value and opportunity

This is a quick follow-up on the Porsche SE post and the Holding company post.

Solvac SA (Had tip to reader G.) is the Belgian Holding company for 30% of the shares of Solvay SA, the Belgium based Chemical company. Majority shareholders of Solvac are the heirs of the founding Solvay family.

The holding company shares some interesting similarities with Porsche, for instance they hold also a 30% stake and account for the stake at equity.

Solvac is what I would call a “neutral” holding company. The structure and balance sheet is very simple:

They have 110 mn of debt, the rest is equity and they own 30.18% of Solvay and no further significant assets.

Solvay in total is worth around 9.03 bn EUR (at 106.65 EUR per share), so 30.18% are ~ 2.72 bn EUR.

If we deduct the 110 mn EUR debt and compare this to Solvac’s current market cap of 1.7 bn EUR, we end up with a discount of 36%.

What I could see is that they use the cash from the Solvay dividend either to pay out their own dividend, to purchase further Solvay shares or to repurchase their own shares. So pretty straight forward here.

Solvay itself is a relatively solid company, compounding at ~12-13% ROE p.a. and trading at 1.44 x book. According to my Boss score model, they are currently fairly valued.

So again, we can see that the market currently applies a relatively hefty discount of 36% for a transparent single stock holding company.

If we look at the chart between Solvay and Solvac, the current discount does not look exceptional:

However if we look at total performance, including dividends we see something interesting:

	Solvay	Solvac
5Y	1.23%	-0.20%
10Y	7.84%	9.44%
15Y	6.95%	8.20%
20Y	9.54%	11.25%

We can clearly see that the long-term performance of Solvac Holding share is significantly better as the underlying OpCo. The reason for the outperformance of a “neutral” holding company bought at a discount is clear:

– Holding companies almost always trade at a discount
– therefore the HoldCo will have a higher dividend yield on a pass-through basis
– therefore the total return will be better for the “discounted” HoldCo

That strongly supports Geoff Gannons point: If you like a company and find a “neutral” Holding company at a discount, go for it. This is one of the easiest and safest ways to leverage returns.

With regard to Porsche SE: Again, I would argue that the discount for Porsche does not represent a special opportunity, unless one is bullish on Volkswagen. As discussed, I am afraid that Porsche SE will be rather a value destroying holding company.

Solvay itself at current prices is not super attractive, but rather fairly valued. Going forward however, Solvac might be an interesting stock if overall price levels go down in the future and one wants to buy a quality company at a discount.