.

The extra power generation plant looks to be a big investment as well : 900MW for an investment north of 500m€ by 2025. 

 

I also noticed Picanol did a major investment in a Swiss textile business. They bought 10 of Rieter Holding for about 45m€.

The textile business has some interesting technology but is loss making. So I don't think Tack made the investment to be a minority shareholder of a loss making business.

 

I expect him to take control of the business. However, the net cash position of Picanol has reduced a lot after a difficult 2020, the Rieter investment and the Tessenderlo share purchases. Now the main chunk of cash and cash generation sits in Tessenderlo.

 

Since he already controls more than half of Tessenderlo, maybe it's time to try combining the 2 companies again? This would make the balance sheets a lot more efficient and both shares have about the same discount to underlying value at the moment. Hopefully, Meryl Witmer isn't around any more to block a deal...

 

We'll see what 2021 brings. But so far, Tack lives up to my expectations...

 

[misterkrusty]

thanks.  are those multiples on trailing or forward numbers?  I spent a lot of time on these companies years ago.  the fertilizer business is a gem

[jefke]

I expect him to take control of the business. However, the net cash position of Picanol has reduced a lot after a difficult 2020, the Rieter investment and the Tessenderlo share purchases. Now the main chunk of cash and cash generation sits in Tessenderlo.

 

Random thought I had was that maybe this could signal the start of a dividend at TESB (gives Tack cash in Picanol to buy more Rieter)?

 

(But no dividend this year)

 

I rather have Tack reinvest all the cash he can within TESB, but a dividend would in a way de-risk the investment a bit. If the main bear case is Tack not treating minority shareholders fairly, a dividend shows he would be willing to return some cash to shareholders.

 

But of course if TESB ends up actually building a second power plant at a cost of €500m+, they will keep all their extra cash.

[jefke]

The big party pooper for "reported earnings" was an FX loss "impacted by exchange gains and losses, mainly on non-hedged intercompany loans and cash and cash

equivalents in USD" of 30m.

 

With it (as reported) earnings are about 100m . Without it 130m

As reported EPS is 2.3. Without those losses it would be 3 (share price of 37-38).

 

(But as usual, cash flows >> reported earnings at Tessenderlo).

 

skanjete, do you think it's reasonable to just back out those FX gains & losses every year?

 

I should look at past reports and see how big the impact was & what it averages out to on an annual basis.

 

[kab60]

What's the deal with the power plants? The first one seemed opportunistic, building one from scratch is different. I definately give Tack the benefit of doubt given his history, but it's a little puzzling. Increases in renewables have lowered electricity prices a lot in most of Europe, but apparently not Belgium, and a lot of utilities have taken large writedowns on power plants. Belgium is a very small country, so renewables might be more difficult to pursue, but anyone know what the deal is? (because it is not just to be paid for providing backup). I am sure there are some dynamics I am not aware of: https://www.statista.com/statistics/418067/electricity-prices-for-households-in-belgium/

[skanjete]

The big party pooper for "reported earnings" was an FX loss "impacted by exchange gains and losses, mainly on non-hedged intercompany loans and cash and cash

equivalents in USD" of 30m.

 

With it (as reported) earnings are about 100m . Without it 130m

As reported EPS is 2.3. Without those losses it would be 3 (share price of 37-38).

 

(But as usual, cash flows >> reported earnings at Tessenderlo).

 

skanjete, do you think it's reasonable to just back out those FX gains & losses every year?

 

I should look at past reports and see how big the impact was & what it averages out to on an annual basis.

 

In 2019 there was a bonus in terms of FX gains, in 2020 a headwind.

These mainly concern intercompany loans that aren't hedged, so I would not consider them to be too important.

 

More important at Tessenderlo, Picanol (and all companies) are cash flows as you mentioned.

 

Consider this : the company produced 282,2m€ cash flow and they need about 100m€ a year for investments. However, the 100m€ consists of replacement and expansion investments.

They record a depreciation of 133,6m€ a year, but apparently they need a lot less for replacement investments. An important part of this is to be explained by the T-Power investment : high depreciation but no need for replacement investments for years to come.

 

To get to true free cash flow, you should use 282,2 - 22,6 (leases) - 99,5 + expansion investments. I estimate it to be about 200m€, or 4,5€/sh.

[skanjete]

What's the deal with the power plants? The first one seemed opportunistic, building one from scratch is different. I definately give Tack the benefit of doubt given his history, but it's a little puzzling. Increases in renewables have lowered electricity prices a lot in most of Europe, but apparently not Belgium, and a lot of utilities have taken large writedowns on power plants. Belgium is a very small country, so renewables might be more difficult to pursue, but anyone know what the deal is? (because it is not just to be paid for providing backup). I am sure there are some dynamics I am not aware of: https://www.statista.com/statistics/418067/electricity-prices-for-households-in-belgium/

 

I don't know the exact math behind the investments but I know this :

 

Belgium has 2 important nuclear plants. Beginning years 2000 it was politically decided that the 2 plants were to be phased out by 2015.

They took the decision although Belgium didn't have an alternative for the to be phased out electricity.

The idea was to replace the nuclear plants by renewables, but the 2 plants represent 3.900MW so this was completely unrealistic.

 

So the phasing out has been repeatedly postponed and is now scheduled by 2025.

Meanwhile, the owner of the plants, didn't invest in them anymore and squeezed out all cash flow possible because they were to be phased out.

Because of this and the postponing of the phasing out, there were quite a few technical problems with the electrical capacity and production in Belgium over the past few years

 

I have the impression that further postponing the phasing out is difficult because of underinvestment and the technical issues involved. Besides, the ecologists are part of the new government and they won't allow further postponing.

 

So now the Belgian government is cornered. They desperately need 3.900MW new capacity by 2025 or the lights go out.

2025 is soon because one needs about 3 years to build a plant, so construction should start by next year.

 

That's why they organise the CRM subsidy mechanism. In view of the stressed situation of the government, it's possible that the CRM subsidies provide a very good investment opportunity.

 

It's organised as a tender. Tessenderlo offers a plant of about 900MW. Engie, Luminus, Eneco and Dils Energie are preparing a similar plant. So that's 5 contenders for about the exact amount of capacity that is needed. A sixth contender, Essent withdrew from the tender and was practically begged by the politic to reconsider. This suggests the subsidies could be really attractive. The process already drew the attention from Europe because they suspect uncompetitive state support.

 

Conclusion : the Belgian energy management is a real mess and Tack stands ready to profit from the situation.

[kab60]

Wow, that's great Skanjete. Thanks for the insight, I figured he had seen an attractive opportunity, but this sounds even better than what I could have hoped for.

[jefke]

Good info skanjete, thanks.

 

So been reading through the report & conference call. Here are some thoughts (through the lens of a bull):

 

As usual for Tessenderlo, need to look at cash flows instead of reported earnings. Still cheap on current cash flows during the COVID year, while they're investing in expansion & will benefit from global reopening.

 

One of the frustration with being an investor in TESB is that management simply refuses to give details in individual projects that would help you think about future earnings power. When asked about capex for a new fertilizer plant, they literally said "We don't give individual details on individual projects". They just guide overall capex for the full group and that's it.

 

So investing in TESB for me is investing in a company cheap on current earnings/cash flows with optionality:

- not all current projects are "mature" (still some extra earnings to be squeezed out. "Continuously looking to de-bottleneck & increase production for existing locations")

- reopening will increase demand for some of their products

- they keep on investing in growth

 

Current COVID impact seems limited, but exists:

- supply chain to their plants & to customers

- rising prices for input raw materials

- gelatin demand in EU (consumption is "tremendously down")

- collagen demand (postponed full ramp up of new production line in Santa Fe because of COVID)

 

Guidance:

"The group expects 2021 adj EBITDA to be in line with 2020 adj EBITDA"

Flat volumes for Agro, flat everything when you add up all the business units

 

"Right now, we go for a stable outlook but then we hope in August to have a better view on HY2 and update guidance"

Their guidance, as usual, seems to be pretty conservative. Not taking into account much improvement in demand post reopening.

 

Current trading update?

"Satisfied, according to our outlook"

 

Analyst asked about Bio-Volarization competitor Darling Ingredients. They guided pretty bullish in all aspects. TESB guides flat. Why?

"Darling is more US-oriented, we are more EU focused."

"Fat prices are indeed at historical highs, but this also impacts the price we pay for raw materials"

 

Inflation?

Q:"Are your input costs hedged? How much are feedstock prices eating into your margins?"

A: "Big volumes for the chemical business are contracted on volume, but prices are most of the time index linked"

"There has been an explosion of prices. In all of our businesses we are trying to pass on the raw material cost price increase to our customers"

 

FCF generation

"We have FCF generation of about 100m a year, after 100m investment and 100m repayment of loans and other financial elements"

(So that's actually more like 200m FCF)

 

My own fears/bearish thoughts:

- How cyclical is this really? To the business units kind of balance out? I'm afraid of seeing this as cheap based in cyclically high earnings.

- Inflation: they focus on creating "value added" products. Might not be a strict commodity, but how will TESB do in a period of inflation? Will they be able to pass on the costs?

[misterkrusty]

my 2 cents:  when I looked at this years ago, I was surprised at just how little cyclicality there was to the fertilizer biz.  Thiosul needs to be applied every year (i.e. farmers can't skip a year) and is used for growing a variety of fruits/nuts/vegetables.  They seem to have a competitive advantage in sourcing some of the raw materials.