HDG - Hunter Douglas NV

[Grossbaum]

Price per share: $64.80 Euro

Price per share: $79.82 USD (1.232/1)

Shares outstanding: 35.4m

 

All further figures in USD:

MCap: $2,890m

Net Debt: $891m

EV: $3,781m

 

Net Debt/EBITDA: 2.3x

 

Revenue: $3,226m

Gross Profit: $1,372

Gross Margin: 42.5%

EBITDA:$391m

EBIT: $269m

EBIT margin: 8.3%

Income: $219m

 

EV/TTM EBITDA: 9.7x

EV/TTM EBIT: 14.0x

P/E: 13.2x

Earnings Yield: 7.6%

 

BV per share: $39.77

P/BV: 2.0x

ROE: 16.4%

 

Net tangible assets: $1,244m

EBIT/Net Tangible Assets: 21.6%

 

Description

"Hunter Douglas is the world market leader in window coverings and a major manufacturer of architectural products." The Company is known for its various window blinds that are used for homes as well as offices and commercial buildings. Hunter Douglas manufactures, distributes, and increasingly retails their window covering products. My impression is that the Company got a major boost in operations over 70 years ago when it pioneered the manufacturing process of light aluminum strips that were the main components of the very popular blinds that still are in many offices today. They have continuously produced new products over the years and have a strong market position.

 

Revenue breakdown is about 50% North America, 35% Europe and the remainder split among Latin America, Asia and Australia.

 

The working capital needs of the business are large with net working capital of $732m (lots of inventory and receivables), which are unfavorable. With recent acquisitions net working capital has grown significantly and a risk to the investment is that future accounting earnings doesn't convert into cash earnings at a high rate due to increases in working capital needs.

 

Hunter Douglas is over 80% owned by the founding family, with Ralph Sonnenberg acting as Executive Chairman and his two sons as Co-CEOs. It seems to be a well run family operated company. With this high ownership, there isn't much float and volume, with about 3.15k shares trade per day (90d avg), or ~$250k per day. The company has historically paid an annual dividend, and recently has significantly ramped up acquisitions. In the last 8 years the company has distributed about $760m in dividends.

 

The Company was slightly free cash flow positive in 2008, and has had a long history of stable profitability.

 

Acquisitions

The Company has made recent acquisitions that gives it a much bigger presence in the retail side of the business, and I am not sure how to judge this development. The amount spent on acquisitions in the past 2 years has been about $719m - very material for the size of the business. 

• Hillary's July 2017 for $400m - UK Retailer of blinds, curtains and carpets with significant expertise in in-home sales. (Normalized earnings for 2017 should include additional earnings for the portion of the year that HDG did not own Hillary's, and valuation metrics above likely understate earnings from this to some degree).
  
• Blinds2Go July 2016 for $52m - 60% of the leading online blinds retailer in the UK with 2016 sales of $70m USD
  
• Levolor/Kirsch June 2016 for $229m - North American supplier of window coverings and drapery hardware to homecenters with 2016 sales of $262m USD.
  

 

Conclusion

Hunter Douglas is an above average company selling at a discounted multiple. I would expect the stock to do reasonably well over time from the current valuations. There is a risk that recent (and future) acquisitions are not accretive to intrinsic value as well as poor conversion of accounting earnings to cash earnings due to working capital growth.

 

 

[Spekulatius]

I own this and it looks like the family is going to take it out on the cheap:

http://investor.hunterdouglasgroup.com/news-releases/news-release-details/agreement-recommended-all-cash-offer-eur-64-share-all-common

 

I wonder about the chances that they up their bid.

[ACooke]

On 12/13/2020 at 3:46 PM, Spekulatius said:

I own this and it looks like the family is going to take it out on the cheap:

http://investor.hunterdouglasgroup.com/news-releases/news-release-details/agreement-recommended-all-cash-offer-eur-64-share-all-common

 

I wonder about the chances that they up their bid.

I also own a stake in HDG and have been unimpressed (to put it lightly) with the offer made.

Jeremy Raper of Raper Capital, who notably holds a position also, has expressed his displeasure and insisted on a review of the offer made and the process through which it was made.

Well worth a read.

 

https://rapercapital.com/engagement-campaigns/

Open-Letter-to-the-Independent-Committee-of-the-Board-of-Hunter-Douglas-N.V..pdf

 

[ACooke]

Thought I'd drop an update here.

 

So the initial tender offer of 66Eu (from memory it was 66?) was met with substantial pushback from a bunch of the minority share holders - namely Jeremy (above) and another fund (i don't recall exactly who) - both of who expressed their belief that fair value was north of 150Eu/share, Jeremy believes closer to 200Eu/share.

 

HDG bumped the offer to 82Eu ~ a week prior to the tender date after the BOD retracted their approval and stated an improvement in business conditions. (Jeremy addressed this with another open letter to the BOD which can be found on his website or twitter).

 

The acceptance rate ended up dismal, as was expected - at something like 25% of the remaining shares outstanding (again from memory) which left the founding family short of what was speculated to be the required holding to force a squeeze out, although above that which management speculated they required.

 

Since then, management has publicly retracted their desire to proceed with a squeeze out.

 

The share price has since jumped above and since, settled around 90Eu.

 

Jeremy has posted his thoughts a few times on twitter which are worth a browse for any of those interested. The most recent of which i'll copy/paste below - at the risk of stating the obvious, the 'informal' formatting due to them being tweets ----- (I'll assume Jeremy won't mind).

 

----------------------------------------------------------------------------------------------------------------------------------------------------------------------------

 

Hunter Douglas UPDATE $HDG.NA. Great news as acquirer formally drops squeeze out after tender ends w/ abysmally low participation (23% of minorities at 82 EUR). The go-forward setup is, I think, the is best risk/reward I have seen, in my history in the markets. Why?

 

What did we learn from the tender process? - the 84% shareholder wanted to pay 82 EUR to acquire all minorities - a Minority Group consisting of 45% of minorities thought fair value was 150-200 EUR/share - Add Value fund, a key minority, thinks fair value is 160->200 EUR/share

 

What else did the tender accomplish? - Everyone who wanted to sell anywhere near the current price (ie 82), sold. This was ~1.3mm shares - All other sizeable shareholders of record think fair value is SIGNIFICANTLY higher than current. Not 10%, 20%, - more than DOUBLE....

 

What else? Two things: 1) absolute valuation is absurdly cheap; and 2) valuation discount to comps is borderline absurd. 1) Imo post-2Q LTM EBITDA is >$830mm. FY21E I think will be ~$900mm EBITDA. At last (86 EUR/share) this means $HDG.NA is at 4.6x LTM, 4.2x FY21E EV/EBITDA...

 

2) Just in case this doesn't compute, consider that any other biz that even looks close to $HDG.NA is trading on a double-digit EV/EBITDA multiple (Somfy, Nien Made, Spring Window, etc)...we are not talking a turn or two here, the discount is massive....

 

3) Catalysts. 2Q will be a massive beat (why do you think they wanted to wrap this up now??); as will 3Q and probably 4Q. Also Springs Window is for sale - best direct comp - this will likely print >10x EV/EBITDA in next few months...

 

Finally $HDG.NA skipped the div last year. I think they earn 13 EUR per share this year, ie its on 6.5x P/E with all other clear comps closer to 20x. I think its on a 6.3% clean div yield EVEN IF there's no special div to catch up for last year...

 

...and finally lets talk about the obvious rerun of a takeout. Dutch law means Bergson can't come back over for a year (ie until next April) but why would they wait? That's only 10 months away...and obviously they aren't paying 82 or lower...

 

...which brings us to the MAIN POINT. The downside is basically the stock stays at a massive discount to fair value and Bergson comes back in a year and pays a tiny premium to 82 and all the holdouts give up...which is basically zero real downside...

 

That is the downside. And what is the upside?? Even if we never smell fair value, $HDG.NA historically traded at a ~30-40% discount to comps...implying something north of 150 EUR and around 190 EUR/share...

 

But even a bare bones normalized 6x EV/EBITDA - versus comps in the mid-teens - on CY earnings implies 125 EUR/share...

 

In other words the upside/downside skew is fairly ridiculous on a one-year view. We risk 2-4 EUR/share, for a shot at something like 40-90 EUR/share upside, or a 20-25:1, option-like payout. This is why today this became my largest position, by a country mile.

 

This is no longer an event trade - but it's a post-event, hugely attractive post-event setup. You don't often get the chance to buy mkt-leading franchises w/ clean floats at 4x EV/EBITDA w no debt. Well done again to all holdouts here. This was the optimal outcome.

 

 DYODD 

[RetroRanger]

Will load the truck up on monday. At the current price you have a downside of around 7% and perhaps a upside of 2x within 12 months.

 

Still will be only 3% of my Portfolio. 

[Cicero]

Not sure I get Raper's math. EBITDA is slightly below EUR 400 MM LTM (and has never been higher) and the business does have debt; about USD 200 MM net. Trades north of 7x from based on the the numbers I see on CapIQ. Not crazy for what looks like an OK business, but not a steal either. 

 

Never traded remotely close to the EUR 150-190 per share he thinks comps imply (note that the "historically traded at 30-40% discount to comps" and the fact that share price has never been above EUR 100 doesn't quite jive with his bull thesis).

 

And on the downside, what is stopping Sonnenberg from not reinstating the dividend? Just sit back and wait a few years and have another run at this. If Sonnenberg ever gets this to squeeze out level. comps and all that stuff does not matter; whatever the stock price then is will be a pretty strong anchor in front of a judge. 

 

Read a few pieces of Jeremy on other things and he is quite good, but don't understand this one. 

[RetroRanger]

Just ask him ?