Sapec SA – follow up
Annual Report 2016
So now Sapec is out with their annual report for the last year (or 15 months).
The report is in French, so I am not sure if understood everything by 100% but I try to summarize the relevant issues:
- Book value per share at year-end was 191,6 EUR
- The operating result of the business ex the sold business is slightly negative
- The Agro business was sold at 318,4 mn equity value, resulting in a gain of 226 mn EUR
- They provisioned the full 36 mn Novo Bank guarantee.
- They made another ~17 mn in restructuring charges throughout the remaining entities
- This results in around 160 mn net income including all “special effects”
- “official” net cash is 274 mn EUR or 203 EUR per share
- “real” net cash deducting the Novo Bank provision is 238 mn or 176 EUR per share
- it seems that they have a buyer for a bulk terminal in Cadiz which would net them another 7 mn EUR cash (or ~5 EUR per share)
- there seem to be transaction related payable which economically decrease net cash further (see below)
- they sold a loss making company (Citri, 1,3 mn loss in 2016) for 1 EUR
Overall it looks like that they used the occasion to clean up and maybe even “kitchen sink” a lot of issues throughout the remaining Group. I would therefore assume that the stated NAV per share is rather on the conservative side and that operating results should improve.
Reality check: How does this compare to the initial case ?
This is what I wrote back then (no escape here….)
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.
So compared to the initial case, the resulting net cash balance is lower than I expected.
One main difference is the Novo Banca guarantee which consumes around 27 EUR net cash and NAV per share. To me it was not clear that they would need to provision this so quickly. I am not sure if there is any upside.
The second main difference is that they retained more debt than I thought. At YE 2015, total financial debt was ~178 mn EUR. So less the 140 mn that should have been transferred in the deal, they should end FY 2016 with 38 mn EUR debt, however the balance sheet shows ~57 mn EUR debt.
On page 65 are the details. It turns out that “only” 128 mn EUR of debt were transferred and around 14 mn of net cash, so only net debt of 114 vs. the 140 that I assumed. This is a difference of 26 mn EUR or ~19 EUR per share.
Another position which irritates me (but maybe shouldn’t) is the following passage (page 74):
Note 25–Autres passifs courantsAu 31 mars 2017, la rubrique d’autres passifs courants comprennent 21.634 k€d’ensemble des frais en liaison avec la cession de l’Agrobusiness non encore payées.
With my bad French this should mean: Costs related with the sale of the Agro Business which haven’t been paid yet. I guess these are investment banking and advisory (legal) fees. If that’s the case (and the amount is realistic), we would need to deduct this from net cash as well as these are not normal “payables” which roll over every period but rather a financial liability.
If we deduct this, then net cash would go down from 238 mn EUR or ~176 EUR per share to 216 mn EUR or 160 EUR per share.
The dividend & taxes
So now comes the part which seems to get most investors really excited: The dividend (and taxes). One important point/disclaimer here:
I am not a tax specialist, so please be very cautious when you read the following part. Plus I only know a little about German taxation and I will only write about my personal situation.
DON’T CONSIDER THIS AS TAX ADVICE OR INVESTMENT ADVICE !!!!
DO YOUR OWN RESEARCH !!!!!!!!!!!!!!!!!!!!!!!
As a German retail investor, the situation in principle is the following:
It doesn’t matter if I make a gain on an investment or if I receive a dividend, I always pay the same amount of tax on any profit which is around 30% (including add ons like “Soli” and “Kirchensteuer”).
However, if I make a loss on an investment I can deduct the loss against any gains from other investments (not against dividends).
So in SAPEC’s case, the following logic would apply if I would buy the stock right now at 155 and then receive a 150 EUR dividend:
- first of all there would be 30% withholding tax in Belgium, of which only 15% are credited directly against my German tax duties.
- Then I would need to pay an additional 15% above the already credited 15% here in Germany which would bring up my gross tax to around 45%. So I only receive 82,5 EUR in Cash directly
- Due to double taxation treaties, I have a right to get reimbursed for the Belgium withholding tax above 15%. I will need to file a claim to the Belgian fiscal authorities which will most likely last 1 year but I will get that amount of money back with very high certainty which would be 15% of the dividend or 22,5 EUR. In the comments there was already a big discussion if and when Belgium will reimburse the money. I have to admit that I have no direct experience as I was too lazy to claim the credit for Miko. From what I have found on German internet boards, Belgium seems to need around 1 year to reimburse the money to Germany.
But aigain: DO YOUR OWN RESEARCH !!!!
- Now, for taxation reasons, the remaining stub value of 5 EUR would represent my current market value against a purchase price auf 155 EUR. So I have an implicit loss on this position of 150 EUR (taxable dividends in Germany do not reduce the cost base for taxation purposes). So if I directly sell and buy back the stub (at 5 EUR), I can offset my capital gains tax. For those taxes I already paid this year I get actually credited those amounts right away. For further realized gains I would not need to pay cash when I sell other shares. If I assume that I already paid enough capital gains taxes this year, i would therefore directly receive 30% x 150 = 45 EUR per share
- Al in all, I end up with 82,5 EUR +22,5 EUR + 45 EUR = 150 EUR and the stub. There is clearly always the delay for the Belgian tax and the timing also depends on how much capital gains I have realized already. Plus trading costs.
I think the key to understand this mechanism is the fact that a dividend paid out of profits does not impact the cost base for taxation purposes in Germany and capital gains and dividends are taxed at the same rate. If I would receive a non-taxable dividend instead, I would of course save the direct tax but my cost basis would go down as well and I would lose the tax credit. I am not sure what would have happened if I would have received 150 EUR non taxable dividend with my cost base of 133.
For investors in countries where for instance the capital gains tax is lower than the dividend tax, then the situation in this very specific case could be very different. But for a German investor with sufficient realized gains, the whole taxation is practically a “wash” with some delays.
Stub Value and further action
I think it is super difficult to really come up with a detailed stub value. Conservatively I would say that we are left with around 15 EUR net cash per share and ~41 EUR book value which I think is reserved relatively conservatively. There is till some goodwill in the balance sheet (8 or 9 EUR per share), but there might be also some very conservative reserving.
I am not sure what this is worth but clearly more than 5 EUR. Is it worth 15 EUR or 20 or 25 ? I don’t know.
The current situation clearly creates a potential advantage for investors how are patient and have a similar tax position like I do or who pay no taxes at all.
That’s why I do think for the time being for me it is worth to keep the shares and try to realize the stub value despite the fact that I will have some “time leakage”. If the stub is worth 20 EUR, I still can make ~10% at the current price of 155 within maybe one year which for me is quite attractive, especially as I get most of the capital back pretty soon.
The biggest risk is that there is some kind of “fxxx up” with the taxes but I am willing to take this risk as I also see some upside if the underlying business recovers. Spain is doing quite well these days and maybe this will help the business (and the value of the real estate in Portugal) at some point in time.
So for me and the time being the strategy is clear: keep the stock and bite the (tax) bullet. If the stock price would go down below (again), I might even add to the position.
Looking back, I think I have been somehow too optimistic. However as the price was cheap enough (134 EUR), the expected value was still high enough and I would have bought the stock back then even if I had known everything that I know now.
But also If I would have known earlier what I know now, I would have sold at 170 EUR….
Edit: I apologize for the time delay for this post. But reader of my blog should consider that I mean “slow value investing” seriously and that I am not able and don’t want to do “real-time” updates. Sometimes that hurts, but more often it helps a lot with regard to the ultimate outcome.