CALT IM - Caltagirone SpA & CED IM - Caltagirone Editore (LONG)

[HIPS]

Caltagirone Group

BUY Caltagirone Spa (CALT IM) @ €2.27

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:

 

a. 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

 

b. 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)

 

c. 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, © 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_Corporate_Structure_2015.03.15_v1.pdf

[Packer16]

From a prelim look it looks like most of the value is in its 57% interest in Cementir, Euro100 to 150m in Italian financial stocks, the construction business and to lesser extent the 29% interest in Caltagirone Editore.  Fortunately, most of the value is in the cement business which is probably the crown jewel here.  Its publicly trade price is close to 6.4x EBITDA (if you remove the RE and investments) and use the 2014 EBITDA.  If these business are run correctly they trade at 9 - 10x EBITDA.  Other comps in Italy include Italicement @8.4x EBITDA and the savings shares of Buzzi @6.1x EBITDA.  The large European players of Holcim and LaFarge trade at 9.1x and 10.7x EBITDA respectively.

 

The newspaper is more difficult as the value can be quite small (Washington Post is an example) or worth maybe up to 3 EBITDA (the unlevered value of US papers).  Interesting company.  Thanks for sharing.

 

Packer 

[Hielko]

Thanks for the detailed write-up. Sounds interesting. Any background with regards to capital allocation? Do they for example pay dividends and/or buy back shares?

[oddballstocks]

Never thought I'd see this name on here.  Looked at this back in 2011.. still just as cheap if not cheaper.

 

My concerns at the time

1) A lot of their earnings come from a few divisions.  Is this repeatable?  At the time a lot of their revenue was coming from the expansion of the Rome subway.  This project was under a lot of scrutiny and there was a lot of hand waving about unfair dealings.

2) I talked to a few Italians about this and they universally said this is a mafia company that happens to be traded.  I was uncomfortable with that because my concern was management's allegiance was to the mafia/connections/whatever over shareholders.  Also the fact that the company might walk on the edges of the law to get things done.  This also brings in an unquantifiable risk, what if the government decides something they're doing is unacceptable?  Will they be shut down, huge fines?

 

Vianni Industria was a net-net for a long time, probably still is.  They were the cheapest component and I owned them for a year or two.  I sold out at break even or a slight loss. 

 

Vianni Industria kept putting out news about what they thought the future held.  It was much rosier than what happened.  I started to get suspicious and connected with someone who lived over there.  They sent me the addresses of Vianni Industria facilities and I started to look them up on Google Streetview.  They were vacant lots or abandoned lots.  I started to get worried that maybe what I owned was a front to clean the money or something and decided to get out. 

 

I'd really recommend you get some on the ground information from Italians.  There is more than meets the eye here.  It does look like there's a lot of value, but I'm worried that structurally it will never be unlocked because the owners don't want it unlocked.

[HIPS]

Addressing the questions / comments in the posts above (sorry for the long post but some interesting discussion points here)

 

 

Hielko

 

I have outlined below what I know about the capital allocation policies of the various companies within the Caltagirone structure

 

Caltagirone SpA

•  Has paid an annual dividend every May since 2005 with a special 10% stock dividend in 2007

•  Current run rate dividend yield is 1.26% and the dividend was cut from a regular €0.08 in 2011 to €0.03 and was raised to €0.05 for the May 2015 dividend

•  To the best of my knowledge the company is not buying back its shares nor has any treasury shares on their balance sheet

 

Vianini Lavori

•  Has paid a regular annual dividend of €0.10 since 2009 which is a current run rate of 1.68%

•  The company owns treasury shares but does not disclose how many in their latest reporting. As of the latest reporting the company has not acquired any of its own stock in 2014

 

Vianini Industria

•  Has paid a regular dividend of €0.02 since 2009 which represents a 1.59% yield

•  The company appears to own some treasury shares but I cannot see if they are buying more due to translation limitations. However, the gain on treasury share reserve has not changed from 2013 to 2012 which may be an indicator that they are not actively acquiring shares anymore

 

Caltagirone Editore

•  Stopped paying dividends in 2012

•  The company is actively buying back its shares although not in great size. As of Sep 2014 they hold 1,249,702 shares which is up from 868,622 in Dec 2013. To put this in context over the period Dec13 to Sep14 8,748,233 shares of CED IM traded in the open market meaning that the company represented c. 4.4% of the traded buyside volume. Unfortunately not many of the companies I get really excited about are buying back their shares so I am not really sure whether this level of buyback interest represents any kind of technical factor or one that would “floor” the share price, however, my gut feeling says no. Interested in other peoples thoughts on share buybacks who have more experience than me

 

Cementir

•  Has paid an annual and increasing dividend which is currently €0.10 up from a low of €0.04 in 2012 and representing a 1.23% yield on the 12 month average share price

•  They appear not to own any treasury shares

 

 

Oddballstocks

 

Thanks for flagging very helpful, your comments prompted a couple of thoughts from my side

 

 

1. What are you actually betting on if you invest in Caltagirone SpA (assume point 1 is not directed at my interest in Caltagirone Editore)

 

I have spent some time on trying to tie this down and it has not been easy so apologies if this is not correct but based on my workings if you invest in Caltagirone SpA the various business stakes they own translate into the following value buckets:

[pretty confident by corporate entity is correct but by value type might be off due the complex inter-related nature of all the businesses]

 

a. by corporate entity (% of my fair value)

•  Vianini Lavori – 40.3%

•  Vianini Industria – 8.9%

•  Caltagirone SpA – 50.8%

 

The stakes in Cementir and Caltagirone Editore are owned both direct by Caltagirone and also through Vianini Lavori (in the case of a 25% stake in Cementir which represents 40% of my total fair value of Vianini L with the remainder mainly coming from listed equities and cash)

 

b. by type of value (% of my fair value)

•  Listed Equities – 29.0% (these are their stakes in ACEA, Generali and Unicredit)

•  Cash – 18.9%

•  Cementir – 68.0%

•  Liabilities – (15.0)% (57.5% is related to Cementir with the remainder in Caltagirone Editore & Vianini L)

 

I think this is helpful to highlight what you are really betting on if you buy Caltagirone SpA which in my mind is:

 

1. The value contained in Vianini Lavori away from the contracts business

2. That Cementir maintains or grows its value as the combination of listed equity and cash means you are creating Cementir “for free” when you buy Caltagirone SpA as the value away from Cementir is conservatively €248.0m vs current market cap of €230.0m

 

The actual leverage in this trade is low at 13.8% of total gross value which I like. The crucial outstanding question becomes whether Vianini Lavori is fundamentally flawed which I address below. This exercise has also highlighted my lack of focus on the key part of the trade Cementir which I will have to address in time but for now I am comfortable that it does not look horrendously overpriced

 

 

2. What is the risk that either of the Vianinis is seriously dodgey / has links to the mafia

 

As highlighted in my original post I really hate construction and EPC businesses but unfortunately I seldom get the chance to look at good companies in my scrummage for value. On the basis that there are “no clean hands in the plague pit” it does not surprise me that there is some noise around specific contracts / business dealings. The language has been a bit of a barrier but I was able to find this article which goes to your point (although the outcome investigation doesn’t mention any mafia / criminal involvement more plain incompetence across multiple different parties) http://www.corriere.it/english/14_novembre_21/rome-metro-shambles-4338ca38-717a-11e4-b9c7-dbbe3ea603eb.shtml.

 

I think the chances that either Vianini is mafia owned are lowered by the following facts:

•  The companies are controlled by the billionaire Caltagirone family and only represent a portion of their wealth. Furthermore the family sit on the board of both Vianinis (albeit not the main man or the favoured son who runs Cementir which would make you more comfortable). My guess is that if they were really associated with organised crime I would have expected them to sell the company or at least distance themselves particularly as it has a c. 25% stake in Cementir which is their biggest holding by value

•  The companies are audited by KPMG. Obviously this is not a banker given countless examples of auditing failures (Enron etc.) but if they were well known mafia front I would expect KPMG to shy away from an audit role

•  Vianini’s partners in the Metro C project are: Astaldi (c. $2bn TEV listed construction company) and a Finmeccanica subsidiary (c. $15bn TEV listed conglomerate) [there is also an Italian cooperative]. All of them are invested into the same JV and I take some comfort that large Italian corporations, particularly Finmeccanica who has a secondary listing in the US and is therefore exposed to the corrupt practices act etc., would not do business with a suspected mafia front

 

All of the above said I unfortunately do not have good business contacts in Italy or the ability/resources to properly run this potential risk into the ground and so I have to rely on two things:

 

1.  The margin of safety inherent in the structure – even if the equity value in both Vianinis fireballed to 0 you would still be left with a value directly owned by Caltagirone SpA based on their stakes in businesses unrelated to the Vianini business of €325.0m vs a traded equity value today of €230.6m

 

2.  As mentioned above I do think the fact that the main assets I am underwriting in Vianini L are no comingled with the construction business and instead owned in separate corporate entities protects you on the downside to some extent. Obviously a huge scandal could result in liabilities for Vianini L (fines, litigation etc.) but it is always difficult to look one stage further up the corporate chain if all the activity / decisions are made in a collective JV and the owner is simply a capital vehicle with 40 employees

 

 

3. Implicit in both sets of questions is a question / concern about whether the value gap across this sprawling conglomerate will ever narrow

The question of a catalyst to narrow the gap is a common stumbling block in the investments that interest me. In focusing on complex, obscure or illiquid securities which trade at a substantial discount to fair value I very rarely come across “underwriteable” catalysts that I think will re-rate these situations.

 

A good example of this was Beaumont Select (BMN/A CN) which I posted on this board. At the time of buying the free float was very small (only 6%) and whilst the main shareholder had been fastidiously buying back shares he has been doing so for the last 14 years. At the time of the underwrite you could have made the argument that the share buybacks would narrow the gap but as I said this has been going on for 14 years and the security still traded at a material discount to liquidation value. What was more likely / a real risk was that you would end up in an ever smaller pool of minority shareholders and the amount of true third party buyers would slowly evaporate increasing the chace the security would never reflect fair value. In the end shortly after initiating a position the controlling shareholder announced a take private which resulted in a c. 25% value bump

 

Currently I do not worry about catalysts for pure discount to liquidation value investments so long as the discount is so material that I would be happy for the gap to close over 5+yrs. If the discount to fair value is not so meaty (<50%) I would have to either see (i) a clear catalyst (example being Caltagirone Editore becoming breakeven / steaming the decline) or (ii) see a business that was likely to post +ve FCF to equity over a long period of time such that the value accrual / cash build up would force value to the equity even if the traded discount remained the same (example would be Genterra Capital Inc. GIC CN which I also posted on)

 

Interested in other peoples thoughts on the catalyst question

 

[HIPS]

https://hidinginplainsightblog.wordpress.com/2015/12/05/caltagirone-spa-more-hidden-value/

 

Below is a quick post updating on the Caltagirone complex which has maintained its discount to our fair value whilst exhibiting an increase in the overall quality and certainty of the margin of safety. We will also be increasing our holdings in CALT IM by another 2.5% to 5.0% at market open.

 

 

1. Vianini Lavori Take Private / Grandi Stazoni

 

On the 15th May 2015 FGC Finanziaria, a company controlled by Francesco Gaetano Caltagirone, made an offer of EUR 6.8 per share ex-div to buy out the 28.1% of Vianini Lavori not controlled by the Caltagirone group which represented a 16.8% premium to the 3 month average trading price immediately preceding the announcement date. In the offer Caltagirone stated that they would delist the entity if their offer was successful and at the a shareholders meeting on the 22 October 2015 it was announced that over 90% of Vianini’s shares were controlled by connected parties and they would be proceeding with a squeeze out and delisting.

 

We cannot fathom why the minority shareholders tendered their shares into this offer given that, excluding any value for Vianini’s stake in Grandi Stazioni, the offer represented a 48.9% discount to the value of the listed securities and cash net of all obligations that Vianini held. In fact, as we saw with Genterra, the controlling shareholders could fund the entire take out of the minorities with cash on the balance sheet.

 

Given the discount to a very conservative fair value we didn’t look further into Caltagirone’s motivations at the time or consider whether there was any other value we should have been taking into consideration. However, we know think that a big part of their motivation in this takeover was the upcoming privatisation of the Italian railway assets known as Grandi Stazioni in which Vianini has a stake through its 40% interest in EuroStazioni.

 

As a quick reminder Grandi Stazioni S.p.A. is a member company of Italy’s Ferrovie dello Stato (English: State Railways) group and was created to rehabilitate and manage the 13 biggest Italian railway stations. The company is 60% controlled by Ferrovie dello Stato and 40% controlled by EuroStazioni which is a consortium of private investors including the Benetton Group, Pirelli, SNCF and Vianini Lavori which has a 32.741% stake.

 

Interestingly it was reported at the beginning of July by Italy’s equivalent of the FT that the state was looking to sell Grandi Stazioni by the end of 2015 (article can be found at http://www.italy24.ilsole24ore.com/art/business-and-economy/2015-07-01/grandi-stazioni-133617.php?uuid=AClNg0J). Having dug a bit deeper we were able to find a number of articles putting the price tag at EUR 1.0bn which we assume is a TEV not equity value (you can see an example at https://translate.google.co.uk/translate?hl=en&sl=it&u=http://www.ilfattoquotidiano.it/2015/11/16/ferrovie-dello-stato-privato-e-sempre-piu-bello/2223751/&prev=search).

 

With a bit more moderate sleuthing (and frankly something we should have done in our initial underwrite of the Caltagirone group) we were able to find the 2014 accounts of Grandi Stazioni with a view to trying to test the credibility of the rumoured EUR 1.0bn price take which you can find at http://www.grandistazioni.it/cms/v/index.jsp?vgnextoid=9d8072ceeae7b110VgnVCM1000003f16f90aRCRD

 

It turns out that Grandi Stazoni is basically a real estate company which earns rent from commercial tenants located in the stations. Taking the latest annual accounts we stripped out the advertising and other revenue assuming a suitable EBITDA margin to arrive at the “clean” real estate earnings. Assuming a EUR 1.0bn TEV and adjusting out the value of the other businesses you would need to believe a purchaser would be willing to acquire the railway stations for a 5.6% rental yield or better. This would seem fair looking at CBRE data on Italian prime commercial rental yields which range from 4.00 – 5.50% (we have attached the research as Italia _Retail _MarketView_2015_Q3_English_Finale.pdf). None of this gives any value to the Czech railway stations which they are currently redeveloping. We have included our workings on Grandi Stazioni valuation attached as Grandi Stazioni Valuation.jpg

 

All in all the additional value from Grandi Stazioni adds an additional 17.7% value to the Vianini stake which equates to 18.4% of the current CALT IM market cap.

 

Finally, in tracing all of this back we also noticed that we goofed up our initial memo by only attributing value from Caltagirone’s 50.045% direct stake in Vianini and missing an additional 6.426% stake that they held indirectly. This is worth an additional 14% of the current CALT IM market cap

 

So all in all we have “discovered” an additional 30% of value in Vianini when considering the market cap.

 

 

2. Caltagirone Editore

 

When we recommended an investment in the group Caltagirone Editore was EBITDA negative. This has now reversed with the group posting positive LTM EBITDA of EUR 3.2m driven by two things: (i) stabilisation / recovery in advertising revenue, and; (ii) continued effective cost cutting. Depending on the levels of employee and other provisions that get crystallised during 2015 the business will still burn a small amount of cash but not much. We have laid out all the quarterly financial and operational KPIs we could find in CED IM’s reporting so you can judge the performance of the company for yourself (you can find this attached as CED IM KPIs (2015.12.05).pdf)

 

To be clear CED IM is not out of the woods yet by any means particularly as the online contribution as a % of the total advertising revenue is only 11.6% as of Q3 2015. However, we still continue to hold a small position in CED IM as we believe that a discount of 53% to cash and listed securities represents a dislocation to fair value given the performance of the underlying business.

 

 

3. Cementir

 

Quick health warning that this asset represents a meaningful part of the CALT IM value story and we have not done a huge deep dive on it (obvious comment but you should always do your own diligence as this post shows we often make mistakes).

 

For the first 9months of 2015 Cementir has roughly stayed flat posting 0.7% revenue increase and a (1.9)% decline in EBITDA. Using Cementir’s LTM EBITDA to Sep 2015 the business is trading at a 7.2x multiple which seems inline to slightly cheap to the other albeit larger cement players such as Holcim, HeidelbergCement etc. At a high level the biggest concern that we have about Cementir is that it generates c. 28% of its revenues and c. 32% of its EBITDA in Turkey which is a potentially overheated economy and also has a higher political risk associated with it that we would normally be comfortable with.

 

CALT IM’s stake in Cementir represents 34% of our total fair value and it you excluded any value for Cementir then CALT would be trading at a 45% discount to our view of fair value.

 

 

4. Updated Valuation

 

We have attached our updated valuation of CALT IM (see Caltagirone Valuation (2015.12.05).pdf), in short we believe that it is trading at a 41.1% discount to fair value based on the current trading value of each listed entity and a 63.9% discount to our view of fair value.

 

Our full workings are attached as Caltagirone Group (2015.12.05).pdf

 

 

Italia__Retail__MarketView_2015_Q3_English_Finale.pdf

CED_IM_KPIs_2015.12.05.pdf

Caltagirone_Valuation_2015.12.05.pdf

Caltagirone_Group_2015.12.05.pdf

[constala]

Ciao HIPS, Caltagirone Editore is now trading at fresh lows below EUR 0.70.

Cash is 1.03, Liquid stakes in Generali and Unicredito are worth .65.

 

Then there is the newspapers  business with large regional readerships.

Maybe you can also throw in the SOTP some hidden assets too, some real estate for instance.

 

What do you thinks are the odds of a take private?

 

Should a tender be launched at a premium to market price and discount to NTA similar to the Vianini Lavori hold up, it would still be a winner IMHO (EUR 1+)....