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 !!!!
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:
- will the deal go through ?
- What are they going to do with the money ?
- 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.
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 !!!