March 3, 2021

Måns Larsson Short ICA Gruppen: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is Måns Larsson of Makuria who presented a short of ICA Gruppen (STO: ICA).

Måns Larsson's Sohn London Conference Presentation

Short: ICA Gruppen (STO: ICA)

ICA is a Swedish based supermarket/ grocery business. It’s the largest Swedish supermarket. ICA isrun on a franchisee model.

ICA is significantly overvalued at 25x accounting earnings. It has made good returns for shareholders over the last decade, but Larsson thinks that is about to change. Given the headwinds, 14x earnings would be a fairer valuation.

Challenging fundamentals: sales volumes are declining, the store footprint is contracting, the competition in Sweden is heating up especially with Lidl quietly gaining share.The Swedish grocery market is moving online quite quickly (expect 15% of total by 2022). Online is growing at about 30% per year. ICA doesn’t make money from online sales. ICA’s offline grocery sales are declining at about 1% per annum. Lidl is growing at about 10% CAGR over the last 5 years.  ICA has stores in the Baltic region, but Aldi and Lidl will be opening stores there next year.

Larsson’s research that looks at the accounts of individual franchisees suggests that profitability is heavily skewed towards the large out of town stores (maxis). In the large cities like Stockholm and Gothenburg where online adoption is higher profitability is lower or non-existent. Because many of the franchisees are not making money, ICA as the franchisor may have to lower fees.

Quality of earnings and cash conversion is poorer than it looks: EBIT looks okay, but they have taken a lot one offs. ICA’s cash conversion is poor. Cash flow to equity holders is less than 20% - it doesn’t cover the dividend. Since 2016 about 30% of cash generation has come from non-operating items like networking capital. Reverse factoring is a big component. Management’s capital allocation has not always been good. They have invested too much in online.

ICA is a low-quality supermarket that is going ex-growth yet it is one of the most highly valued food retailers in the developed market.

Be sure to check out the rest of the presentations from Sohn London conference 2019.

Per Johansson Short Koenig and Bauer, Long LivaNova: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is Per Johansson of Bodenholm Capital who presented a short of Koenig and Bauer (GER:SKBX) and a long of LivaNova (NAS:LIVN).

Per Johansson's Sohn London Conference Presentation

Short: Koenig and Bauer (GER: SKBX)

Koenig and Bauer is a German based printing press manufacturer. It has less conservative accounting. Cashflow and earnings expectations are set for a big reset.

Demand for the presses has structural challenges. Bank notes in circulation are not shrinking yet but may do in the future. Bank note printing makes up 20% of revenue, 40% of profits. They used to have a monopoly in the bank note printing area but now buyers are tendering contracts. Japanese competitors have started to win contracts recently. The other part of the business, sheetfed offset printing, is also facing headwinds. Volume is slowing and margins are contracting.

They have taken a lot of ones offs and restructuring charges making the accounts look better than they are. This may have been incentivised by management bonus targets.

Long: LivaNova (NAS: LIVN)

LivaNova is a medical device company. Bodenholm like spinoffs and they like companies that are de-conglomerizing. They have been invested in the company for 4 years and its one of their largest positions.The neuromodulation business is high quality. It’s almost a monopoly, there are high barriers to entry. They can grow revenue at 5-8% per year.

The other part of the business is better than analysts think and has market leading positions in most businesses. It can grow revenue at 5-6% and profit at 10% per annum.

They are also running clinical trials to see if the neuromodulation technology can be used to treat depression. If it can, it will be a game changer for the company because the market is huge.

LivaNova is a prime acquisition target.

Be sure to check out the rest of the presentations from Sohn London conference 2019.

Catherine Berjal Long Accor: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is Catherine Berjal of CIAM who presented a long of Accor (EPA: AC).

Catherine Berjal's Sohn London Conference Presentation

Long Accor (EPA: AC)

CIAM is an activist but Accor is not currently an activist position.

Accor is the perfect target for Private equity. PE like the travel and Tourism sectors because of the high returns on capital. In particular, they like the hotels businesses as they are: asset-light, scalable, it’s easy to bring in new management, there are often opportunities to sell off assets.

Accor is a European leader in hotel management. It’s the sixth largest hospitality conglomerate worldwide with 5000 hotels and is the market leader in Europe and the Middle East.

It has above average cash generation. EBITDA will grow at 14% CAGR over the next 5 years.

There are multiple opportunities for a PE firm to unlock value: sell non-core assets, sell luxury brands. A PE takeover would bring 50% upside from the current share price. CIAM will support a PE takeover at the right price.

Write-downs in recent years have scared investors off. Accor is undervalued and out of favour. A sum of the parts valuation suggests 30% upside.

Be sure to check out the rest of the presentations from Sohn London conference 2019.

Jason Ader Long Playtec: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is Jason Ader of SpringOwl Asset Management who presented a long of Playtec (LON: PTEC).

Jason Ader's Sohn London Conference Presentation

Long Playtec (LON: PTEC)

Spring Owl’s active approach could be referred to as private equity in public markets. It acts as a sponsor and focuses on turnarounds. Jason Ader has been involved in turnarounds in the gaming industry for several years, including Lss Vegas Sands, Bwin Party and The Stars Group.

SpringOwl disclosed their stake in Playtec in August 2018. Early in 2019 they were successful in getting two independent directors added to the board. They view Playtec as a technology company:a provider of gambling software. It would be hard to for another software company to duplicate what they have. With the US moving forward with the legalisation of sports betting – 10 States so far– there is a huge opportunity. Playtec has the potential to double its EBITDA in the US alone. Ader has encouraged the company to focus on the more regulated markets in the US and to operate through New Jersey.

SpringOwl has made recommendations to the company on how to improve the existing core business and pushed it to divest its stake in the UK Fintech, Plus 500. They have pushed for and achieved the introduction of share buybacks. They have tied management compensation to an incentive-based scheme. There is value in the Asian business even though analysts don’t see it. Ader wants an Asian investor to come in and take a minority stake in 2020. That would demonstrate the value of the business to the rest of the market.There is less risk in Playtec since SpringOwl got involved. The share price is a bit lower than their entry price. The end game is to sell to private equity.

Be sure to check out the rest of the presentations from Sohn London conference 2019.

James Hanbury (Odey) Long Plus500: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is James Hanbury of Odey Asset Management who presented a long of Plus500 (LONG:PLUS).

James Hanbury's Sohn London Conference Presentation

Long Plus500 (LON: PLUS)

Plus500 is a CFD trading business. Its main competitors are IG Group, Saxo bank, CMC. It’s a fintech business and very much a technology company. In the last 3 years: revenue 38% CAGR, EPS 58% CAGR, EBIT margin 59%. It is best in class with a very high return on equity. Cash conversion has been excellent. At the IPO in 2013 they raised £22m in primary net proceeds. Since then, they have returned nearly £850m to shareholders, mainly in dividends. Over and above this, there is £200m excess cash on the balance sheet.

Can Plus500 keep generating this level of cash and what are the barriers to entry? Plus500 offer negative balance protection to all customers. As a customer with Plus500 you can use lots of leverage but not lose more than your deposit. The competition does not offer balance protection because it’s difficult and expensive requiring good risk control. Plus500 also offer spreads that are 10% to 15% inside other CFD brokers.

Hanbury said that you can tell a good disruptive business by its revenue / employee. Plus500 £1.5m/ employee compared to the two strongest competitors: IG Group £300,000/ employee and CMC£200,000/ employee.

Plus500 has good marketing. It has invested in machine learning and artificial intelligence to produce algorithms that place adverts on Google, Twitter and other web sites. It spends more on marketing in absolute terms than competitors and more as a percentage of sales. Even though they spend more on marketing their fixed costs are lower: Plus500 12%, IG Group 50%, CMC 60%. Plus500 has been taking market share every year. It is the market leader in the UK, Germany, Spain, Australia.

What are the risks? Plus500 has been hit by ESMA regulatory changes over the last year that have reduced customers’ ability to take on high levels of leverage. The European area represents 70% of its revenues. There are also similar regulatory changes taking place in Japan and Australia. Hanbury believes that in a tough regulatory environment the tough will get stronger and the weak will get weaker. Expect the number of operators to decline. Having less leverage will be better for customers. Since the ESMA changes, Plus500 have reported falling customer acquisition costs, churn has hit record lows and the win/lose ratio for customers has been improving.

Part of the bear case for Plus500 is that customers are often inappropriate, low value and don’t last long. However, the percentage of customers who have been with Plus500 for more than 1 year is high at 73%. Expect that number to improve further in the new regulatory environment.

It’s important to remember that one of the most important drivers of revenues for a CFD trading business is market volatility. Plus500 do well in difficult markets.

Another aspect of the bear case is that the business is high risk. Plus500 now has a full listing on the main market and has the best transparency in the industry. The market has not fully appreciated that it doesn’t hedge its positions. Instead they limit customers’ position sizes. They are very happy to have whale traders, but they don’t like single whale trades. Their profile of winning/ losing days is extremely impressive: 85% of days are winning days. They do have big losing days. The biggest one came on a day in the Crypto craze in Oct 2017 where they lost £3.5m. Hanbury’s view is that is easily coverable by the £200m cash on the balance sheet. When there are high levels of downside volatility, Plus500 tends to make back money that it has lost quickly because volatility stimulates activity elsewhere.

Plus500 has started to buy back stock. In the current market there is potential for them to make a good acquisition. They could move into new markets like stockbroking, ISAs and new geographies. It is the best business in the industry yet it has the cheapest valuation 2.3x EV/EBIT 2020. PE 5.3x 2020.

Be sure to check out the rest of the presentations from Sohn London conference 2019.

Brian Baldwin (Trian) Long Ferguson: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is Brian Baldwin of Trian Fund Management who presented a long of Ferguson (LON: FERG).

Brian Baldwin's Sohn London Conference Presentation

Trian disclosed a 5.2% stake in Ferguson in June 2019. It’s an activist investment and Trian has been in discussions with the board and management. Trian is the largest shareholder.

Ferguson’s main business is selling parts for plumbing and heating (80% of profits). They also sell waterworks and fire protection products (20% of profits). They have 1700 branches and 11 distribution centres in the US.

Plumbing products distribution is an attractive business in the US. Trian likes businesses that provide products at a fair price to their customers. Ferguson’s products cost much less than the labour costs to install them. Eighty percent of sales are done through their branches. Ferguson has the scale to get good prices from suppliers. Its scale also allows it to provide a wide range of products (100,000SKUs) to meet plumbers’ need.

Ferguson has used this scale to take 3-4 percentage points of market share per year over the last nine years. Revenue has been growing at over 9% CAGR for the last five years. EBIT at 11% CAGR over the same period. It is the market leader with 20% market share. There is still room for growth.

Ferguson announced that the remaining part of the UK business, Wolseley, would be divested just weeks after Trian disclosed their stake. At the same time, the CEO was replaced by the head of the US business, Kevin Murphy.

While the US business is a leader in a fragmented market the UK business operates in a less attractive consolidated market with several large players. Once Wolseley has been sold off, Ferguson will be a completely US business.

Ferguson’s main listing is on the London Stock Exchange. The company is not well known by US investors and is under-owned by US institutions. Trian are pressing for a listing on the NASDAQ.  European analysts misunderstand Ferguson because they focus too much on the UK operations.

Ferguson should be compared to other specialty distributors in the US. If Ferguson was listed in the US and traded in line with other specialty distributors its shares that sell for £68 today could be worth £105.

Be sure to check out the rest of the presentations from Sohn London conference 2019.

Notes From Sohn London Investment Conference 2019

Below are links to notes from the recent Sohn London Investment Conference 2019 which featured investment managers sharing ideas to benefit charity.

Sohn London Conference Notes 2019

- Brian Baldwin (Trian Fund Management): Long Ferguson

- James Hanbury (Odey Asset Management): Long Plus500

- Catherine Berjal (CIAM): Long Accor

- Jason Ader (SpringOwl Asset Management): Long Playtec

- Per Johansson (Bodenholm Capital): Long LivaNova, Short Koenig and Bauer

- Tamas Eisenberger (Sikra Capital): Long Star Bulk Carriers & Scorpio Tankers

- Måns Larsson (Makuria): Short ICA Gruppen

- Arnaud Langlois (1798 TerreNeuve Fund): Short Air Products & Chemicals

- Lucy Macdonald (Allianz): Long Bloomsbury Publishing

- Fadi Arbid (Amwal Capital): Short Kuwait Finance House, long Ahli United Bank

- Pieter Taselaar (Lucerne Capital): Long Altice Europe (apologies, no notes from this one)

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