Agfa Gevaert (ISIN BE0003755692) -An Ugly Duck with some Golden Eggs in its nest ?
Disclaimer: This is not investment advice. PLEASE DO YOUR OWN RESEARCH !!!
Agfa-Gevaert was on my research list for some time now. Fellow blogger Undervalued Shares than triggered my renewed interest with their post from a few days ago and one of my best “Special situations” ideas ever was a Belgian company (Sapec).
I’ll try to summarize the part of the post that deals with Agfa:
- Active Ownership, a relatively new but successful German activist fund (Stada) has build up a position (~14%] and board membership (actually the Chairman) in Agfa Gevaert, the traditional German-Belgian film / imaging company
- Despite having some interesting assets, Agfa didn’t create shareholder value over a long time
- opaque reporting and a 1 bn EUR pension liability made it unattractive to stock market investors
- In 2020, Agfa managed to sell part of its Healthcare IT segment for 975 mn EUR
- Initially, the stock went up to ~5 EUR based on the first info on the sale but hasn’t fully recovered yet
- Major question is how the cash will be used. A 50 cent tax free dividend and a 20% stock buyback seem to be likely. Part of the money could be used to plug the 1 bn EUR pension hole partially and part to develop the remaining most attractive asset, radiology
- Overall the author sees a good chance of the share price going to 5 EUR within the next 6-24 months
The long term share price development looks quite depressing since the spin-off from Bayer AG in 1999, the company currently has a market cap of around 640 mn EUR (3,8 EUR/share):
Also looking at the 5 year figures we can clearly see that Agfa is not a beautiful swan in aggregate but a very ugly duck at first sight:
|Adj. Op. profit||180||208||169||128||26|
|Net income margin||2.34%||2.76%||1.51%||-1.10%||-2.37%|
|Adj. operating margin||6.80%||8.20%||6.92%||5.84%||1.16%|
Sales have retreated for years and 2018 and 2019 Agfa had to book a loss on an aggregate basis. In a typical “stock screener” Agfa looks unattractive from almost any angle. The book value is low and has been eaten up by the pension deficit, aggregated EV/anything numbers do not look good because of the bad segments and the restructuring expenses.
Under the hood: Very different businesses
Under the Agfa “hood” however, Agfa has gathered a number of very distinct and different businesses. The main business lines are as follows:
- Healthcare IT (part of this was sold as outlined above) – 505 mn sales, 63 mn adj. EBITDA
- Radiology Solutions, another Healthcare tech business line that could be attractive – 536 mn Sales, 88.5 mn adj. EBITDA
- Digital Print & Chemical – at first look an “ok but not great” business – 355 mn sales, 29,5 mn adj. EBITDA
- Traditional Offset business which seems to be the least attractive part but has the largest share in sales – 843 mn sales, 16.5 mn adj. EBITDA
3 step Sum of part valuation
Whenever you have such a sort of diverse businesses under one roof, a sum of parts valuation makes sense. The problem with a sum-of-part valuation is often, that the value will never realize and value is destroyed along the way through bad capital allocation (good businesses are capital starved and the holes in the bad businesses get plugged over and over again). I guess this has played out at Agfa over the last decade or so.
In Agfa’s case however NOW there is a clear catalyst with the presence of an activist owner and a first realized transaction that shows the potential.
Step 1: Determining economic debt (Net debt / pension liability)
According to the annual report, net debt amounts to 219 mn EUR at the end of 2019 (I do conservatively not adjust for capitalized leases). With the proceeds of 975 mn EUR for the sale of the Healthcare IT business, net cash in theory would be ~760 mn or ~120 mn more than the market cap. In technical terms we would have a “negative EV” stock which looks like a nice and tasty free lunch and a no-brainer.
However the issue are pensions. As of year end, the recorded net liability was 1.028 mn EUR. As I have mentioned in the past, a pension liability has to be treated as financial debt. Also the net liability is not the best indicator.
For a “mark to market” we need to make a few assumptions:
- interest movement since December 2019
- development of trust assets
- Required Buffers
Agfa disclosed sensitivities of 75 mn EUR of the liability for a 0.25% reduction in interest rates. Looking at the market, we can see the following developments since year end:
UK 10 year Govies -0,5% lower
US 10 year Govies -1,20% lower
Germany 10 year Govies -0,25% lower
Unfortunately, we do not know the split of the reserves. We know roughly that Germany accounts for 700 mn unfunded reserves. Let’s assume that a further 300 mn are EUR denominated and the rest is split 50/50 between UK and the US, then we have the following economic decrease of the discount rate of ~0,58% or an increase of the liability of ~(0,58/0.25)*75 = 175 mn EUR.
A further assumption would be that the overall value of the investments remains stable (gains on bonds are eaten up by the losses on the stocks).
In addition, I will assume that a 10% Buffer on Gross liabilities (2.24bn) should be applied to adjust for other risks (mortality, inflation). This adds another 224 mn EUR to the MtM pension liability.
Overall indebtedness and EV for Agfa look like this:
|Net debt 12/2019||219.0|
|Net pension IFRS||1028.0|
|Mtm pension 2020||174.7|
|10% buffer on gross pension||224.2|
|Cash from Healthcare sales||-975.0|
|Net economic debt MtM||670.9|
|Market cap (3.80)||637.0|
Step 2: Valuing the Businesses
The HealthCare IT division’s top line increased by 3.0%. Throughout the year, the HealthCare Information Solutions business continuously recorded solid top line growth, confirming its leading position in the German speaking countries of Europe and in France.
This is the part where they had actually done the first sale. We do not know the actual income attribution to the sold segment. A rough estimate would be that the sold entity has ~200 mn EUR sales.
For the Imaging IT Solutions business, the division focuses on generating ‘quality turnover’ in selected geographies and segments to further improve profitability. In spite
of the decision to wind down the Imaging IT Solutions from certain less sustainable
markets and segments, this business’ top line remained stable versus the previous year.
I assume the entity has the remaining 305 mn EUR in sales out of a total 505 mn for this segment. A potential comparable company to that segment would be Sectra AB from Sweden. Sectra has very decent margins (17% Operating margin) and is growing nicely. Sectra trades at around 8x sales and 82xPE. Agfa’s business clearly does not grow that much and is less profitable. However for a sum of part valuation I would assume 2x – 4.0x sales as a potential range of value estimates and I will use 3x sales as the midpoint which results in a value of 915 mn EUR (or 3/8 of Sectra’s multiple)
In the Radiology Solutions division, the top line growth of the hardcopy and Direct
Radiography ranges was partly counterbalanced by the market-driven decline in Computed Radiography sales. Clearly benefiting from the reorganization of the distribution channels in China, the hardcopy business posted double-digit revenue growth. The top line growth of the innovative Direct Radiography solutions range was also based on increased service revenues.
I am not sure if it is 100% comparable, but it looks like that RadNet Inc from the US is somehow comparable, at least they also specialize in radiology solutions.
The company has around 1.1 bn in sales and is valued at ~730 mn Equity and around 700 mn in debt. That translates into roughly 1.3 times EV/Sales and around 9x EV/EBITDA. Agfas Radiology business had 536 mn EUR in sales and 88.5 mn EBITDA. If I average the two multiples, I get a value of 737 mn EUR for Agfa’s radiology business.
Digital Print & Chemicals
Based on its strong performance of its core businesses, the Digital Print & Chemicals
division’s topline increased by 5.5%. In inkjet, the ink product ranges posted volume and revenue growth. Large-format equipment sales were also up, based on the success of high-end systems such as the Jeti Tauro H3300 LED.
In the Industrial Films and Foils segment, the Synaps Synthetic Paper range performed
well, as Agfa’s paper range is being distributed in an increasing number of geographies.
The Electronic Print segment’s Orgacon Electronic Materials range also reported good
sales figures. Furthermore, the division is making progress in a number of promising
new business areas. For instance, the rise of the hydrogen economy is leading to an
increased interest in Agfa’s membranes for alkaline water electrolysis.
For this segment, I make my life easy: I just use Fuji Films from Japan as a proxy, which trades at 0,9x sales and seems to have a somehow similar business. With 355 mn EUR in sales, that results in a 317 mn valuation.
The Offset Solutions division’s revenue remained almost stable at 843 million Euro.
Mid 2019, the consolidation of the sales coming from the alliance with Lucky HuaGuang
Graphics started to show in the division’s top line.
The Offset Solutions division is active in structurally declining markets. The offset industry is marked by the strong decline in demand for analog prepress technology and
decreasing newspaper and commercial print volumes. The division also continues to
face price pressure, caused by intense competition, as well as high aluminum costs.
Going forward, new challenges such as the corona virus outbreak could also affect the
division’s results. The developments in the offset industry explain the booking of an
impairment loss by the Group in the fourth quarter.
This is clearly the weakest business. EBITDA dropped from ~40 mn in 2018 to 16 mn in 2019.
For valuation purposes I use avg 2018/2019 EBITDA of ~30 mn multiplied by 6, resulting in an EV of ~180 mn EUR
Step 3: Deducting for Corporate Center / overhead
As I have found no real numbers here, I do a “wild guess” adjustment of -100 mn for all corporate functions.
Bringing it together: Sum of parts
So this is the total summary:
|Total sum of parts||mn EUR|
|Value Imaging business||915.0|
|Value Digital & Chemicals||316.0|
|Total sum of parts||1377.7|
|Current share price||3.8|
My quick and dirty valuation has resulted in a theoretical value of more than twice the current share price. Of course, as this is a “quick and dirty” exercise, I could be off several hundred mn EUR in any direction.
There could also be negative effects from Covid-19, although I guess the healthcare businesses which are the main drivers should be not affected too badly.
However, as the adjustments could go either way and my debt assumptions are rather conservative, the stock looks attractive at current prices.
Additional considerations: Time horizon, share buy back & Management incentives
First the time horizon: My theoretical value will not land on my bank account any time soon. So it is fair to assume that the stock price will only gradually move up to the fair value. My estimate is that the full value might only be realized in 3-5 years.
Another interesting aspect are share buy backs: If a stock is as undervalued as Agfa looks like, a share buy back can increase the upside considerably. Here is an example of a 200 mn EUR share buy back:
|Share buy back example|
|Purchase Shares (mn)||33.7|
|Sum of parts value new||1250|
|Shares count new (mn)||134.1|
|Value per share||9.31|
All other things equal, a 20%/128 mn share repurchase would increase the intrinsic value per share by 13,5% and lead to a significantly better upside for remaining shareholders.
By coincidence, this 20% share repurchase was just approved in today’s AGM 😉
Management compensation and alignment with shareholders is unfortunately not super clear from the annual report. There seems to have been a special bonus for the sale of the Healthcare IT business but I did not find details. I didn’t find any details on the compensation package of the new CEO who started on February 1st 2020. The old management compensation plan was rather bad, with among others, absolute EBITDA being one of the targets without taking into account returns on capital. I guess the activist shareholder will align this going forward with shareholder value creation.
Why is the stock (still) cheap ?
From the outside, it seems a combination of bad management, “Bad screening”, difficult to understand structure and a 15-20 year stretch of stock market disappointment that explains the current valuation. The real question is: Why didn’t have anyone else the idea to “kiss this frog” ? I don’t know.
There are of course many risks, Covid-19 is only one of them. Others are:
- UK pension plans are notoriously difficult to handle
- any of the businesses could take a turn into the negative and/or the adjusted EBITDAs are not sustainable
- Selling the German based offset business with its unfunded pension liabilities will not be easy.
- The Activist could sell out quickly and/or lose interest if they see a better opportunity etc.
- I am not an expert in healthcare stocks and my crude valuations could be WAY off any real value
On the other hand, other then many turnaround cases, the company has after the sale a lot of financial flexibility which you normally don’t see in such situations.
The just released Q1 numbers look relatively solid with debt debt having decreased by around 50 mn EUR and limited effects of Covid -19.
My “quick and dirty” analysis resulted in a significant upside for Agfa Geveart shares. The presence of a good activist investor and an already executed transaction strengthens the case that the “Hidden” value will be actually realized over time.
Therefore I allocated a 5% position of my portfolio into Agfa as “special situation” at a price of ~3,80 EUR/share. My target would be all-in 100% gain over 3-5 years.
Why 5% allocation ? I do think the stock is as attractive as German Startups Group and FBD and therefore I weight them accordingly. As with the 2 other special situations, I do like the “idiosyncratic” risk aspects of the stock.