National Express/Stagecoach Merger – Effect on Columbus fund

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National Express, the international transport company, announced on Tuesday 21st September, that they are in merger discussions, in all-share deal, with UK public transport operator, Stagecoach. The suggested deal appears to make strategic sense for both parties as it combines the two operations to enable significant annual cost savings (“at least £35 million”) and accelerate growth. In our opinion it is a sensible step forward and should help to unlock the potential for both sets of shareholders. We hold a position in National Express in the Columbus European MidCap Equity Fund (2.1%).The shares in National Express rose by 8% on the announcement of the combination of both businesses.
We bought the shares in National Express, after the Covid associated sell-off, when we felt strongly the franchise of the business was no longer reflected in the share price. We were able to take advantage of the short-term disruption with a view to the longer-term recovery. It appears we were not alone in seeing hidden value in this business.
The Columbus European Mid Cap Fund is a concentrated, long only portfolio with a long-term investment horizon. The majority of the fund comprises high quality, structurally growing businesses with proven competitive advantage. As significant investors in the fund ourselves we have deep conviction in the companies, as well as their highly attractive investment potential. Outside this majority core of high quality companies we can take a more opportunistic approach where we see companies that are trading well below intrinsic value, as in this case.

Global Dominion Access – Holding Update

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Price €4.50
Market Cap €730m PE FY2022 14x
EV €664m EV:Sales 0.54x
DY 0.5% EBITDA Margin 9.2%

 

Conclusion

Having initially purchased our position in DOM at the IPO in 2016 for a price of €2.74 we have now followed the company for over 5 years and continue to find the investment case very attractive. The compound annual return (inc dividends) of almost 11% has been acceptable rather than dramatic but following our recent review we continue to find a compelling risk:reward case for the stock.

Operations

Global Dominion Access (DOM) is a diversified service company that offers consultancy, project management and commercial management services. In addition, in Spain they provide a consumer utilities offering providing households with access to a wide range of services from telecoms to insurance and alarms to plumbing. This latter B2C segment represented less than 7% of the group profit in 2020 but is growing quickly and ischaracterised by high renewal rates. Since the 2020 financial year was so impacted by Covid I will use the more recent H1 2021 numbers to give a more accurate breakdown of the business.

global dominion b2b revenue by activityThe core B2B business is divided into 2 segments; the higher margin design and implementation solutions provider, ‘360 Solutions’, and the more stable, but lower margin BPO division, ‘B2B Services’. Contract lengths vary significantly between the two segments with the Solutions business typically one-off projects as compared to the multi-year recurring BPO contracts. The company aims to offer a complete end-to-end solution for customers from project consulting, design, implementation through to the operation of facilities. The core focus is on industrial operations across Energy (particularly alternatives such as solar and biomass), Industry (chemicals, cement, glass etc), and Tech & Telecoms.

The group separates the operations of building and then maintaining projects in order to maintain visibility of returns in both elements. By it’s nature the 360 solutions side is highly project driven with visibility coming from the depth of the order pipeline, which appears to have held up well during the pandemic. The most recent release has the backlog at €605m which they believe is conservatively assigned and currently represents ~years of revenues for the division. This segment represented ~30% sales in H1 with a contribution margin of 17.6% (and 19% in Q2). By contrast the Services segment is characterised by high levels of recurring sales (c60%) as the management contracts typically last for 3-5 years and sometimes longer. This division represented 53% of sales in H1 with an 11.4% contribution margin. This area continues to see solid revenue growth posting a 14% increase over the 2019 H1 figure (which was not distorted by the pandemic). Both divisions have clearly performed well despite the on-going disruptions in many of the regional markets.

The B2C division, while currently small (15% of the profit contribution in H1 2021) has shown solid growth since launch in 2018. DOM acquired Phone House Spain from Dixons Carphone and spent the last 3 years expanding the range of services away from being a pure telecoms reseller to now marketing a wide range of services including gas and electricity supplies, telecoms, insurance, alarms and security, and general maintenance. They offer this both online and across a network of 400 retail outlets. The maintenance services are provided by FAMAEX, a subsidiary of the group which serves both the B2B and B2C businesses, which allows for a small amount of cost synergy between the two.

Many investors were sceptical regarding the Phone House acquisition, seeing it as a complicated and opaque change to the Group strategy. Certainly Covid had a more significant impact on this business as the retail stores were closed for much of the pandemic period, dramatically impacting the flow of new subscribers. In 2020 the revenue declined by 11% with the contribution margin falling by 68% (although distorted by one-offs). However, this has bounced back strongly in H1 2021 with the contribution on track to surpass the 2019 figure. The firm remains committed to this strategy and plans to increase the store network by up to 100 new franchise-based locations, as well as acquiring smaller competitors in line with the Alterna deal from 2019. The business aims to tie customers into a range of services making the process simple and competitively priced meaning that the revenues should provide high renewal rates going forward.

Attractions of the investment case

  • Overall focus on key trends of digitalisation and alternative energy.
  • Net cash balance sheet of €66m at H1 2021. While this is certainly conservative it is also an important confidence builder for clients looking appoint partners in new construction projects.
  • Significant proportion of recurring revenues – and growing as the B2C business expands. Organic revenue growth compounded at 11% from 2016 until the arrival of Covid.
  • Highly diversified revenues by geography (35 countries) and customers (largest customer<5% sales)
  • BPO segment advantaged by connection to the design and construction phase through the B2B 360 division.
  • In 2016 the group co-founded the Bas Projects Corp to focus on development of alternative energy projects. Since then the new division has built a pipeline of ~1GW of projects across wind, solar, hydro and bio-mass plants across Europe, Latam and the Caribbean. While DOM currently own a 35% stake in this business they are looking sell a minority stake in this business to generate additional growth as the investment across the sector continues to ramp up aggressively. The division may be spun-out of the group which would create a valuation catalyst which is not reflected in the current valuation. This makes DOM an inexpensive way to invest in the growth of renewables over the next 5 years.
  • The service based model means the business runs with limited capital intensity with capex running at just over 2% of sales.
  • DOM was spun out of CIE Automotive in 2018 and the founding Riberas family remain the largest shareholder in the group. The portfolio of companies controlled by the Riberas family (including Gestamp Automoción) have an excellent reputation and this stability of ownership allows the management team to focus on the longer term development of the company, which is a characteristic we actively seek in our investments.
  • Strong record of achieving financial targets (net prior growth plan 1 year early) – achieved RoCE of mid 20s percent since listing (ex Covid). Current strategic plan calls for doubling of net profit from 2019 to 2023 (delayed from 2022 due to Covid). Note that this target is not expected by consensus or our internal forecasts and so if achieved would lead to a meaningful upgrade for the stock.
  • The valuation remains attractive given the growth and profitability of the business (see below).

Valuation

When it comes to valuing companies we agree with the maxim it is better to be roughly right than exactly wrong, so we tend to review valuations from more than one perspective. The best sense-check of a company’s intrinsic value is generally a DCF model. As we know this technique can produce a wide range of outcomes with even relatively small adjustments to the inputs, but ultimately a company is ‘worth’ the present value of it’s future cash creation and so it makes sense to be comfortable that the current price incorporates reasonable assumptions. We often call this a reverse DCF as it enables us to assess what is currently priced into a stock as well as how this compares to what we believe is realistic.

Valuation multiples are a short-hand version of this and are a simple way of assessing a company relative to other listed peers. The water here is quickly muddied by different tax rates, profit margins and other variables so in order to avoid these issues I find that a useful starting point is EV/Sales. The benefit of this multiple is that the EV normalises for debt and revenues tend to be much less volatile than earnings, particularly for cyclically exposed stocks like DOM.

In this case we know that the revenues in 2020 were depressed by the pandemic and the management have been clear in outlining their expectations for the current year and looking ahead. Assuming 2021 plays out as expected then the shares currently trade on an EV:sales of 0.65x. This falls to 0.54x for 2022. For a company that is likely to grow EBITDA margins back to ~11% in 2022 this looks very under-valued. Contrast this to another portfolio holding, Akka Technologies, which offers somewhat similar engineering consultancy with an EBITDA margin of ~10% and a similar organic growth rate. Akka was recently  acquired for an EV:sales of 1.1x – or a premium of 70% to DOM. (Actually the equity premium was larger as the static debt component of EV within Akka hides some of the increase in market cap). In our view the acquisition under-values the Akka business in the mid-term but either way the comparison stands.

As DOM returns to an 11% EBITDA margin and recovers the organic top-line growth the shares should re-rate back towards 1x EV:sales providing a theoretical upside of >60% for the shares. We handicap this by around 15 percentage points to represent the exposure of the business to Latam and the associated political risks. Even allowing for this we are still expecting ~45% upside from the current price.  Our DCF (9% WACC, 2% terminal growth after 10 years) also suggests a target of €6.30 or ~40% upside – excluding the potential uplift from the spin-off of the renewables division (Bas Projects).

While this appears to be a considerable potential return we should note that the company does not, in our view, sit amongst the higher quality business in the Columbus framework. Our portfolio approach is to have the majority of holdings, typically 70-80% in companies that we perceive to have very high-quality attributes – essentially strong barriers to entry, clear and consistent strategy, and a proven management team. These factors tend to lead to higher than average margins, more consistent growth and strong returns on capital. However, the remainder of the portfolio is invested in more ‘opportunistic’ holdings where we see significant under-valuation and the catalysts to reveal this to the broader market. DOM fits into this second category and so needs to offer material upside to justify a continuing position on the fund.

Risks

The most obvious risk comes from the geographical exposure of the group with ~22% of sales from Latam (principally Mexico, Chile and Peru). Potential political risk is high in the region which can affect FX rates and payment terms.

The growing focus on the B2B segment is a largely unproven model and may not achieve the growth, profit or revenue renewal targets the group expects. Worth noting that the analyst community appears to have conservative assumptions here so the risk:reward appears fairly balanced.

 

 

 

(You can also download this report as a PDF here)

ZOOPLUS agrees €3bn private equity takeover – Effect on Columbus fund

On Friday last week (13th August) our position in Zooplus, the German online pet supplies retailer, soared by 40% to €390 per share on news that management had agreed a €3bn all-cash takeover bid by US Private Equity group Hellman & Friedman.

Prior to the takeover the Columbus fund held a 2.6% position in Zooplus having originally purchased the stock in August 2020. Before the bid was announced the shares had already performed well, returning 73% since our initial purchase. The bid comes just over two weeks after the announced acquisition of another fund holding, Akka Technologies.

Zooplus was a beneficiary of the covid disruption, as both the penetration of online shopping and pet ownership across Europe rose sharply as people were forced to stay at home. In 2020 the Group’s revenues surpassed €1.8bn, up just over 18% in the year. We anticipate that Zooplus will continue to benefit from these trends in the long-term, with the Group forecasting total online sales in the European pet supplies category to rise 4-fold over the coming decade with the sector achieving sales (including traditional channels) of close to €50bn by 2030. Following the deal Zooplus’ management team are expected to stay in post and both the executive and supervisory boards and see the deal as bringing “additional sector expertise, hands-on support, the financial firepower, and a stable ownership structure to expand its (Zooplus) competitive lead and secure sustainable long-term growth.”

From Columbus’ perspective, it is gratifying that others appreciate the value and growth potential that we saw in the stock. Having reviewed the European online retail space in early 2020 we selected Zooplus over better known listed players after being drawn to the increasing penetration of pet product sales over the internet, Zooplus’ early lead in this market and their impressive operational performance. We believe they have a strong future ahead.

(Source of the image: zooplus)

Adecco Bid for Akka Technologies

Wikimedia Commons

On Wednesday this week (28th July) our position in Belgium’s Akka Technologies soared by 95 % on news that management had agreed a takeover bid by Adecco Group, the Swiss recruiter, for €49 a share. The offer values Akka at an enterprise value of €2bn. Prior to the takeover, Columbus held 3% in Akka, representing one of our top 10 positions.

Strategically the deal appears to make sense as combining Akka with Adecco’s engineering and IT consultancy subsidiary, Modis, will create a powerhouse in the sector, just behind the industry leader, Capgemini. Adecco see considerable cost and revenue synergies from the deal and appreciate the growth potential inherent in this industry which was largely being ignored by investors for Akka as an independent group.

Both groups are strong proponents of the growing importance of ‘Smart industry’ for accelerating innovation and returns for their customers. In the words of Jan Gupta, President of Modis, “Smart Industry is where IT and engineering technologies converge into a digital and connected world, and we look forward to joining forces with Akka, combining their excellent market reputation in engineering with Modis’ strong digital experience.”

At Columbus we see the deal as a vindication of our belief in the business which has at times been controversial and suffered several setbacks during our holding period. After weakness in the stock last year, we reviewed the holding and increased our position, leading to Akka being in our top 10 positions at the time of the takeover. Our view is that investing is an occupation where conviction and patience are important, and we should celebrate when the two are well rewarded.

(Source of the image: Wikimedia)

Pareturn GVC Gaesco Columbus European MidCap Equity Fund Update

We passed an important milestone earlier this week as Columbus European MidCap Equity Fund (I2-B) returned to a positive absolute performance for 2020 – something that seemed a distant prospect in the dark days of March and April when the Coronavirus first exploded onto the scene. At this stage European Markets still remain in negative territory while Columbus is back to positive return year to date, after it has risen by +24.39% over the last since 6 months, and by +58.55% since the market’s low on March 18th. Over the last 12 months the performance is +4.60%

Our attention to valuation led us to a relatively large cash position before the pandemic struck so we were well placed to capitalise on the weakness through March and April and were then fully invested while markets recovered. The weakness also provided an opportunity to add a couple of new names to the fund that we had been monitoring for some time in the infrastructure sector. As our investors know, our aim is not to time the market, but we do try to take advantage of opportunities when they present themselves – always with a focus on the long term.

Since June 14, 2018 both domestic and foreign investors have been able to access the Columbus strategy via the master-feeder structure between the Columbus 75 Sicav in Spain (feeder) and the Luxembourg registered Pareturn GVC Gaesco Columbus European Midcap Equity Fund (master). The Luxembourg vehicle offers both institutional and retail share classes.