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Jacob Wolinsky
Jacob Wolinsky
Articles  | Author's Website |

Fernando Barnard of Bestinver on Sonae

Following full-time internships at Price Waterhouse (Madrid, 1994), BBVA (Madrid, 1996), and DG Bank (Frankfurt, 1997), he started his professional career in 1998 in Frankfurt at an asset management company, Value Management & Research, where he worked closely with the founder, a former associate to legendary investors Peter Lynch and the Browne brothers of Tweedy Browne. It was then that he began to gain in-depth knowledge of the theories of value investing. He then worked in the Spanish private equity sector as an Associate at BNP Paribas Leveraged Finance. Subsequently he joined the analysis team at Banesto following the oil and steel sectors, and later formed and led the analysis team at a small Spanish independent brokerage house, whose strategy was focused on investment ideas based on the theory of value. In 2005 he joined the Vetusta Group as investment director, leading a three-person team specializing in the value-style management of portfolios and funds. In his two years in charge at Vetusta he achieved average annual returns of around 30% on equities, always beating the benchmark indices.

He joined Bestinver in February 2007 along with Francisco and Álvaro, whom he considered the leading lights in the value school in Spain. Bestinver is known as the top value firm in Spain. Francisco García Paramés, the CEO, is considered by many to be “The Warren Buffett of Spain.”

He has a bachelor's in business administration (summa cum laude, awarded jointly by ICADE, Madrid and Northeastern University, Boston), has three years education in Spanish law and is a CFA charter holder. He is fluent in English and reads German and French.

First a short global outlook:

Growth rates are reasonable worldwide: between 3% and 3.5% for 2011.

China’s GDP should grow 8%, G-7 1.6% and Spain 0.7%

Ten negative years in stock markets for past ten years.

Little investment in equities as investors have exited in recent years.

Extreme monetary instability favors real assets: Stock markets, Commodities, Property Assets, etc.

Historical cases: Weimar Republic, Argentina, Mexico.

But the focus is on finding good businesses, with moats and that generate tremendous amounts of free cash flow.

Investment philosophy has changed since 2008 in this regard.

Last investment ideas worked out, but wouldn’t buy into them again. They were mostly cyclical, bad companies low ROC, no moat-“cigar butts.”

We might still buy again in the future if the price is low enough.

But we like excellent businesses with competitive advantages at fair valuations. Over time this ends up providing superior investments, and these do well regardless of economy and economic conditions, which are worrying.

Fuchs Petrolub, Germany-based lubricant business is an interesting company. They have tremendous price advantage, the switching costs are high because clients need it even if the cost is small, because the product has performed well; companies won’t risk going to another brand just for a slightly lower price.

ROC of over 30%, they were doing $216 EBITDA in 2007, went down during recession now at $258, 2012 will probably will be $301 million EBITDA.

They big operations in China, they have distribution centers in Malaysia, Latin America; this is small company with a boring business, and the business is fantastic.

Schindler is another interesting name. In 2010, they spun off a small business; EBITDA has been growing again and is now well above the 2007 peak; they also have operations worldwide including China.

BMW is at higher EBITDA than 2007, close to 30% ROC which is due to their brand name. While competitors do at 8-9% ROC. China is now third largest country for BMW; five years ago it was close to nothing.

SGS-Do not directly invest in it, but we are invested through Fiat. Infinite ROC on investment; they have great brand power. Even with economy doing poorly they still have and will continue to well.

Wolters Kluwer, in 2011 will have over 900m EBITDA well above 2007, but the stock price has not recognized this, and the company is trading at less than 9x earnings, even though there are huge barriers to investment, which gives the company a nice moat.

We always liked these types of businesses but now we are investing in them further.

My main idea is based on a company that is based on domestic consumption — Sonae is a family run business in Portugal. The bulk of its wealth is tied to the company, so we think they are working to create shareholder value.

The father is still on the board, and is a fan of Warren Buffett, which is of course something that is a positive to us.

Holding company controlled by the Azevedo Family (53%).

They own business food retailer in Portugal with a 30% market share. This market share has been growing in past few years, because they are better managers. They have a very loyal and stable customer base. They were the first food retailing in Portugal; most of their hypermarkets are in the city center. All of their hypermarkets and supermarkets are in malls.

They get traffic from shoppers from other stores in the mall. With shopping malls in Portugal, people go to for all their shopping. They are open until Midnight, so it is a big advantage to be located in malls.

They have the biggest logistic operations in Portugal, no logistic company has the popularity and power of Sonae.

50% owners of Sonae Sierra

– Owns and develops malls.

– International diversification: The Portuguese business represents 40% of its business.

Strong presence in Spain, Brazil, Germany and Italy.

– GROWING, despite the dramatic crisis, both in Sales and income.

– Conservative Loan-to-Value - 46%.

– Returns close to 20% in the last several year.

Sonae also are 53% owners of SonaeCom, the Third Telecom operator in Portugal, with a 20% market share.

Back to their core business:

They distribute to whole country and they have more than one distribution plant, unlike competitors; which makes them more cost efficient.

Their margins are higher than peers compared to local well run competitors, such as Jeronimo Martins and DIA; 5.3%, 3.6%, and 4.4% respectively.

Even with the difficulties in 2009 and 2010, their market share has increased 2%; and even in 2011 with awful consumer confidence. They have still taken 1% market share in just give months, because they are fantastic managers.

Their EBIT margins are much higher than peers.

Their valuation is very simple.

Modelo (food operations) $3.434 million sum of parts.

Sonnae Sierra $834 million

SonaeCom $346 million

Others $39 million

Minus debt the total value $2.02 per share compared to 70 cents it is currently trading at. This is for a great company, with great management, non-cyclical with a 300% upside. The margin of safety is very high and the price was at 2.0 per share in 08, now despite the massive increase in EBITDA, the company is only trading at 70 cents a share.

EBITDA has increased from $299 of their core business in 2007, to $387 in 2010m euros.

Sonae owns the RE assets in their retailing operations, and the ROC is 13%. If they didn’t own RE it would be closer to 40% margins.

All their debt of ~$1 billion is tied to RE, and all the RE they own is close to $1.3 billion. The RE is important assets, because they have the best assets all over the country.


What if Portugal is ejected from euro? That is the biggest risk, because the business is entirely domestically based. If the currency decreased it would be very bad. Without getting into it, we think the situation is not in bad in Portugal as we have in Spain. The bailout that was just decided helped the country. The country has higher financing costs and will have a couple of years of slow GDP, but the bailout is good and I hope it happens with Spain. Because Portugal is cutting unproductive businesses and I think in 10 years the country will emerge much quicker than had the country not been bailed out.

The important thing about Portugal is that they did not have a previous bubble like US or UK. The country does not need to recycle its production base from a bubble like in Spain with the RE sector and construction sector.

The US market is way more flexible; the economy adjusts much more quickly. Portugal does not have that, but now they do not have a chose. After a difficult 2011, and 2012, the country will probably grow at better rates in 2003 and 2004. I think the risks of Portugal leaving the euro will not happen. But if it did, the margin of safety is so huge that even in that worst case scenario the company is still cheap.

Disclosure: None


About the author:

Jacob Wolinsky
My investment ideas have been inspired by many of value investors including Benjamin Graham, Charles Royce, John Neff, Joel Greenblatt, Peter Lynch, Seth Klarman,Martin Whitman and Bruce Greenwald. .I live with my wife and daughter in Monsey, NY. I can be contacted jacobwolinsky(AT)gmail.com and my blog is www.valuewalk.com

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