SAP.BR - Sapec SA

[writser]

I saw this idea on a blog I follow: link. Did some research on it and bought a small position. Wondering what other people think about it.

 

Sapec is a conglomerate listed in Belgium but operating mostly in Spain and Portugal. They have a collection of assets and businesses but results haven't been spectacular. Last year they announced they were selling their Agro businesses for 318m net cash, no taxes (link). This was a huge surprise, the market cap of Sapec was ~40m at the start of 2016 and shares subsequently  quadrupled. Regulators have approved the deal and Sapec expects it can be closed in a few weeks (link). Also pointed out in that press release is that they want to return ~150 EUR per share to shareholders. Shares are currently only trading at ~162 EUR so you are paying 12 EUR per share for the remaining assets (or 16m in total with ~1.35m shares outstanding). What's in there?

 

+ The remaining cash of the Argo Business sale, approximately 110m EUR.

+ A liquid bulk port terminal they are trying to sell, "in the final process of due diligence", on the books for 7m EUR.

+ Several plots of real restate they are actively marketing, on the books for 13m EUR.

+ An environmental business they are in the process of selling - on the books for 0.

+ A chemicals business with 30m revenue, 11m assets, currently running breakeven but "good prospects" according to the company.

+ A commodities trading business with 14m in assets that made a net profit of ~1m EUR in 2014 and 2015, but is shrinking in 2016.

+ A somewhat problematic Logistics business (16m revenue, 9m assets, unprofitable).

- Looks like there is 45m debt on the holding level

- There is an off-balance sheet liability of at most 36m pending legal proceedings. Uncertain, also the company claims they can claim 'very significant amounts' of it from the Spanish government. I value it at 20m.

 

Total value for the stub should be at least 60 EUR per share by my calculations. Even if I apply a 30% holding discount I end up above 40 EUR. Looks like shares are trading way too low and your IRR is excellent if you receive the large dividend in a few weeks. Key problem is the Belgian withholding tax of 27% (which is I think a major reason for the current market price). I live in a country that has a tax treaty with Belgium so I can reclaim ~12% in Belgium and use the remaining 15% to offset taxes in my home country - effectively I pay no withholding taxes. If you are in a similar situation this looks like a great deal. If you have to pay the whole 27% this looks terrible.

 

Also, per 1 january 2017 the 'speculation tax' on short-term profits for Belgian residents has been abolished. Maybe some shareholders are now taking profits tax-free after the huge runup last year, driving the price down a little bit.

[tombgrt]

Read about Sapec in our local financial newspaper De Tijd when the stock was at 60-80 EUR a few weeks ago. Evidently I'm frustrated because anyone who can count knew this would very likely go much higher.

 

Witholding tax was raised to 30% this year btw and I would assume this would be the tax rate that would count?

[writser]

Ah, I see. I'm no expert on Belgian taxes but yeah, I think that is the relevant rate. For me personally the exact rate doesn't matter as we have a 15% withholding tax treaty with Belgium and I should be able to reclaim the surplus withheld for a fixed fee.

 

I wonder how many market participants can sidestep the complete 30%. I'm no expert on Belgian taxes but I think there is a distinct possibility that Sapec uses a tender offer instead if that is more tax-efficient: "The exact way how the company will organise this distribution of cash to the shareholders is currently under study and is not yet confirmed".

 

@Tom: according to my research there is no capital gains tax in Belgium for individuals in case they start a tender offer, would you agree with that?

[writser]

Deal completed: link.

 

This is now my largest position. Sapec received 345m euro, gains are tax-exempt, they want to return 200m euro to shareholders and have multiple other assets they are actively marketing. But the market cap is just 220m euro ..? If you live in a country that has a tax-treaty with Belgium or you can somehow sidestep the potential 30% withholding tax (for example you are Dutch) this is a great opportunity imho.

 

And even if you have to pay taxes this is still interesting. Quote from the latest press release: "The modalities of this distribution are not yet defined". I read this as: a tender offer is still an option. Worst case outcome is pretty much a 150e dividend (partially a tax-free return of capital) so your downside is limited. As for upside, a tender offer for a large amount of shares in the 200-250 range would not surprise me.

[mttddd]

This is very interesting, need to have a look at how this plays with US taxes. Might go into the too much trouble bucket though

[Jurgis]

In US, if you buy in regular account, this may go 3 ways, I guess:

 

1. Return of capital. Best case. You don't pay taxes, just adjust cost basis.

2. Qualified divvie - 15% tax == $22.5 from $150 (you can adjust for Euro conversion for precision). This is not that great.

3. Not qualified divvie - your income tax rate - probably bad.

 

I'd guess it will be one or two. Two might be still marginally attractive.

 

If Belgium charges 30%, you can write it off your taxes (there might be limitations, I don't know), so it should not be an issue.

 

In US IRA account things might be worse, since you cannot writeoff 30% if Belgium charges it.

 

People may not like this, since it's counterlevered: you have to put up E162 to make gains on E12 stub. OTOH, this may mean that once the stock is ex-divvie, the stub may soar 2x or whatever.

[Jurgis]

1. Max return of capital just E26/share

2. Tax will be 30%

 

If you are talking about US, then your statement 2 does not make sense, sorry. :) It's either qualified divvie and you pay qualified divvie tax rate or it's not qualified divvie and then you pay income marginal tax rate. Maybe you are saying that it's not a qualified divvie, but then the rate will depend on your marginal tax rate and not gonna be 30%. 30% Belgian tax is mostly irrelevant to US investors, since they can write it off at tax time.

[writser]

@Hielko: I think what Jurgis means is that he only has to pay 15% in the US _if_ the dividend is 'qualified'. No expert on that but seems like Belgium is part of the deal. So, if I understand correctly, for US residents I think one of the following scenarios is likely:

 

1. ~25 euro return of capital (I think that would be the maximum allowed), 125 euro dividend taxed at 30%, get a 15% tax credit from the IRS.

2. Tender offer / buyback / other creative solution.

 

I'm not sure about the precise US tax implications of either outcome - please do your own work.

 

People may not like this, since it's counterlevered: you have to put up E162 to make gains on E12 stub. OTOH, this may mean that once the stock is ex-divvie, the stub may soar 2x or whatever.

 

Yes, I think this is one of the reasons the current opportunity exists. People don't want to invest a huge sum upfront to receive a large dividend with unclear tax implications and a very small position in the stub. I think the stub is worth at least 3x the current (implied) price. If you actually model a couple of scenarios, worst case you pay 15% withholding taxes and run approximately break-even. Best case they come with a tender offer, they manage to sell their other businesses and the IRR of this deal is through the roof. Don't forget the CEO specifically mentioned he wants to treat minority holders fairly. Given that the withholding tax in Belgium is 30% I would think that they do their utmost best to find another way to return capital. Also, it wouldn't surprise me if this trades up a bit if there is more clarity about what will happen.

 

For Dutch residents the situation is even better as in the worst case they can reclaim 15% of the withholding tax in Belgium and use the remaining 15% as a tax credit to avoid paying wealth tax.

[wachtwoord]

If you're Dutch how do you request the 15% of Belgian tax above the 15% treaty back from the Belgian government? What would the fee be for that?

 

If they do a tender, how do they proceed? (I mean simply tendering would cause them to buy back only some shares).

 

Could they not do a stock split and then a tender for 100% of the float of one?

[Jurgis]

1. Max return of capital just E26/share

2. Tax will be 30%

 

If you are talking about US, then your statement 2 does not make sense, sorry. :) It's either qualified divvie and you pay qualified divvie tax rate or it's not qualified divvie and then you pay income marginal tax rate. Maybe you are saying that it's not a qualified divvie, but then the rate will depend on your marginal tax rate and not gonna be 30%. 30% Belgian tax is mostly irrelevant to US investors, since they can write it off at tax time.

Paying 30% and writing of 15% isn't the same as paying 15%.

 

And that's not at all what happens.

Have you ever dealt with foreign qualified divvies in taxable account where foreign country taxes the divvie?

 

To spell out:

- You get divvie $D and are taxed X% by country Y. Amount of the tax $D*X%

- At US tax time you do two things:

- You declare $D as your divvie income and calculate US divvie tax $D*US%.

- You declare $D*X% as foreign tax paid and you get credit for it from your US taxes one-for-one. (You can also reduce your income by $D*X%, but that's bad choice and nobody does it).

 

So ultimately amount of X% is irrelevant. You get it all back. (And you pay US% which does matter).

 

There are limitations AFAIK. I've never run into them so far. Possibly because my foreign divvies and taxes on them have not been in huge amounts.

[NeverLoseMoney]

If you're Dutch how do you request the 15% of Belgian tax above the 15% treaty back from the Belgian government? What would the fee be for that?

This page has some info (below "Teruggaafprocedure Belgische dividendbelasting"). I've looked into reclaiming dividend taxes in a few countries, but it always seems like a nightmare to actually get it done. It was never really worth the trouble for me to go through the whole process.

[writser]

I sold a chunk today.  Sapec is up 5% for no reason (at least I can't find one) and up ~10% since I bought in the beginning of 2017. Still attractive in case you think a creative return of capital is coming (i.e. tender offer at decent price, going private or whatever). However, I think it is likely that they just pay out a 'boring' dividend and in that case the IRR of holding doesn't seem spectacular.

[writser]

Sapec reported results yesterday. The AR is as of yet only available in French so a bit hard to understand for me. Nevertheless, here are my cliff notes:

 

- The payout will be in the form of a E150 dividend per share (so no partial tax-free return of capital the way I read it).

- They used the good results to write down remaining real estate and fixed assets by 13m.

- Logistics business doing terrible, 4m restructuring costs, writedowns, no positive EBITDA.

- Chemicals section - doing reasonable but a fire in March damaged one of their facilities.

 

Frankly, apart from the sale of their agro business the company has performed terribly. Writedowns, bad results and restructuring costs. The board cashing in a ~E9m paycheck even though the decision to pay out all profits as a dividend is borderline criminal negligence given that Belgian retail investors have to pay 30% taxes over the whole amount. Especially sour after the CEO assured investors he would find a solution that would be 'good for minority holders'. Talking the talk but not walking the walk. The large dividend was probably the easiest / cheapest way to return capital for the majority holders.

 

So far my bile. The good points:

 

- Despite everything tangible book value is ~E42 per share after the dividend. Write down some more stuff, apply a holding discount, but the stub should be worth something like E20-E40 and I paid around E10 (given that I can reclaim withholding taxes). The margin of safety was great.

- Pro-forma the company is essentially debt-free with net cash of ~E130m versus total liabilities of ~E150m.

- The 36m loan to Novo Banco has been fully provisioned but the company is still in discussions regarding the terms of payment.

- Liquid bulk terminal: an agreement with a buyer has been reached.

 

Even though I sold most of my position in the run-up to ~E178 I still have some shares. We'll see how thing turn out next week, could be interesting. If you can reclaim withholding taxes the stub is still cheap but it looks like Belgian investors got screwed. They should sue. As a Belgian newspaper put it: "Sapec spijst staatskas met superdividend", which roughly translates as: "Sapec fetches millions for state coffers with large dividend".

 

Despite this outcome being in the range of possibilities when I bought I was hoping for something much better and expecting something slighly better. Good thing the margin of safety was there.

[wachtwoord]

Thanks for the follow up  :)

[rolling]

I cross read part of the report last night. I entered this at an average price of ~123.5 and sold off at an average of ~168, and am no longer invested, but have been watching this for a potencial remake. My takes:

 

1) The dividend solution is horrible. Belgium investors have to pay 30%. My country tax treaty would make me pay over 40% and only be able to recouver less than 30% of losses on the sale, the remaining money would disappear in thin air.

 

2) They kept moving on monetizing the remaining non operating businesses:

a) sold land in Huelva and used proceeds to pay Novo Banco

b) Naturener should start selling assets this year, proceeds to be used to pay debt

c) sold port in Cadiz (money to be received gradually)

d) disposed of environment business

e) Have expelled remaining miner families and will start trying to sell/develop that land (not expecting much from there... I don't see much turistic potencial in former mining land https://www.lousal.cienciaviva.pt/en/ - the video on the site is cool though)

 

3) wrote down a bunch of assets and provisioned for Novo Banco loan (poins 2a and 2b could bring a partial reversal to that) and incurred in restructuring costs. Expected since they had a nice pillow this year to use and now they can declare profits on the following years without the risk of unexpected paper losses

 

4) Operating businesses however seem to have little future, but will see what they do with the remaining cash.

 

Taking into account my tax disadvantage I'll stay out

[Paarslaars]

Yeah I passed on this one because of the tax, glad I did.

[rtvinvest]

http://www.tijd.be/markten-live/homepage/Overnamebod-moet-Sapec-van-beurs-halen/9905753

 

Dutch but:

 

– Family (55%) wants to take Sapec private for E60 per stub

– 15% shareholder has agreed

 

Prospectus to follow

[writser]

After ripping off minority holders with the withholding taxes I have to say this looks like a generous offer. E60 is above my range of fair value estimates. I bought a lot of extra shares this morning. Now a ~25% position for me. Roughly 15% withholding taxes are priced in but I can reclaim 15% and use the other 15% as tax credits. Great deal. A fellow forum member wrote a small blog post about it: link.

 

Unfortunately I was planning to buy yesterday already but the incompetent Belgian market authorities deemed it necessary to halt the stock the entire day _before_ the AGM .. Idiots. Would have been a slamdunk trade.

[writser]

Well, the dividend has been paid out, stub now trading at a roughly ~2% discount to the offer price. Idea worked out great so far - now it's up to the tax authorities.