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This Italian Holding Company Is Trading Less Than 20% of Book Value

Chris Mydlo

Chris Mydlo

31 followers

With the euro zone coming out of a recession, I ran a screen on GuruFocus’ All-In-One Screener to see if there were any stocks available at a steep discount to participate in the economic turnaround. I searched for companies on the European exchanges that were trading at a price-to-book ratio of no more than 0.50 and had a positive net current asset value.

An interesting company that resulted was Italmobiliare SpA (MIL:ITM)(ITSMF). It is a financial holding company with investments in companies operating in different sectors, mainly industrial, but also financials and banks. The stock is trading at a deep discount to its book value at a price-to-book ratio of 0.16. It trades on the Milan Stock Exchange and is available over-the-counter in the United States.

Along with Greece and Spain, Italy had been one of the hardest hit economies in the most recent European recession. In 2011 and 2012 many investors were watching the Italian 10-year government bonds as an indicator for the European Debt Crisis. A 7 percent yield was viewed as being economically unsustainable. It reached that level in late 2011 and early 2012. Currently the 10-year Italian bond yields are at 3.06 percent, reflecting a much lower risk in the government’s economic condition.

Late 2011 is when Italy’s economy slipped back into recession. The fourth quarter of 2013 was the first positive reading of GDP since the third quarter of 2011. The new Prime Minister Matteo Renzi announced in March a $14 billion package of tax cuts and other measures intended to stimulate Italy’s economy, invest in public education, and create jobs. In an interview with Corriere della Sera, Italian Economy Minister Pier Carlo Padoan said that the economic growth in 2014 could be more than 0.8 percent.

The Italian market has already begun its turnaround. EWI, iShares MSCI Italy Index ETF, has increased 42.7 percent in the past year compared to an increase of 20.44 percent for the S&P 500. Italmobiliare has increased 113 percent, but it still does not reflect the full value of its holdings. Its largest holding is Italcementi SpA (MIL:IT)(ITALY). In Italcementi’s 2013 annual report, it listed Italmobiliare as its largest shareholder at 60.363 percent. Italcementi has a market cap of €2.47 billion. 60.363 percent of the shares equates to €1.57 billion, 2.25 times Italmobiliare’s market cap of €699 million.

Italcementi on its own is trading at a discount. It’s price-to-sales and price-to-book ratios are much lower than those of its competitors, such as Cemex and Vulcan Materials. The long recession in Italy has taken its toll on the company. Italcementi is strong enough financially to make it through the hard times and is ready to rebound coming out of the recession. In March, Moody’s announced that has placed the company’s corporate bonds under review for a possible upgrade from its Ba3 rating. The rational for the upgrade was triggered by Italcementi’s announcement of its plan to streamline its corporate structure. Part of the streamlining effort is to raise €450 million of capital through a rights offering to current shareholders.

Company

Price-to-Book

Price-to-Sales

Moody's Bond Rating

Financial Strength

Porfitability & Growth

Italcementi

0.67

0.56

Ba3

6

5

Cemex

4.9

1.1

N/A

7

6

Vulcan Materials

2.1

3.1

Ba3

5

6

Compared to its competitors Italcementi is undervalued by over 50 percent by taking the most conservative comparison of price-to-sales with Cemex. The stock can be obtained even cheaper by purchasing it through shares of Italmobiliare.

Italmobiliare should be releasing its latest annual report toward the end of May. The Annual General Shareholder’s Meeting is on May 27, 2014. The latest reported data available is from September 2013. The company gave a general overview of their holdings:

(in million of euro)

9/30/2013

% of total

12/31/2012

% of total

Construction

635.9

55.14

504.5

46.9

Publishing

52.1

4.39

102.1

9.49

Banks

269.4

22.72

266.5

24.77

Cash and cash equivalents

139.3

11.74

115.5

10.74

Other

71.3

6.01

87.2

8.11

Totale net asset value

1,185.90

100

1,075.80

100

Italcementi is the construction holding. The next largest industry in their holdings is banking. They have six holdings, but only three of them are public. Of the outstanding shares, they hold 0.16 percent of UniCredit, 2.62 percent of Mediobanca, and 0.26 percent of UBI Banca. Today the public positions in the banks have a total value of €252 million. The “other” category includes companies involved in energy, e-commerce, food packaging and thermal insulation and environmental industries.

In conclusion, Italmobiliare is an excellent opportunity to buy an uncovered deep-discounted stock in an economy that is likely coming out of a recession. The company has an established history, starting in 1946, and Italcementi’s founding dates back to 1864.

This stock is not without risk. One risk is that one quarter of GDP growth is not yet a trend. It is possible for Italy to slip back into recession, but it is not forecasted to do so.

Even so, Italmobiliare is trading at such a discount that is has a significant margin of safety. Buying the stock now would equate to owning Italcementi at a discount and getting the rest of the holdings for free. If the stock trades at its book value, it would be €201.88. Currently it is trading for €32.30 on the Milan Exchange.

Another risk is that it might never trade at its book value in the same way some closed-end funds always trade at discount. If that’s the case the stock would be valued at €161.50 with a price-to-book ratio of 0.80.

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Rating: 4.0/5 (1 vote)

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Comments

vgm
Vgm - 4 months ago

Thanks. European holding companies are interesting entities which often trade below book value. First Eagle is one money manager who understands them. Bestinver too.

Seems Italmobiliare was selling its public bank holdings to participate in the Italcementi rights offering: http://www.reuters.com/article/2014/03/07/unicredit-mediobanca-italmobiliare-idUSI6N0LT02O20140307

Have you considered other Italian holding companies like Cofide and CIR? Bestinver is a major holder of both. Share prices are still depressed and Bestinver has been adding. The de Benedetti family is involved as the controlling family who are very shareholder friendly.

c.cerbo
C.cerbo premium member - 4 months ago

The annual report for the FY 2013 is already available on the italian version of the site:
http://www.italmobiliare.it/sites/all/files/italmobiliare/bozza_di_bilancio_esercizio-2013.pdf

The NAV as of December 31, 2013 increased to 1.283,1 million of euro (page 27 of the pdf).

If the stock would be valued at 20% of its book value, the price would be €174.74 (5x the current price of €32.82)

chris mydlo
Chris mydlo premium member - 4 months ago
Great information. Thank you for the comments.

That's right, Francisco Garcia Parames (Trades, Portfolio) of Bestinver has been adding Cofide and CIR. He's a great person to keep an eye on to watch for European bargins. Italmobiliare showed up on my screen because of its positive net current asset value. With a quick look at it, I would go with Cofide over the subsidiary CIR with its much lower P/B valuation. It looks like you would need to have access to the Milan Exchange to buy it. CIR can be bought OTC in the U.S. if someone does not have access to international exchanges. I like Italmobiliare because of its exposure to construction and banking, two industries that have been beaten down and will come back faster in a recovery.

vincent20100
Vincent20100 premium member - 4 months ago

I would double-check the numbers. Looking at bloomberg, the market cap appears to be 1.1B euros not 699m euros. Be wary of numbers you read for ADRs - there are often mistakes

BowenR
BowenR premium member - 4 months ago

Thanks for the write up.

Have you done any work to investigate why it trades at such a discount to BV (like extra overhead)?

c.cerbo
C.cerbo premium member - 4 months ago

Yes, Vincent20100 is right, there are some errors in the numbers.

I checked the data directly on the last not audited annual report (FY 2013 - link in my previous post) and it seems that the company is not so undervalued as suggested.

As of today there are 22.18M ordinary and 16.34M saving shares for a total of 38.53M (page 122). Using today's close price for both classes of shares (respectively 32.85 and 22.70) the total market capitalization is 1099.69M.

Thus the discount to NAV is only 17% = (1283.10 - 1099.69)/1099.69

While the NAV is estimated as 1283.10M, the book value amounts to 1,662.1M (4,332.8M Total Equity - 2,670.7M Minority Interest) making the P/B 0.66.

(all amounts in EUR).

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