Price: €61.9 (March 16, 2013)
Cap: €10 billion
Net Cash: €339 million
Adjusted net assets: €83.55/share (Feb. 22, 2013)
HistoryBelgian Baron Albert Frere (the current CEO, born 1926) grew up as a son of a nail merchant. His father died when Albert was 17 and he had to leave school and run his business. Slowly, he started investing in the steel industry and by 1970s controlled a large part of the Belgian steel industry. He foresaw the downturn of the steel industry in the late 70s and sold his stake.
Frere invested the money in Belgium’s prominent companies. In 1981, he teamed up with the Canadian billionaire Paul Desmarais (CEO of Power Corporation Canada) to rescue international assets of BNP Paribas from the winds of nationalization in France. Together they successfully put many of the Paribas’ assets out of the reach of the socialist French government. In a very smart way ,they formed a Swiss company (Pargesa Holding) which is controlled by Parjonitco (each of them holds 50%).
The two groups, the Frere family and Power Corporation, have extended their shareholding agreement to 2029 and there is a possibility to extend it further beyond that. Under this agreement, the two families will have equal control of Pargesa (which controls GBL).
Philosophy and ManagementGBL’s mission is to create value for its shareholders. It believes that a quality portfolio of concentrated holdings in companies which are leaders in their markets is the way to achieve outstanding performance in the long run.
GBL’s investment philosophy can be condensed in four main points: 1) Holding a high quality portfolio balanced between growth and return [26% revenue from the emerging markets], 2) Maintaining a solid and flexible financing structure [€2.3 billion in liquidity], 3) Pursuing continuous and sustainable dividend growth [7% growth in the annual dividend yield in the last 10 years], and 4) Being an active and committed shareholder [in its six main investments it has 18 seats on the board of directors].
The CEO of the company is Albert Frere. He has a track record of being a very smart investor. Paul Desmarais is an astute investor himself. The company believes in a low structuring cost (the overhead being paid to the management and the employers). There are only 34 employees (equivalent to full-time employees) in the company. The cost of the company is also quite small - compared to similar holding companies in Europe.
The management believes in concentration and long term holding. Nearly 95% of its assets are split into six publically traded securities. A brief description of the securities and the investments follow.
Shareholder ReturnOn the topic of shareholder returns, two charts suffice.
Financial SituationGBL promises to be a financially responsible holding company. In the last 10 years, the company had been in net debt only once in 2011. Other times it has been with a net cash position. Currently, it has a net cash position of €339 million. In 2012, interest expense stood at €43.7 million. Given that the the net income was €276 million the company has a large interest cover.
The company has only €1.1 bllion in debt. This is around twice the net income of the company and hence arguably is a very small debt load. The following chart shows the cash earnings of the company in € millions.
ValuationThe company is paying an ever-increasing dividend which is €2.6 a share. The company is based in Belgium and one has to pay 25% withholding tax on it.
The company has a net asset value of €13.2 billion and trades for a €60.62 a share for a market cap of €9.78 billion. Furthermore, the larger holdings in its portfolio are trading well below their true worth. Here is what Steven Romick (an investor) or FPA Funds has to say about it.
Our attraction to GBL was not just the 25-30% discount to NAV at which the shares have traded, but also that the various parts of the company were generally out of favor and relatively inexpensive at low double digit earnings multiples. By purchasing a collection of inexpensive companies via a holding company trading at less than NAV, we viewed ourselves as effectively taking advantage of a double discount. Given that Belgium-based holding companies are not subject to capital gains taxes on the sale of assets, we would argue that the GBL discount is perhaps less justified than that applied to holding companies domiciled in jurisdictions with less favorable tax policies. While we see no catalyst for narrowing the gap between GBL’s market valuation and NAV, our purchase price was accompanied by a dividend yield of roughly 4.5%.
RisksWith a holding company, the risk lies with the management. If they get sidetracked or have different opinions about the world then you might get into trouble and rightly so. Also, it is imperative to keep an eye on management changes. For GBL the situation is a bit different. Given that the management holds most of the company - it is in their interest to make sound investments.
There is also something specific to GBL which I feel I should discuss. The management feels that it needs to “reshape” the portfolio to manage the risk better - in a changing economic environment. They want to diversify across sectors and geographical regions, and make a better balance between growth and dividend yield. The company sold some of its stake in Pernod Ricard to repay the debt and improve its financial flexibility.
On the other hand the management has a clear strategy on what kind of companies it wants to buy. It wants to invest in: a) Clear and understandable businesses which create value, b) Companies with lower dividend yields but higher growth prospects, and c) Companies where the management can play influencing role in the day to day business.
This gradual shift in our portfolio will take place while staying true to the principles of our model: a friendly, long-term approach, no debt or time-limited debt, a high standard of management sharing our values and a return on invested capital above the market average, ultimately resulting in balanced growth in our intrinsic value and cash earnings.
Recent News and Additional DisclosureOn 13 March, GBL sold the whole of its investment in Arkema. The net income from the disposal totals €432 million, generating a capital gain of €221 million.
On 14 March, a 2.3% interest in Pernod Ricard was sold for €499 million, producing a consolidated capital gain of €240 million. Following the transaction, GBL still retains a 7.5% interest in Pernod Ricard.
The ex-dividend date is April 29, 2013; the company will pay €1.9 per share after withholding taxes.
- Taken from http://en.gbl.be/
The data is taken from the financial report of GBL and ft.com.