TOCQUEVILLE VALUE EUROPE
Our birthday, guiding principles and holdings
DON FITZGERALD, CFAFund Manager
7th Annual Value Investing Seminar Trani Italy July 13 14 2010
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Trani, Italy July 13-14, 2010
Tocqueville Value Europe 10 year anniversary
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Tocqueville Value Europe 10 year anniversary
No. 2 of 67 funds marketed in France - European Equities category
Compared to MSCI EUROPE total return
3Source: Europerformance. Past performance is no indication as to future performance and is not constant over time
Compared to MSCI EUROPE total return
Tocqueville Value Europe 10 year anniversary
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 at 31/05/10, past performance is no indication as to future performance and is not constant over time
Our Value Investing Principles
Independence of thoughtIndependence of thought
Contrarian stance
Evaluate fundamentals to determine intrinsic value
Invest with margin of safety to intrinsic value
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Our Value Investing Principles
Independence of thought
Confident in own judgement
Mindset ‐ buy a small part of a business
Ignore market’s noise, capitalise on occasional inefficiencies
Index not a factor in portfolio construction
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DCC - Buying where others exit
DCC – Buying where others exit
DCC €1.5 Bn market cap / Dublin Listed
5 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%
Operating Profit Split 18%
13%
UK
Ireland
Rest of world
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69%
Source : Company accounts, Tocqueville estimates
DCC – Buying where others exit
Strategy
Building leading positions
Focus on high returns on capital
Financial disciplineFinancial discipline
Contrarian perspective - Invest capital where others exit
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DCC – Buying where others exit
Reasons to avoid
For “top‐down” investor For event‐driven hedge fund
Exposed to weak economies
Conglomerate structure
Limited Catalysts
Inefficient capital structureg
Difficult to forecast
p
Helped by favourable weather
Under-researched
Boring
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DCC – Buying where others exit
Why stay invested ?
Management - careful steward of shareholder’s 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 – Buying where others exit
Why stay invested ?
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
Our Value Investing Principles
Contrarian stance
Beware of passing fads
Be counter‐cyclical
Our hunting ground:
Profit warningsProfit warnings
Turnaround situations
Fallen angelsFallen angels
Limited analyst coverage
Disappointing IPOsDisappointing IPOs
Company break‐ups
Inefficient balance sheets
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Inefficient balance‐sheets
KESA – The good, the bad & the ugly
KESA – the good, the bad & the ugly
European consumer electronics (number 3 in Europe) and householdEuropean consumer electronics (number 3 in Europe) and household appliance retailing group
London-listed
Sales - GBP 5Bn; EV - GBP 800m
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Kingfisher spin-off 2003
KESA – the good, the bad & the ugly
The “good” ‐ Darty France
Market leader -13% market share
S i d i b dService-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
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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 – the good, the bad & the ugly
The “good” continued
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 aCurrently lose ca. GBP 20m p.a.
Need scale to breakeven
17Source : Company accounts, Tocqueville estimates
KESA – the good, the bad & the ugly
The “bad” – COMET, UK Weak 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
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with web, avoiding price war
Source : Company accounts, Tocqueville estimates
KESA – the good, the bad & the ugly
The “ugly” – Darty Spain (formerly Menaje del Hogar)
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 Inglés; Large independent sectorCompetition MediaMarkt / Corte Inglés; 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
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Losses ca. GBP15m in 2009/10
Source : Company accounts, Tocqueville estimates
KESA – the good, the bad & the ugly
Previous Management
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 – the good, the bad & the ugly
New CEO / CFO team since 2009. Initiatives:
“Dartyzation” of the network
Common sourcing
Improved internet strategy
Sold Switzerland
21Source : Company accounts, Tocqueville estimates
KESA – the good, the bad & the ugly
So what’s it all worth?
lMay 2010 July 2010
EV ca. GBP 650m ca. GBP 800m
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 – the good, the bad & the ugly
Kesa – Sum of the parts
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 ‐Waiting for clouds to clear
Provides outsourced services to airline industry CHF 650m Market‐CapZ i h li d i 05/09Zurich listed since 05/09
25Source: Company data & Tocqueville estimates
GATEGROUP ‐ waiting for clouds to clear
Provides outsourced services to airline industry
(2008) (2008)
26Source: Company data & Tocqueville estimates
GATEGROUP ‐ waiting for clouds to clear
Medium term prospects for airline catering?
Global passenger growth Low Cost Carriers
VSOutsourcing 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 ‐ waiting for clouds to clear
GATEGROUP is out‐growing airline catering industry
Independent caterers gain market share from captive caterers
Non-catering businesses
Related fields e.g. rail
On-board retail new opportunity
One-stop-shop strategy
28Source: Company data & Tocqueville estimates
GATEGROUP ‐ waiting for clouds to clear
Competitive Environment
No. 1 independent player with 25% market share; No. 2 globally after LSG (30%*)
More rational than airline industry
Scale at hub important
New entrants (food companies, logistics) on short haul
Good contract win (40%) & retention (80%) rate
29Source: Company data & Tocqueville estimates *Includes intragroup
GATEGROUP ‐ waiting for clouds to clear
Why out of favour?
Airline-related
Pays no dividendPays no dividend
Limited track record / history of financial statements
Low book equity on Balance Sheet
Generous equity incentive planGenerous equity incentive plan
No short term earnings growth - high EUR exposure (40%), volcano, BA strikes etcstrikes etc.
Perceived share overhang from PE investors
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GATEGROUP ‐ waiting for clouds to clear
Why better business than market perceives?
Competitive advantage – reputation, global reach & scale, cost-leader, one-p g p , g , ,stop shop
Visibility from long term contracts (3 – 10 years; typically 5 years)y g ( y yp y y )
75% of 2009 revenues from contracts valid through 2012
Cost-plus element
S l h (LCC h d f d d di ) l l l dStructural threats (LCC growth and food downtrading) largely played out
Flexible cost structure
One-stop-shop strategy
High returns on capital / Cash generative
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High returns on capital / Cash generative
Source: Company data & Tocqueville estimates
GATEGROUP ‐ waiting for clouds to clear
Visibility from long‐term contracts
BA 13% 353 2019 only long‐haulDA 9% 244
Carrier Expires Comments% of revenues
Revenues (CHF m) 2009
DA 9% 244UA 7% 190Easy Jet 5% 136Swiss 4% 108 2015Iberia 3% 81 2011Budget airlines (ex. Easy Jet) 7% 190Railway 2% 54Others 57% 1 546Group 100% 2 712
Client concentration – Top 3 27%, Top 5 35%
32Source: Company data & Tocqueville estimates
GATEGROUP ‐ waiting for clouds to clear
Short term caution due to :
CHF strength
SeasonalitySeasonality
Risks
Loss of major contract / Client failure
Poor acquisitionsq
Structural dynamics mis-evaluated
Cyclical, terrorist / health scare etc.
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GATEGROUP ‐ waiting for clouds to clear
Texas Pacific sold business for CHF 1.8Bn in 2006
Valuation
Publicly listed catering + logistics businesses valued much more generously
2009 / 10 Period - Can it get much worse?
Severe recession swine flu volcano ash BA StrikeSevere recession, swine flu, volcano ash, BA Strike
2010 Guidance - Stable top line - small improvement in margin
Normalized earning power:
Recover what lost in recessionRecover what lost in recession No market share gains No M+A
CHF 650 f NOL l ff ti t t *
34Source: Company data & Tocqueville estimates
CHF 650m of NOLs assures low effective tax rate*
GATEGROUP ‐ waiting for clouds to clear
Valuation
2009 A Normalized Shares outstanding 19 7 2009 A Normalized Sales 2712 3000Reported EBIT 98add back amortization of intangibles 21
Shares outstanding 19,7Max equity incentive plan 1,6Share price 32Adjusted Market Cap 681,6 g
listing costs 6,6share-based payments 23,4Adjusted EBITA 149 210EBITDA 202 255
j p ,Cash -258Debt 693Pension obligation 70
EBITDA 202 255EBITDA Margin 7,4% 8,5%EV / Adjusted EBITA 8,0 5,7EV / EBITDA 5 9 4 7
Adjusted Enterprise Value 1187
EV / EBITDA 5,9 4,7Net Debt / EBITDA 2,2Maintenance capex 50Pre-tax FCF to Firm after maintenance capex 205pPost tax FCF 154
35Source: Company data & Tocqueville estimates *Even if not all utilized
Our Value Investing Principles
Evaluate the fundamentals
Sustainable business model?
Entry barriers and competitive advantages?
Operational and financial risks?
How credible and motivated is management?
Principle catalysts?Principle catalysts?
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NESTLE – At times good ideas are obvious
NESTLE – At times good ideas are obvious
Dominates attractive categories - Premium position & Limited private label competitionp p
28 Billionaire brands => Scale in marketing & pricing power
Geographic spread - 30% of sales / ca. 40% of profits from emerging market consumer
Strong corporate culture
Focus on long term, sustainable growth
Balance sheet
History of sensible capex dividends and share buybacksHistory of sensible capex, dividends and share buybacks
Limited regulatory, fiscal & cyclical risks
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Nestle ModelNESTLE – At times good ideas are obvious
Nestle ModelConsistent earnings growth (ca. 10% p.a.) driven by ca. 5-6% p.a.
organic sales growth and regular (ca. 30 bps) margin improvements
Can Nestle grow sales?
Its food categories are growing
World market share - “only” 16% in its categories
Raise prices39Source : Company accounts, Tocqueville estimates
NESTLE – At times good ideas are obvious
MARGINS 1990 -2009
Can Nestle improve margins?
Mix effect - higher growth in EM (45% of sales by 2020) & premium products
Evolutionary operational improvements
40Source : Company accounts, Tocqueville estimates
NESTLE – At times good ideas are obvious
Are shares undervalued?
EV e L’Oreal is ca 10 5 EBITEV ex L’Oreal is ca. 10.5x EBIT
Discount to long term average & sector
Premium to World Equity Market (9x EBIT)
Can the stock continue to re-rate?Can the stock continue to re-rate?
Better communication re L’Oreal
Premium for quality?
Any catalysts?
No – Get rich slow scheme
41Source : Company accounts, Tocqueville estimates
NESTLE – At times good ideas are obvious
Which would you prefer to own?
A ll i f l b l b t i l ith 3 5% di id d i ld (th tA small piece of a global best in class company with ca. 3.5% dividend yield (that should grow high single digits year after year)
OR 10 year German Bund that yields 2 5 %10 year German Bund that yields 2.5 %
It li i fl ti li k d b d th t i ld 2%Italian inflation-linked bonds that yield ca. 2% (based upon “official” inflation statistics)
Negative cash flow after storage costs
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Our Value Investing Principles
Margin of safety
Why is margin of safety important?
Over time market price should converge to intrinsic value
V l i i iValuation imprecise art
Future unpredictable
Protects against bad luck, poor investment timing and errors of judgement
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VICAT – Cash cows & young bulls – A year later
VICAT ‐ Cash cows & young bulls – A year later
Cement good industry if in right markets
Why we own Vicat?g y g
Balanced portfolio - cash generative local oligopolies & fast new growth marketsgrowth markets
Quality operator with proven management
Underappreciated through the cycle earnings power
B l h tBalance sheet
Status change: developed vs emerging mix
Remains undervalued
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VICAT ‐ Cash cows & young bulls – A year later
July 2010 Update
Contrary to market thinking prices largely held
Earnings down 1/3 from 2006 peak
Turkey / US to recover over time
E t S l d l ith itEgypt, Senegal - deal with new capacity
Acquisition of 51% of Bharati Cement (Southern India)Acquisition of 51% of Bharati Cement (Southern India)
Helps consolidate the region; Synergies with Sagar
Growth market - unstructured => short term price pressures
Emerging markets - 44% of capacity (2006) to ca. 73% (2014)
46Source : Company accounts, Tocqueville estimates
VICAT ‐ Cash cows & young bulls – A year later
Intrinsic Value
Earnings / Cash flow Balance Sheet
FCF yield to equity before expansionary capex ca. 10%
Replacement value of Assets implies share value of ca. EUR 65
Earnings / Cash flow Balance Sheet
EV / EBIT 8x 2011, 2011 PE 8xUn-justified discount to peers of ca. 20%=> private market, peer & historical average multiple analysis imply share value of ca. EUR 75
Assume fair EV of 7x normalized EBITDA of EUR 750 in 2012/13 implies
Looking forward….
pshare value of EUR 87
Blue-sky medium term (2014/15) potential - EBIT EUR 600m / EBITDA EUR 900m vs current EV EUR 3.4Bn
47Source : Company accounts, Tocqueville estimates
VICAT ‐ Cash cows & young bulls – A year later
Static intrinsic value - EUR 65 to 75
Intrinsic value growing towards EUR 90
100
120
Intrinsic value growing towards EUR 90
Presented at ValuePresented at Value
80
100 Presented at Value Presented at Value Investing seminar, Investing seminar, July 2009July 2009
60
20
40
0Bought
48Source : Bloomberg
Our Value Investing Principles
Independence of thought DCCIndependence of thought DCC
C t i t KESAContrarian stance KESA
Evaluate fundamentals NESTLE
Margin of safety VICAT
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THE BEST TACTICS DO NOT ALWAYS WORK OUT
My disclaimerTHE BEST TACTICS DO NOT ALWAYS WORK OUT………..
Giovanni Trapattoni Trainer Republic of Ireland soccer team
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Giovanni Trapattoni, Trainer Republic of Ireland soccer team
DUE TO BAD LUCK OR UNFORESEEN EVENTSMy disclaimer
……………….DUE TO BAD LUCK OR UNFORESEEN EVENTS
France 2 1 Republic of Ireland (on aggregate)
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France 2-1 Republic of Ireland (on aggregate) World Cup 2010 Playoff November 2009
BUT HARDWORK GENERALLY YIELDS IMPRESSIVE RESULTSMy disclaimerBUT HARD WORK GENERALLY YIELDS IMPRESSIVE RESULTS
Germany 4 : 1 EnglandGermany 4 : 0 Argentinay gGermany 3 : 2 Uruguay
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German soccer team in training
My disclaimer
SO DO YOUR OWN HOMEWORK
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The official disclaimer
This document is strictly confidential and for the use of intended recipients only. It may not be reproduced, communicated or published in its entirety or in part, without the prior written authorisation of Tocqueville Finance S.A.
This commercial document should not be interpreted as a contractual or pre-contractual commitment on the part of Tocqueville Finance S.A. It is produced purely for illustrative purposes and may be amended at any time without previous notice.
The information/analyses contained in this document, particularly figures, have come partly from external sources considered to be trustworthy. However, Tocqueville Finance SA cannot guarantee that the information/analyses are complete, accurate and up-to-date.
Tocqueville Finance S.A. draws investors’ attention to the fact that past performances are presented on q p p pthe basis of figures relating to previous years and are not an indication of future performance.
Moreover, Tocqueville Finance S.A. in no way guarantees the current or future performances of funds cited in this document
Investors are reminded that any financial investment includes risks (market risks, capital risk, foreign exchange risk) that may result in financial losses. Therefore, Tocqueville Finance S.A. recommends that prior to any investment, the recipient of this document carefully reads the prospectuses of the cited funds which are available free of charge at its head office located 8 rue Lamennais, Paris 75008 or on its website
t ill fi f d th t th h th i d k l d d d t kwww.tocquevillefinance.fr and ensures that they have the experience and knowledge needed to make an investment decision, particularly with regard to the legal and tax implications.
Grazie
Grazie per la vostraattenzioneattenzione
Q l h d d ?C t t
Qualche domanda? Contact:
DON FITZGERALD, CFAFund Manager, European Equities
Tocqueville Finance S.A.Tel. :+33 (0)1 53 77 20 36
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g @ q