DCC + Nestle

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Every year dedicated value investors from around the world make their way to Italy to exchange investment ideas. It is a unique event in a great location far from the madding crowd. Link to the event. http://www.valueinvestingseminar.it/pages/eng/index.aspThis is the presentation I gave this year.

Transcript of DCC + Nestle

  • TOCQUEVILLEVALUEEUROPE

    Ourbirthday,guidingprinciplesandholdings

    DON FITZGERALD, CFAFund Manager

    7th Annual Value Investing Seminar Trani Italy July 13 14 2010

    1

    Trani, Italy July 13-14, 2010

  • TocquevilleValueEurope10yearanniversary

    2

  • TocquevilleValueEurope10yearanniversary

    No. 2 of 67 funds marketed in France - European Equities category

    Compared to MSCI EUROPE total return

    3Source:Europerformance.Pastperformanceisnoindicationastofutureperformanceandisnotconstantovertime

    Compared to MSCI EUROPE total return

  • TocquevilleValueEurope10yearanniversary

    With volatility well below the market...

    Volatility Tocqueville Value Europe MSCI Europey Europe

    1 month 16.64 21.52

    1 year 16.19 19.87

    3 years 19.18 20.85y

    5 years 16.11 17.49

    Since inception 14 99 17 16Since inception 14.99 17.16

    4Source:Europerformance at31/05/10,pastperformanceisnoindicationastofutureperformanceandisnotconstantovertime

  • OurValueInvestingPrinciples

    Independence of thoughtIndependenceofthought

    Contrarianstance

    Evaluate fundamentalstodetermineintrinsicvalue

    Investwithmarginofsafetytointrinsicvalue

    5

  • OurValueInvestingPrinciples

    Independenceofthought

    Confidentinownjudgement

    Mindset buyasmallpartofabusiness

    Ignoremarketsnoise,capitaliseonoccasionalinefficiencies

    Indexnotafactorinportfolioconstruction

    6

  • DCC - Buying where others exit

  • DCC Buyingwhereothersexit

    DCC 1.5 Bn market cap / Dublin Listed5 divisions 21 operating businesses

    Energy EnvironmentalSerCom Healthcare Food & Beverage

    Distributor of IT & Distributor of Distributor of

    Recycling and waste

    Distributor of Oil & LPG

    consumer electronics p

    Distributor of consumables to

    hospitals ghealth food &

    beveragesmanagement

    services

    13%

    OperatingProfitSplit 18%

    13%

    UK

    Ireland

    Restofworld

    8

    69%

    Source : Company accounts, Tocqueville estimates

  • DCC Buyingwhereothersexit

    Strategy

    Building leading positions

    Focus on high returns on capital

    Financial discipline Financial discipline

    Contrarian perspective - Invest capital where others exit

    9

  • DCC Buyingwhereothersexit

    Reasonstoavoid

    Fortopdowninvestor Foreventdrivenhedgefund Exposed to weak economies

    Conglomerate structure

    Limited Catalysts

    Inefficient capital structureg

    Difficult to forecast

    p

    Helped by favourable weather

    Under-researched

    Boring

    10

  • DCC Buyingwhereothersexit

    Whystayinvested?

    Management - careful steward of shareholders capital and owners

    Portfolio optimization may continue

    Favourable environment for bolt-on acquisitions

    Solid balance sheet

    Defensive business model basic needs, below the radar business

    Track record solid EPS growth 10% last 10 years11Source : Company accounts, Tocqueville estimates

  • DCC Buyingwhereothersexit

    Whystayinvested?

    Valuation Modest

    EV ca. 10x Net Operating profit after taxes FCF yield before acquisitions to Enterprise Value ca. 10%

    Growing (5 years CAGR 14%) stable dividend (3.6% yield)

    Limited risks Weather related, GBP/EUR

    Mini Catalysts Portfolio changes, Acquisitions & earnings upgrades

    12Source : Company accounts, Tocqueville estimates

  • OurValueInvestingPrinciples

    Contrarian stance

    Bewareofpassingfads Becountercyclical

    Our hunting ground:

    Profit warnings Profitwarnings Turnaroundsituations Fallen angels Fallenangels Limitedanalystcoverage Disappointing IPOs DisappointingIPOs Companybreakups Inefficient balance sheets

    13

    Inefficientbalancesheets

  • KESA The good, the bad & the ugly

  • KESA thegood,thebad&theugly

    European consumer electronics (number 3 in Europe) and household European consumer electronics (number 3 in Europe) and household appliance retailing group

    London-listed

    Sales - GBP 5Bn; EV - GBP 800m

    15

    Kingfisher spin-off 2003

  • KESA thegood,thebad&theugly

    Thegood Darty France

    Market leader -13% market share S i d i b d Service-driven brand

    Well located, small stores

    Generates over 100% of the group EBIT

    EBIT margin ca 5% (pre crisis ca 7%) EBIT margin ca. 5% (pre-crisis ca. 7%)

    Own real estate of 1/3 of stores

    Grows by internet penetration & share gains from independents

    We estimate the value of the Darty retail business alone at ca GBP 1 Bn vs

    16

    We estimate the value of the Darty retail business alone at ca. GBP 1 Bn vscurrent EV of GBP 800m

    Source : Company accounts, Tocqueville estimates

  • KESA thegood,thebad&theugly

    Thegoodcontinued

    Profitable established operations in:Profitable established operations in:

    Belgium, Netherlands, Czech Republic (each with 5% - 8% market share) Combined ca. GBP 20 to 25m EBIT p.a.

    Getting Better - DartyBox - internet service, FranceGetting Better DartyBox internet service, France

    Break even next year if subscribers reach 350k

    Getting Better - 36 stores in Turkey & Italy ca. 1% market share

    Currently lose ca GBP 20m p a Currently lose ca. GBP 20m p.a. Need scale to breakeven

    17Source : Company accounts, Tocqueville estimates

  • KESA thegood,thebad&theugly

    Thebad COMET,UKWeak no. 3 in very competitive market y p

    Intensifying competitive pressure from:

    Service-led propositions of reinvigorated Currys, John Lewis and arrival of Best Buy.

    Price-led propositions of Argos / Supermarkets

    Pre-crisis avg. EBIT of GBP 40m / 2.5% EBIT margin

    Annual rental bill ca. GBP 75m

    Can remain viable by: Can remain viable by:

    Better mix (e.g. push on accessories, service), leveraging synergies with web avoiding price war

    18

    with web, avoiding price war

    Source : Company accounts, Tocqueville estimates

  • KESA thegood,thebad&theugly

    Theugly Darty Spain(formerlyMenaje delHogar)

    Bought 2007 for ca. GBP 100m (.6x sales) GBP 37m losses inBought 2007 for ca. GBP 100m (.6x sales) GBP 37m losses in 2008/09

    Competition MediaMarkt / Corte Ingls; Large independent sector Competition MediaMarkt / Corte Ingls; Large independent sector

    New management finally restructuring:

    21 stores closed out of 71

    Service concept / Conversion to Darty banner

    Losses ca GBP15m in 2009/10

    19

    Losses ca. GBP15m in 2009/10

    Source : Company accounts, Tocqueville estimates

  • KESA thegood,thebad&theugly

    PreviousManagement

    Rejected KKR bid for group at 325p in 2006

    However, off-loaded But (2006) at attractive price

    Disastrous Spanish acquisition

    Back-tracked on share buyback

    Comet claim purchasing synergies no obvious buyer

    20Source : Company accounts, Tocqueville estimates

  • KESA thegood,thebad&theugly

    NewCEO/CFOteamsince2009.Initiatives:

    Dartyzation of the network

    Common sourcing

    Improved internet strategy

    Sold Switzerland

    21Source : Company accounts, Tocqueville estimates

  • KESA thegood,thebad&theugly

    Sowhatsitallworth?

    lMay2010 July 2010

    EV ca.GBP650m ca.GBP800m

    Share Price 100p 125pShare Price 100p 125p

    Darty retail France + profitable international pro-rata central costs = ca. GBP 140m EBIT vs ca. GBP 95m at group level. ca. GBP 140m EBIT vs ca. GBP 95m at group level. On 3 year view - eliminate start-up losses and maintain Comet close to breakevenbreakeven

    Pays 5p dividend

    22Source : Company accounts, Tocqueville estimates

  • KESA thegood,thebad&theugly

    Kesa Sum oftheparts

    Worst C tBase C t

    Darty retail france 1020 8,5x EBIT - market leader 1020GBP 300m freehold

    CaseComments scenario Com ments

    GBP 300m freehold

    Dartybox 55 EUR 200 per subscriber 0Comet 160 5% of sales - ca 4x avg. EBIT -100 Managed exit over

    several years yBenelux, Czech 140 7x EBIT 140Italy, Turkey 18 .5m per store 18Spain 0 -40 4 years of lossesInvestment Properties 30 estimateInvestment Properties 30 estimate Fair EV 1423 1038Average debt over year -50 -50Pension obligation -117 Adjusted upwards due to m ore -117

    realistic discount rateCapitalized costs -149 9x annual -149Equity Value 1107 722Value per share 2 09 1 36

    23Source : Company accounts, Tocqueville estimates

    Value per share 2,09 1,36Note - Excludes GBP300m of core retail property

  • GATEGROUP - Waiting for clouds to clear

  • GATEGROUP Waitingforcloudstoclear

    ProvidesoutsourcedservicestoairlineindustryCHF650mMarketCapZ i h li d i 05/09Zurichlisted since 05/09

    25Source: Company data & Tocqueville estimates

  • GATEGROUP waitingforcloudstoclear

    Providesoutsourcedservicestoairlineindustry

    (2008) (2008)

    26Source: Company data & Tocqueville estimates

  • GATEGROUP waitingforcloudstoclear

    Mediumtermprospectsforairlinecatering?

    Global passenger growth Low Cost CarriersVS

    Outsourcing trend Down-trading in food

    Catering factor of differentiation Less business travel?

    Overall market growth below global passenger growth

    27Source: Company data & Tocqueville estimates

  • GATEGROUP waitingforcloudstoclear

    GATEGROUPisoutgrow