SAPEC SA (ISIN BE0003625366) Still an attractive Special Situation despite +350% YTD ?

Disclaimer: This is not investment advice. The stock mentioned is relatively illiquid and potentially risky. Please do your own research !!!!

Management Summary:

SAPEC SA, despite having gained already 350% YTD is in my opinion still a highly attractive special situation. The company is in the process of selling its main business which will result in around 230 EUR net cash per share compared to a share price of 135 EUR. Deal closing is very likely and management promised to distribute a “significant amount” of the proceeds. For me this is very attractive as I expect this to happen in the first half of 2017.

SAPEC is a somewhat strange company. Although the company is listed in Belgium, business activities are almost exclusively in the Iberian Peninsula (Portugal & Spain). This is how the company describes itself:

Established in 1926 as a mining and chemical company, Sapec expanded into various industrial and service sectors becoming an industrial holding group controlling and managing various businesses.

A quick look into the 2015 annual report is not pretty. Sales declined 5 years in a row and the company made losses for the last 3 years. Only “recurring” EBITDA increased.

With around 1,5 mn Shares, the company had at the low point around 30 mn, overall Enterprise value including debt at 150 mn.

The beautiful Swan emerges

A quick look at the chart shows that something significant has happened in the last few weeks:

It started with a short press release on October 13th including this:

The Board of Directors of the company has given strategic thought to the future of its Agro Business activity to maximise its value for the benefit of all shareholders. Agro Business has now grown to a significant market share in its traditional markets and has consolidated its international presence in a global market in rapid consolidation. A new development phase requires, among others, new investments. Different scenarios are on the table, including the search for new investors for AB, which is the reason why Sapec has hired the services of Lazard Madrid. While it is true that preliminary contacts have been established with potential investors, at this stage no decision has been made in one direction or the other, and no specific negotiations have begun with one or more potential investors. In this context, any speculation about the sale of AB or its valuation is premature. In accordance with the applicable regulations, the company will immediately inform the market if there is inside information in that respect.

This was followed on October 31st by another press release:

In connection with the latter option, the Board of Directors requested the intermediary Lazard Madrid to submit the offers from potential candidates by Tuesday, 1 November 2016 at 8 p.m.. A Board meeting will be held on 3 November 2016 to decide on the best option for the future of AB, and to examine the potential offers received by the company on 1 November. The company will issue a new press release following that Board of Directors meeting to explain the preferred option for the future of AB and, if the Board of Directors chooses to sell AB, whether it will involve one or more potential buyers, and the negotiations thereof. Any speculation about the identity of those potential investors is, therefore, premature. The Board of Directors also makes it clear that following the Sapec Group’s press release of 13 October 2016, no decision has been made by the company regarding AB, no negotiations have been initiated with one or more potential investors, nor any valuation of the entire AB sector has been decided.

3 days later another press release, this time with “real meat”:

AB’s recurring EBITDA for the period 01/07/15 to 30/06/16 amounted to 39.5 M€. The offers presented by the candidates value this business in an amount equal to 11 to 12 times its recurring EBITDA (enterprise value), minus the net debt and other adjustment items considered by the candidates (on this day the overall amount of which is estimated to be of about 140 M€)

Then, 4 days later the decision:

Bridgepoint evaluated the AB sector, composed by the Portuguese and Spanish companies, Sapec – Agro S.A. and Trade Corporation International S.A., for an amount of EUR 456 000 000, giving a selling price of the shares of those companies in the amount of EUR 318 387 000, taking into consideration the net debt and other adjustment items as explained in the previous press release by the Sapec Group on 3 November 2016

So a company which had an EV of 180 mn some weeks ago is selling its main business for 2,5x that amount.

Could one have seen it earlier ?

However, looking deeper into the annual reports, on could have seen that the initial mentioned sales decline came mostly from the trading operation and especially the crop protection business did really well.

2010, crop protection had 72 mn of sales and 8 mn EBITDA compared to 143 mn sales and 23 mn EUR EBITDA in 2015. And the first 6 months 2016 looked good again for the agro sector.

With the current activities in crop protection (Syngenta, Monsanto &Co) it is also clear that for the remaining large players like BASF, there are only a limited amount of targets if they want to play at least a little bit of catch up.

Another hint would have been the half-year report where they talk about larger reorganizations in some of their businesses as well as the intention to dispose the environment business. However there was no hint that they were thinking about selling the profitable core business.

In any case, the overall case was clearly not easy to spot.

– no single analyst was following the company
– no “famous” fund was invested
– the company didn’t screen well with the exception of P/B and EV/EBITDA
– the setup as such (Belgian company, Iberian business) was strange anyway

So ist the stock still a “buy” ?

Buying a stock which just has tripled or quadrupled in value is not easy for a value investor. In SAPEC’s case the question is clearly: Is the stock maybe worth more than the 130 EUR ?

If the deal goes through, SAPEC will have around 230 EUR per share net cash plus any other business activities which however were not that profitable.

Buying 230 EUR cash per share sounds like a no brainer but there are 3 clear caveats:

  1. will the deal go through ?
  2. What are they going to do with the money ?
  3. What about taxes ?

Will the deal go through ?

There is always a risk that something unexpected happen, but my take is that there is relatively little risk that the deal fails. Why ? The buyer Bridgepoint is a large Private Equity investor with around 13 bn AuM and a strong European focus. They have ample access to funding and really seem to know what they are doing. They have an office and Spain and know the regulatory environment.

What will Sapec do with the money ?

If SAPEC would just keep all the money, then there is the big risk that they would be just another undervalued holding company with no clear catalyst. However, in one of their releases they stated the following.

The company intends to strengthen its other activities in Portugal and Spain and, once the transaction has been completed, to distribute to its shareholders a substantial part of the cash received, under specific terms and timing still to be analysed.

So they will buy some stuff but distribute “a substantial” part. What is substantial ? It seems local investors expect a 150 EUR dividend which clearly would be interesting considering the current share price of around 135 EUR.

But even if the dividend is lower, let’s say 100 EUR or so, this is clearly an interesty “catalyst” and increases the chance that there is further upside.

On interesting detail: Sapec will hold an extraordinary shareholders meeting on December 28th in order to extend their current financial year to March 31st 2017. It seems that they do this to book the transaction into the 2016 business year and enable them to distribute the profit in Spring/Summer 2017.

What about taxes ?

As  a German private investor, there would be a tax of around 30% for the dividend received, which would clearly make this less attractive. So far however we don’t know how they will distribute the cash. According to my “sources”, Sapec seems to have a good reputation to treat minority shareholders friendly, so maybe there is also some stock repurchase tender or similar.

If not one could still need to consider that in Belgium, stakes above 10% or more than 2,5 mn EUR value are exempt from local dividend tax. So there is the high likelihood that some funds would be interested to “arbitrage” the potential tax exempt status and theat the stock price then is much more a function of tax exempt investors. As a German Private investor one would need to sel then before the dividend payment which of course  includes a certain amount of risk.

Overall assessment:

After the deal (which is very likely in my opinion), the company will have 230 EUR cash plus any other assets. The expected distribution might help to unlock some of the value. I think it would not be unreasonable that the stock price will be at ~200 EUR before the distribution, an upside of almost 50%. Of course if the deal fails there is some downside, but the probability in my opinion is very low and the value of the underlying business is quite obvious.

For this reason I have established a full (5%) position for the portfolio some days ago at an average price of 134 EUR/share. This is a signifcant allocation but in my opinion justified by the very attractive risk/return profile.

A big “THANK YOU” goes to the reader who recomended me to look at the company !!!

 

57 comments

  • If you roughly value all the remaining assets at 36M, you still get a net cash position of 293,5M (216,5€/share). If they distribute 150€, you keep a 66,5€/share business. Since the investment is in improvements to existing units, then it is incremental investment which is worth more than if you were investing the 66,5€ in a tottaly new business (basically it is possible that they improve factories and warehouses, thus improving the value of the assets they already own (those I assume to be worth the full 36M of the guarantee).

    ps: this is bad news, however it would be strange if it went to (or under) 150 after the dividend having been announced

  • Looks like bad news: 36m loan guarantee is being called, http://www.sapec.be/images/2017/2017-01-05COMMUNIQUE-DE-PRESSE-DU-GROUPE-SAPEC-FR-NL.pdf

    Unclear to me when translating to English if this means that 100% will be paid immediately or just that Sapec needs to set aside a provision / restricted cash for that amount in case it needs to be paid in the future. Any thoughts?

    • There is no immediate requirement to pay. According to the annual report they don’t think that they need to pay and have therefore no provision. So not really anything new here in my opinon.

      • The last sentence of the press release actually says that management believes that this call from Novo Banco doesn’t affect the amount of cash they plan to distribute to shareholders.

        They may be wrong, but it does indicate that this is not something new.

  • Any idea on when the record date will be for the dividend? Any chance it has already passed (i.e. the date of the board meeting)?

    • hmm, I am not an expert on Belgian Corporate law but I assume that without actually having officcially announced the date and amount of the dividend, it will be very difficult to already have a record date.

      • They haven’t even decided yet if it will be a dividend, or if they will return capital through some other way.

  • HEEELP!!!!!
    In my previous reply, I tried to explain that taxes on dividends paid to institutional investors were also important to private investors. This is because if everybody, or nearly everybody, expects to pay taxes on a 150€ dividend, the share price should be lower than a “no dividend tax price” in the dividend tax amount until de ex-dividend date. I think I will know how dividend taxes work in a few days.

    Today, I am trying to figure out the value of the rest of the assets of SAPEC. I really hard to undestand the value. For example, focusing in what the annual report calls other assets:
    1) Energia Limpia Invest (ELI): Looks like the most interesing asett. From de 2015 report:
    “Sapec holds a 49% stake in the company Energia Limpia Invest (ELI), which owns 99.59 % of Tharsis S.A. Tharsis owns real estate and forest land in Spain, and a 58.6 % stake of Naturener Group (a 70 % economic interest on 31 December 2015), the holding company of a group that operates in renewable energies in Spain and North America”
    The real estate and forest land, I haven’t researched but probably isn’t worth a lot. Grupo Naturener, S.A. has two important brunches in renewable energies:

    i ) Naturener Solar, SA: appears to be a disaster due to regulatory changes in the Spanish renewable energy. Management sais is now cash-flow even, but has 100M debt with Novo bank. It has also a lawsuit against the Spanish government, this lawsuit could easily end in no compensation for SAPEC. In the top of this, SAPEC could not only have a worthless investment in Solar Energy, it could have to pay another 36M€ as a collateral given by SAPEC to Novo Bank for the ELI 100M loan.

    ii)Naturener North America: More lawsuits. Naturener started to build a wind farm park in Montana financed with $320 million lent by Morgan Stanley. San Diego Gas & Electric would by the energy and pay $285 million to finance the construction. San Diego Gas & Electric didn’t pay, Morgan Stanley transformed the loan into equity taking over de assets of Naturser. Naturser North America (Is not the same company as Naturser USA, which is owned by Morgan Stanley) has a minority interest, or rights to receive some of the earnings of the operations of the wind farm or the procedures of the selling of the wind far. Recently there has been a settlement agreement between Morgan Stanley and San Diego Gas & Electric, this means than the wind farm could be sold as soon as 2017/2018, and the value of the farm is huge (hundreds of $ millions) . It´s not clear how much of this belongs to SAPEC´s shareholders, not a lot in %, but maybe a considerable amount in $.

    2) “100 hectares of industrial land (in Setúbal), and about 100 hectares for tourism in Lousal, Portugal. These assets are not allocated directly for use by the various sectors of the Group and are, therefore, considered as nonoperational and can be released for sale.” How much is this worth? 10€/m2, 20? Is there any buyers? Is there any need for this land uses in Setúbal or Lousal? Again, looks hard to estimate value.

    3)Citri: This seems to be worth 500 k€.

    These are a fraction of the assets in SAPEC´s books.

    The problema is that all the stuff that will remain in the company is a lot of stuff, and it could be worth a lot, zero or even a negative amount given the loans SAPEC has conceded to the subsidiaries. No wonder the market doesn’t value SAPEC at full price. I don’t think many investors, professional or not, can value this company. If you could help me in some way….

    • Just relax. I assume the rest is simply worth zero.

    • Simply put, the rest of the activities are making a loss and chances are there are no guarantees that this will change in the future (even after they will invest some euros in it which is the plan). I think the value is around 10 euros per share is you are being careful (and not wishful). Best is that you value the Sapec deal without the other activities and take into account the dividend taxes. I think the Sapec share is priced reasonable right now for small investors when you take the other activities and the dividend taxes into consideration. If you don’t need to pay dividend taxes, the share is undervalued.

      • Haha.Ok, I’ll follow your advise. I was thinking that this company was worth 25€ a year ago, now is 160€. The market didn’t realize the value of the asset because the earnings, debt, lawsuits…didn’t look very good. Just wondering: now the company is trying to sell everything, there could more positive surprises. but I can’t figure out.

        It could be worth 0 or a lot more than 0.

        • There can be some surprises (like the Naturener case that becomes positive and would have a signifant impact on the valuation), but I think that the rest of the activities are worth between 10 and 20 euros per share. But then you also need to diminish this with the Naturener collateral.

      • The rest of the actives could be worth 10€/share. But, to give you a general Idea:

        About the value of the 400MW wind park in Montana, the management wrote “In Canada, several interested parties have come forward to acquire similar projects in that country, and we feel that a transaction could be made in 2016” A similar transaction:
        http://renewables.seenews.com/news/boralex-buys-wind-park-interest-raises-ebitda-and-capacity-targets-550249
        A 400MW farm would be worth 1200 million €.

  • The company will have this amount of cash, but corporate taxes have to be paid… So cash per share would be about 160€

  • Official statement from SAPEC (in French and Dutch):

    http://www.sapec.be/images/2016-12-%2029%20COMMUNIQUE%20DE%20PRESSE%20DU%20GROUPE%20SAPEC.pdf

    The 150 EUR/Share dividend has now been officially confirmed as target. The structure is still open, but from what I have heard they said that they will make it as shareholder friendly as possible (capital repayment).

    • And I forgot: Portuguese/Spanish authoroties have approved. Deal will close January 12th….

      • A very muted market reaction considering that:

        – the deal is now done
        – a lot of cash is being returned and in shareholder friendly manner
        – Sapec is cashing in 318 m, net of debt
        – the remaining business is worth something and the management is trying to squeeze profit out of all the assets of the company
        – and… market cap is around 220 m.

        Thank you, MM, and Happy New Year!

        • my advice: Partience. I think we will see higher prices once the dividend is formally announced and people are back from the holidays.

        • A Belgium Sapec investor here. In Belgium you pay a 33% tax on the profits that you make when buying a stock (called the speculation tax). This tax will be canceled at the first of January luckily enough, but this means that small investors can not sell the share until the first of January. Because of this, there are some chances for other investors because there will be some selling pressure in the coming days. Not because there is something wrong with the company, but because of fiscal reasons. I am going to buy some more if the stock would drop significantly in the coming two weeks.

      • One thing worries me: I’ve read that institutional investors have to pay dividend taxes. Given the size of the dividend, this could mean 21€ tax per share assuming 15% efective tax and 150€ dividend.

        • I’ll explain/correct the commentary above a little bit.

          The strategy as a private investor looks clear, sell the shares before ex-dividend date. Doing this, the withholding tax should be avoided (30% from 1/1/2017 I’ve read). This should work if investments funds, SICAV’s… pay no dividend taxes, because if they do pay taxes on dividends, these investors are in the same or similar situation as a private investors. I think it is relevant because the full value could not be achieved, the arbitrage opportunity for a Institutinonal investor would be NAV= dividend + value of remaining assets -Dividend taxes.

          Let’s suppose SAPEC’s share price is 170€ before dividend, if the effective dividend for funds is 15%, the share could drop to 40-45€/share instead of 20€/share. Ruining the “sell before dividend” strategy. Even more, it could make sense to receive de dividend and claim de withholding tax to the Belgium authorities.

          My initial plan was to sell before the dividend, study de rest of the assets(looks pretty complicated). And, if it looks very undervalued, buy again after the dividend, buying a larger number of shares (kind of levering this new arbitrage opportunity with the dividend). But, if the share price is going to catch up with de real value, right in the day of the dividend distribution because of taxes (when I’m sold), it will probably not work.

          Tomorrow I’m going to call a taxes advisor tha have recovered for me dividends in foreign countries and ask them about claiming in Belgium and about dividends for institutional investors. To date, recovering withholding taxes from countries like Germany worked well for me (6 months), but in others like France worked terrible (3 years waiting and problems never end, looks like they just don’t want to fulfill international treatys).

          About withholding taxes:

          https://www.kpmg.lu/withholding-tax-study/2015/documents/Withholding-tax-study-2015.pdf

  • About taxes on the sale:
    At the US:
    http://www.cfkfinance.com/sale-of-the-shares-of-the-holding-company-or-the-subsidiary/

    In Belgium:
    https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-belgiumguide-2016.pdf

    From what I understand there might be (at max) a 0,412% tax

    About personal taxes:
    1) Most people will pay a withholding tax on the dividend (25%). If on top of that you pay your national tax you should be able to get it back if there is a double taxation treaty with your country (EU countries should have one with Belgium)
    2) If you problem is paying the tax on the full dividend: after selling you should be able to sell at a loss and recover the excess tax. If the stock drops less than the dividend – better! you recover less taxes but you get more gains. There should be no motive for dropping more than the dividend.
    3)If they buy back shares: you only have to pay taxes on capital gains as usual.
    4) If you don’t want the trouble of getting the tax back: sell after the dividend has been announced but before distribution at a small discount – for sure plenty of people will be interested on profiting on the spread (be it because it is less trouble for them to recover the excess tax or any other motive)

  • On interesting detail: Sapec will hold an extraordinary shareholders meeting on December 28th in order to extend their current financial year to March 31st 2017. It seems that they do this to book the transaction into the 2016 business year and enable them to distribute the profit in Spring/Summer 2017.
    –> Has tot do with a very specific Belgian tax legislation. Taxes will rise starting from bookyear 2017. There ‘s more Belgian companies prolonging their bookyear 2016 🙂

    What about taxes ?
    As a German private investor, there would be a tax of around 30% for the dividend received, which would clearly make this less attractive. So far however we don’t know how they will distribute the cash. According to my “sources”, Sapec seems to have a good reputation to treat minority shareholders friendly, so maybe there is also some stock repurchase tender or similar.
    –> Belgian shareholders are hoping for / expecting a capital reduction, at least partly. On this sum, no dividend tax is payable. A very technical issue, but a 30-40 euro taxfree part looks feasible.

  • I àm belgian And i Own the stock . Tax issue on the spécial dividend is critical. There is à mistake on your assumption of tax arbitrage by fund or great investor. You have forgotten one condition for avoiding 30% dividend tax. You need to own the stock 12month !!! . So No tax arbitrage . So to value the stock : remaining business :20 euro per Share. Add the spécial dividend discounted of 30%. And add the part of the money not distributed . So 150 euro per Share is expensive!!!

    • #Henry, some quick remarks:

      – until now, we do not know when and how the cash will be distributed. So deducting -30% is the worst case
      – even assuming 30% on a 150 EUR dividend, my caluclation would be as follows: Dividend (150*0,7)= 105+20+ (231-150) = 206 “NAV”.

      So 150 EUR/share is not that expensive in my opinion.

      But I could be of course wrong.

      mmi
      ) =

      • You Forget the traditional holding discount ( about 30%]. I Wonder who is buying a so big volume????If it is a belgian company that want to have rdt dividend ” they Would be soon deceved Às there are a 1 Year holding requirement . Sorry for the spelling but i àm on mobile

      • a rather general question, not just about Sapec:
        I know US private investors are inclined to sell stocks that are in the red YTD for tax reasons. And the month they do it most of the time tends to be December.

        Is the situation the same in Germany? I have some exposure to MDAX companies.
        Would you expect some selling pressue on stocks that performed flat / badly throughout the year and expect overperformance from stocks that had big intrayear rallies (like Blilfinger, one of my holdings)

        • #Falke,

          I don’t know but I would not expect big impact of tax loss selling in Germany. You can carry over tax losses into the following year, so there is no real need to do so.

          mmi

      • Shouldnt you take into account ~45m debt at the holding level?

        • According to my info, the debt is within the Agro business. Based on which information do you think there is extra debt that will remain after the sale ?

          And again, I assume that everything else is worth zero. So there is some room for error.

        • They take over Agro for EV of 456m but pay 319m cash so they take over 137m debt. On the interim balance sheet there is 100.5m in LT debt and 80.5m in ST debt so there’s a ~44m gap. Also, if I look in the AR 2015 page 56 I see ~46m in non-current liabilities classified as ‘unallocated’. I assume this is on the holding level. Will shoot a mail to IR. Nevertheless this idea looks very decent.

  • Well , seems you have some impact on the market . The tax issue will be key to a successful investment . A dividend didtribution would hurt late investors .

    • hmm, I think one does not need to “panic buy” this stock. We will see what they do. In case of a taxable dividend, a retail inevstor will need to sell before.

      • What is the difference for a German retail investor? With the Abgeltungssteuer it won’t matter whether you receive the dividend or sell and pay tax on the capital gains. Am I wrong here?

        • I tdepends. You will have to pay “Abgeltungsteuer” on the full dividend amount. It depends then on where the stock will trade after the dividend payment (ex dividend). This adds an additional layer of uncertainty.

          Again, I am not a tax advisor……

        • But I think you are right. If you buy before the dividend date, and the stock price then drops exactly by the divdend amount, you should be able to offset the tax on the dividend with the loss of the sale (all other things equal).

  • Good to see that you regained your spirit for SpecialSits. 😉

  • Why wouldn’t they have to pay capital gains on the sale? The sale price is higher than their equity. Unless they have taken significant write downs in the past.

    • Because you rarely pay capital gains tax in Europe these days especicially in the Benlux region.

      I assume that they have smart lawyers so that the tax burden will be very low. As far as I know, the decision to sell came from the fear that this might change in the future and that they want to relaizse this profit as long as it more or less tax free. That’s why they do a special meeting on Dec. 28th….

      But I am not a tax lawyer and this is not investment advice 😉

      • Yes, I think they need to structure the sale in a certain way…
        They still have a litigation with the Portuguese tax authority regarding capital gains tax on the sale of some investments.

  • On a general note, it is always difficult to value net cash.
    I have found a company, for ex., which trades at an amazing discount (about 60%) to net cash and liquid assets (shares of listed companies).
    It is called Caltagirone Editore.

  • Great! Reminds me strongly to Balda/Clere.

  • Hi MM,

    If I understand correctly, there is an off balance sheet guarantee of 36 million, related to the Naturener issue, which may become an actual liability.
    Have you studied this element? What is your take?

    Thank you

    • My case assumes that the rest of the business (grain trading, port, real estate) is worth zero. My take on the guarantee is that it seems to be unclear, I don’t have more information than management.

      Do you have a different opinion on this ?

      • I think that the information in the annual reports is not enough to make us thoroughly understand this issue. That is why I am asking if you or other reades have more insight.

  • Does the €230 net cash figure account for any taxes that Sapec has to pay on the sale?

  • great ! i will have a look. great value story with this hidden asset

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