Value Investing Seminar July 2009

VALUE INVESTING IN EUROPE

DON FITZGERALD, CFA

[email protected]

Fund Manager, Tocqueville Value Europe

6th Annual Value Investing Seminar

Molfetta, Italy July 14-15, 2009

� Tocqueville Finance & investment philosophy

Tocqueville Finance

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� Some investing principles re-visited

� Case study: Vicat

Tocqueville Finance

Tocqueville Finance

� Established May 1991 (AMF [French Financial Securities Regulator] approval No. GP 91-12)

� International footprint - France, Switzerland, USA

� Independent company with capital divided between European (92%) and US (8%) shareholders

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� 2 business lines: Asset Management and Private Wealth Management

� 53 staff in Paris and 8 in Geneva

� €1.5bn of assets under management at 30/6/2009

� A range of 9 funds

� Fundamental analysis of companies based on a bottom-up approach

� No geographical or sector bias

� Non-benchmarked, contrarian, value-oriented approach

� Interest in all market caps

• History of expertise in small and medium caps (€ 100 m - € 5 bn)

The investment philosophy

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• History of expertise in small and medium caps (€ 100 m - € 5 bn)

� Low portfolio turnover

� Marginal use of derivatives (covered calls…)


� Quality companies we understand• Unique & durable market position

• History of improving margins and return on capital employed

• Sound balance-sheet structure

• Quality management or replacement of disappointing team

� Stocks undervalued in relation to intrinsic value (probable transaction value)

Profile of stocks in which we invest

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• Company generating high cash flows: high FCF yield

• Candidate for corporate activity: sum of the parts vs market value

• Turnaround situation

• Optimisation of capital structure: significant cash surplus

� Stocks of companies out of favour with or forgotten by the market

• Historically weak stock-market price

• Succession of profits warnings

• Illiquid & ill-covered

Performance of Ulysse since creation


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Past performance is no indication of future performan ce. Performance is not constant over time

Some investing principles re-visited

“Holding cash is uncomfortable but not as uncomfortable as doing something stupid” W. Buffett

… and be patient

Carry cash ...


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… But remain alert

� Continuous review – Add where fundamentals are intact & cull value traps

� Discipline to sell when value is “outed”


� Don’t confuse a bull market with being a super-investor

� Balance conviction with humility

� If facts change or new facts emerge that challenge investment, take action

Be humble not dogmatic

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Some “Dos”

� Use meetings to understand barriers to entry, competitive advantage & company strategy, alignment of shareholder interests

� Complement/cross-check insights with other sources

How to get most out of Management Meetings

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� Judge by actions not words

Some “Don’ts”

� Search for information that confirms your investment case

� Expect management to pick economic turning points


� Credit/ Liquidity – cost, availability & terms• For financials, corporations, households & sovereigns

� Industry Economics – supply, demand, capacity utilization, etc.

� Sentiment – Irrational exuberance & hubris to gloom to doom

Try to have basic understanding of cycles …

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� Sentiment – Irrational exuberance & hubris to gloom to doom

"Buy when there's blood in the streets, even if the blood is your own and sell to the sound of trumpets."

Baron Nathan Rothschild, 19th Century

� Identify bubbles (and inverse bubbles) in earnings, valuation multiples and sentiment


� Macro variables Economy, inflation, interest rates, FX rates, sector bets, political interference etc.

… But precisely predicting the future is a waste of energy

“Better to be roughly right than precisely wrong” John Maynard Keynes

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� Micro variables Price, volumes, gross margin, SG&A, tax rate etc.

� EPS more volatile than intrinsic value

� Focus on where consensus thinking is wrong

� Use price volatility arising from short term trading noise, quarterly EPS revisions, sector rotation etc. to optimize your entry & exit point


� Investor level – amongst shareholders of your (potential) investments

� At level of corporation’s clients and supply chain

� Concealed leverage at company level e.g. lease obligations, defined benefit pension obligations etc.

Understand different layers of Leverage

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On pensions

• Gross assets vs gross liabilities not net position

• Are you investing in an operating business or an investment company that also

controls an industrial company?

• Accounting Liability – Challenge key assumptions regarding life span of retirees,

discount rate

• Is statutory liability disclosed


� But we’ve had several boom bust cycles in last 20 years 1980s Japan, 1990s Tech, 2000s Structured credit, real estate etc.

We should all be better Investors after our experie nces in 2008

“Experience is not what happens to you It's what you do with what happens to you.”

Aldous Huxley

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� Understand both fundamentals & psychology

� What is next bubble?

� Guiding principal “Price is what you pay. Value is what you get” not seducing story

Case Study: Vicat

Case Study: Vicat

Company Overview

� Leader in South East France and strong regional positions in mature markets (Western Switzerland, California, South East USA) and in emerging countries (Western Africa,Egypt & Turkey)

� Vertically integrated - 2/3 cement, 1/3 aggregates / RMC

� Modern production base & cautious acquisition strategy

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� 60% family controlled. Free float increased from 5% to 40% in 2007

� Strategy - use group cash-flow to improve vertical integration, diversify from home base and increase exposure to faster growing markets

Case Study: Vicat

� Uses - housing, commercial construction, infrastructure, RMI

� High weight to value

� Producers concentrated vs customer base, limited substitutes

� Barriers to entry

Cement Industry

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• Ownership of quarries / environmental constraints

• Capital intensity

• Geographic / Transport costs

• Control over import terminals

• Vertical integration

Case Study: Vicat

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Cement Plant, Montalieu, France

Case Study: Vicat

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Extracting & crushing aggregates at quarry, Maizieres France

Case Study: Vicat

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Concrete Plant, Turkey

Case Study: Vicat

Business overview

Market % of sales Market Share C A R ProducersSupply /

DemandImports Comments

France • • • 4 BalancedTerminals

controlled

• Demographics

• Limited housing

bubble

Switzerland • • • 3 Balanced Landlocked

• Western border

• Alpine

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Switzerland • • • 3 Balanced Landlocked • Alpine

• No housing bubble

South-East

US• • 6 Balanced

Distance

from sea

• Infrastructure

deficit

• Integrate vertically

California • • 7 Normally deficitTerminals

controlled

• Demographics

• Integrate vertically

Key : C : Cement / A : Aggregates / R : Readymix concrete

Source : company filings, industry reports

Case Study: Vicat

Market % of sales Market Share C A R ProducersSupply /

DemandImports Comments

Senegal

(West Africa)• • 2 Deficit

Exports Mali,

Mauritania• Limestone rare

Turkey • • •Fragmented,

Surplus Exports Russia, Syria • Lowest cost producer

Business overview

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Turkey • • •Fragmented,

volatileSurplus Exports Russia, Syria • Lowest cost producer

Egypt •Medium

concentration

Deficit moving to

surplus

Will move

from importer

to exporter

• Regional leader

Sinai

• Low cost energy

Key : C : Cement / A : Aggregates / R : Readymix concrete

Source : company filings, industry reports

Case Study: Vicat

� Alignment of interests - Allocate capital with care, no dilutive option programmes

� All growth self-financed

� Conservative capital structure – net debt ca 1.6x EBITDA

� Long term approach – secure reserves of ca. 100 years for limestone / clay & 30 years

Management

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� Long term approach – secure reserves of ca. 100 years for limestone / clay & 30 years for aggregates

� Efficient operator – production per employee, ROCE, alternative energy

Case Study: Vicat

� Increase portion of alternative fuel sources from 14% to 23% and other measures to reduce energy costs per tonne by ca. 10% (ca. 1% of sales)

� Less external procurement, reduced logistics & maintenance costs (ca. 1% of sales)

� Further EUR 50m cost savings announced in Q4 2008 - of which ca. EUR 20m relate to fixed costs => sustainable margin improvement of ca. 1% p.a.

Investment Programme - Efficiency Gains

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All in all we estimate these measures, ceteris paribus, relutive to margins by ca. 3%

Case Study: Vicat

� Ca. 50% increase in capacity from 2006 to 2012. Biased towards emerging countries

� Estimate increase in sustainable earnings power from new capacity at existing sites at least EUR 130m of EBITDA p.a.

� Developing markets move from ca 25% to 35% of EBITDA

Investment Programme – Capacity Additions

CEMENT CAPACITIES (m tonnes) 2006 2007 2008 2009 2010 2011 2012

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CEMENT CAPACITIES (m tonnes) 2006 2007 2008 2009 2010 2011 2012

France 6,0 6,4 6,8 6,8 6,8 6,8 6,8

Switzerland 0,9 0,9 0,9 1,2 1,2 1,2 1,2

USA 2,1 2,1 2,1 2,1 2,1 2,1 2,1

Turkey 3,7 5,3 5,3 5,3 5,3 5,3 5,3

Kazahkstan 1,2 1,2 1,2

India 2,75

Egypt 2,1 2,1 3,5 3,5 3,5 3,5 3,5

Senegal 2,2 2,2 2,2 3,6 3,6 3,6 3,6

TOTAL 17,0 19,0 20,8 22,5 23,7 23,7 26,5

Growth 12% 9% 8% 5% 0% 12%

% Capacity Developing 47% 51% 53% 55% 57% 57% 62%

Case Study: Vicat

� 1.1Mt cement plant due to start operations in 2010

� Country recently moved from deficit to surplus but long term growth prospects very promising

Kazakhstan - 60% stake in JV

India – 51% stake in JV

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� 5.5Mt cement plant. 2.75Mt is due to start operations in 2012

� Fragmented - MNCs already trying to begin move to consolidation

We estimate the combined earnings power of the two JVs at ca. EUR 100m (Vicat share EUR 55m)

India – 51% stake in JV

Case Study: Vicat

� Earnings

� Peer Group

� Transaction multiples

� Balance sheet

Valuation

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� Balance sheet

Case Study: Vicat

� Current earnings

• 9x 2009 net earnings and 5x EV / EBITDA which should represent trough in earnings cycle. In 2010 lagged benefit energy price deflation

• Free Cash flow yield before expansionary capex ca. 15%.

Valuation - Earnings

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� Peak 2007 earnings

• 5.8x 2007 net profit; 4.3x 2007 EBITDA

� Earnings power in next cycle

• We estimate mid-cycle EBITDA at ca. 600m comparable to 2007 levels (current EV EUR 2.6Bn). If mid-cycle 2012 – ca. 3.5x EBITDA

• Peak earnings - next cycle

Case Study: Vicat

� Trades at discount of ca. 20% to peer group despite better pricing power, stronger balance sheet, superior track record and better medium term growth

� Implied value of equity per share ca. EUR 60

Valuation - Peer Group

EV EV/EBITDA EV/EBITDA

2009 2010

Cemex (USD) 23 307 7,1 6,8

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Cemex (USD) 23 307 7,1 6,8

CRH 14 837 6,7 6,6

Lafarge 29 655 7,5 7,3

Holcim (CHF) 35 039 7,9 7,5

Heidelberg Cement 15 433 6,9 6,7

Italcementi 5 533 5,6 5,2

Ciments Français 4 459 4,9 4,6

Cimpor 5 555 9,3 8,7

Titan 2 709 8,1 7,3

Cementir 845 5,6 4,9

Buzzi Unicem 3 193 5,3 4,8

Peers average 6,8 6,4Vicat 2 623 5,7 5,2

Case Study: Vicat

� Industry average 8.7x EBITDA transactions over last 17 years (Source JP Morgan)

� Given family control & cyclical considerations a transaction is unlikely but implied value of equity is ca EUR 75 per share

Valuation - transaction multiples

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Cement Cost Replacement Capacity per tonne Value (EUR m)

OECD 8,8 200 1764

Case Study: Vicat

� Ca. 1x book value

� Replacement Value of industrial assets

Valuation – Balance Sheet

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OECD 8,8 200 1764Developing 11,8 100 1181

Value - cement capacity 2 945

Value - Aggs & RMC * 511

Implied EV 3456Implied Value per share 61

* Eur 51M EBITx10

Case Study: Vicat

� Prolonged deeper recession

� Price Deflation – Mitigated by

• Industry consolidation

• Focus of geared players cash generation not market share

• Capacity utilization comparable to 1990s

Key Risks

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• Capacity utilization comparable to 1990s

• Capacity additions delayed / cancelled

• Limited risk of falling prices for Vicat due to market mix

� Antitrust investigations / fines

� CO2 compliance costs

Case Study: Vicat

� Consensus concern industry-wide price deflation – Vicat largely protected

� Industry out-of-favour due to negative momentum

� Consensus focus on cyclical downturn not through the cycle earnings power. Next cycle’s earnings power for Vicat higher due to:

• Efficiencies from industrial upgrades

Where we diverge from consensus thinking

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• Efficiencies from industrial upgrades

• Increased earnings from capacity additions & JVs

• Possible acquisitions at bottom of cycle

� Liquidity

� Overexposed to France? Attractive market & diluted over time

Case Study: Vicat

� Cement - reasonable business in cyclical downturn

� Vicat: • Quality operator, proven management, interests aligned with shareholders,

cautious growth strategy

• Balanced portfolio, cash generative oligopolistic businesses & fast-growing markets

Summary

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markets

• Underappreciated through the cycle earnings power and earnings growth

• Stable balance sheet & option value to create value from acquiring assets at bottom of cycle

� Status change: Improved diversification & developed vs emerging mix

� Value exceeds price

Grazie per la vostra attenzione

Qualche domanda?

... in inglese per favore

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Contact: DON FITZGERALD, CFA

Fund Manager, European EquitiesTocqueville Finance S.A.

Tel. :+33 (0)1 53 77 20 [email protected]

Value Investing Seminar July 2009

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Transcript of Value Investing Seminar July 2009