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Bram de Haas
Bram de Haas
Articles (229)  | Author's Website |

How to Buy Fiat, Ferrari and PartnerRe at a Large Discount

Holding company Exor NV is trading at a large discount to NAV. Why? Is it an interesting investment?

April 16, 2018 | About:

Exor NV (MIL:EXO) is an Italian conglomerate that is controlled by the Agnelli and Elkann families. Its primary holding is Fiat (NYSE:FCAU), which has been something of a value investor favorite over the last five years, with guys like Mohnish Pabrai (Trades, Portfolio) and Guy Spier holding large stakes. The company just released its letter to shareholders, which is an interesting read offering perspective on its investment portfolio as well shedding light on the discount to NAV it trades at. You can find the full letter here.

Exor trades at around $74 per share while its NAV is more like $117 per share or a 37% discount. This seems somewhat undeserved as Exor sports an impressive investment record in terms of compounding its net asset value per share:

To put it in their own words: "We continue to trade at a discount, which means you are effectively getting PartnerRe for free when you buy EXOR."

In my experience, conglomerates tend to trade at a discount, but family-controlled companies trade at particular deep discounts.

At Exor they talked about the discount to net asset value extensively within the latest letter:

"...before going through our businesses in more detail, I would like to spend some time on the discount that we have between our Market Value and our Net Asset Value, which increased during 2017.

...we have been trying to understand possible explanations for the discount to NAV that exists for many diversified holding companies.

Two of these seem particularly plausible:

1. Holding companies are perceived to give disproportionate advantages to their
controlling shareholders instead of delivering returns to all shareholders;

2. Buying shares in holding companies is seen as less attractive than buying shares in
the listed businesses within their portfolios because of the reduced transparency and
the additional holding cost."

To be fair, controlling shareholders taking advantage of the structure to enrich themselves at the expense of all shareholders is something that happens on a semi-regular basis. Sometimes it is arguably, sometimes it can be justified and in rare cases it is obviously nefarious.

Interestingly, Exor contrasts the seemingly justified reasons for a discount with performance data:

"However, in contrast to these arguments, what the data tells us is that our peers have been
a good investment. In the last 20 years they produced ~5 times the return of the MSCI World Index denominated in Dollars. They outperformed the businesses they own3 by 50% and on average their holding cost was less than 20bp."

To offer some pushback here, I'll say that you will often see leverage applied at the holding company level. The same phenomon can be observed at certain closed end funds. If you want to go long 100% or more, a preferred way to do it could be through these sort of publicly traded investment vehicles, as they are often able to borrow at lower rates compared to yourself.

However, this leverage can be dangerous because comes in addition to leverage at the investment level. For example, Fiat Chrysler itself used to be a highly leveraged company. It also explains away some of the outperformance. You could argue a more reasonable comparison would be against a levered version of the World MSCI Index. Then again, part of the skill in managing these companies is knowing when to apply leverage and how much.

At Exor, they identify these traits at holding companies that explain their superior performance:

"1. They tend to be prudent in how they are run, particularly in relation to financial
matters, which means they remain robust when they face downturns, crises and unexpected events;

2. They have the patience not to act when action is unnecessary and resist the pressure to do so. As Charlie Munger (Trades, Portfolio) says:

“Success means being very patient, but aggressive
when it’s time”;

3. They are aware of changes in the world and are able to adapt when those changes
require it;

4. They have strong cultures, clearly defined purposes and a sense of responsibility.
Their cultures, rather than pay, help them to retain talent and to grow leaders
internally."

Some of these traits are the same as those identified behind the more widely documented outperformance of family run and owner/operated companies, and I believe those subsets offer additional substantiation of the above.

Overall the peer group outperformed the MSCI World Index by a substantial amount over 20 years. The group also outperformed the companies that were held by trading in and out of them opportunistically:

grafico1

The company holds a concentrated portfolio with large stakes in a small number of names:

With a track record of compounding net asset value at around 20% and a trading price at a steep discount to net asset value, it could very well be an interesting investment opportunity.

Disclosure: No position.

About the author:

Bram de Haas
Bram de Haas is the managing partner of several investment partnerships.

Visit Bram de Haas's Website


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