Rezidor Hotel Group: Do Chinese Read Sun Tzu?


Rezidor Hotel Group (“Rezidor”) is a hotel company operating Carlson Rezidor Hotel Group’s (“Carlson”) hotels in EMEA region under master franchise agreement.

HNA Tourism Group (“HNA”), a part giant Chinese conglomerate HNA Group (“HNA”), bought the US based Carlson in end of 2016.

As Carlson owned 50 % of Rezidor prior to the transaction, the change of ownership in Carlson lead to change of ownership in Rezidor, which forced HNA to make a public mandatory offer of rest of Rezidor.

The price HNA offered from Rezidor was 35 SEK a share. Rezidor’s board recommended shareholders to decline the offer due to “financial reason” (=too low price). Despite board recommendation to say no for the offer, 20 % of shareholders decided to sell their stake, making HNA 70 % owner of Rezidor.

After that, the Rezidor’s stock price have declined significantly to about 23-26 SEK share.

The decline in the stock price below the HNA’s 35 SEK offer price is probably explained by uncertainty regarding HNA’s intentions towards minorities, HNA’s highly publicized debt problems and episode relating to a delayed payment for the shareholders who accepted the mandatory offer (HNA had to ask permission from Chinese authorities to get money out of China to make the payment).


The whole situation between Rezidor, Carlson and HNA looks quite hairy. But despite the apparent difficulties, the decline in the stock price has resulted quite interesting valuation levels:

According to 4-traders, the forward P/E multiple for 2017E is 12x and for 2018E about 8x. EV/EBITDA multiples for same years are 4,4x and 3,8x.

These are really low absolute multiples, especially given that the 4-traders database’s consensus estimate, which is sourced from Thompson-Reuters, predicts significant growth for the coming years for Rezidor.

According to the estimates, the business seems to have good growth prospects and profitability, which I broadly agree. For, of the international hotels chains, Rezidor has the biggest new hotel pipeline in Africa and Middle-East, and various restructuring programs are starting to kick in.

The valuation looks also very attractive relative to comps:

The forward P/E multiples for the comps for 2018E vary between 16-33x and forward EBITDA multiples for 2018E between 8-19x, both at least double the Rezidor’s levels.

As Carlson and Rezidor have been in business for long time with well known Radisson-brands, and the combination as a whole is one of the top 10 or so international hotel companies in the world, and as said, Rezidor is probably the largest hotel operator in the Middle East and Africa region, the Rezidor’s valuation discount relative to peers cannot be explained by it being some backwater hotel company from middle of nowhere or by significantly worse competitive position.

One possible explanation for the Rezidor’s lower valuation could be the master franchise agreement with Carlson, which is valid until 2052 and has an extension option.

But with so long duration in the contract and the extension option, for valuation purposes the Rezidor’s business can thought as if it was a “going concern”.

And even if it’s assumed that the business would end at the maturity, the valuation difference between going concern and 34 year fixed contract is not big enough to come even close explaining the differences in the valuation multiples (10%-20% in all else equal scenarios, depending of assumptions).

Other possible explanation for the lower valuation multiple relative to the peers could be differences in hotel portfolio distribution between leased, managed and franchised hotels.

About half of Rezidor’s segment EBITDA comes from leased hotels and other half from managed and franchised hotels.

From the comps, Scandic has all lease portfolio and it’s trading at 8xEBITDA’18E.

Intercontinental and Hilton have more or less 100% managed and franchised hotel portfolios, both trading at about 15xEBITDA’18E.

Assuming “hotel portfolio type weighted peer EBITDA-multiple” (50%*8+50%*15=11,5) for the estimated ~110 MEUR EBITDA for 2018 (from the 4-traders consensus data), Rezidor’s fair valuation would be 11,5×110=1265 MEUR.

With the current 414 MEUR market cap and net debt free balance sheet, the upside with the portfolio composition adjusted peer EBITDA-multiple based valuation for Rezidor is about 3x –> the structure of the hotel portfolio is not likely explanation for the big valuation discount relative to the peers either.


After accounting for the master franchise agreement, the main difference between Rezidor and comparable international hotel chains comes down to the ownership structure.

HNA owns 70 % of Rezidor and 100 % of Carlson.

HNA is a giant Chinese conglomerate that has been growing with debt fueled acquisitions around the world.

It for example owns major positions in Deutche Bank and Hilton and has bought global technology wholesaler Ingram Micro among few airports and financial companies around the world.

The ownership of the HNA is unclear, some Chinese billionaires which might or might not have connections to the Chinese Communist party.

The basic story in the news is that everything it does is shady, and the people involved are shady, but somehow it has unlimited amount of money and connections to do deals of trophy assets around the world, seemingly without any central strategy.

There are two ways the concentrated ownership structure can manifest problems for Rezidor’s minority shareholders and thus effect the valuation multiples;

1) Majority owner loot the company

As HNA owns 100 % of Carlson and 70 % of Rezidor, and thus effectively controls both, there is incentive to move costs from Carlson to Rezidor and income from Rezidor to Carlson.

While there are probably ways to move cash past minorities to the majority owner, there are some practical limitations that make it seem like a low probability event:

A) Illegal

As independent legal entities, transactions between Carlson and Rezidor are governed by mutually binding contracts, probably mainly by the master franchise agreement.

If management, board or shareholder meeting would decide to change the contracts governing the important transactions between Rezidor and Carlson so that it would benefit majority shareholder at cost of minority shareholders, under my non-professional legal interpretation it would be illegal under the “shareholders equality principle”, as defined in the laws governing limited liability companies (at least in Finland).

I don’t know but if such proposal would come to board’s or shareholder meeting’s table, the majority shareholders or their board representatives couldn’t participate in the decision making, or their votes wouldn’t count, leaving the decision for independent directors or minority shareholders, who would surely vote any such proposals down immediately.

B) Small benefit

HNA owns 100 % of Carlson and 70 % of Rezidor, so they already get 100 % of whether profits Carlson makes and 70 % of whether profits Rezidor makes. The maximum incremental profit HNA could make by abusing minorities is to get the last 30 % of profits to their hands.

That’s small benefit relative to HNA’s debt problems and relative to the potential repercussions if done illegally, as explained next.

C) Repercussions from (western) financial backers

HNA is under tight scrutiny by their financiers due to very high debt load and rumored liquidity problems.

Financiers, which directly through HNA include many Chinese banks and indirectly through their wholly, majority and minority owned subsidiaries probably many western financial institutions.

If HNA would change contracts between Carlson and Rezidor so that Rezidor’s minorities’ position would be illegally weakened to benefit the majority owner, the information would quickly spread to the financiers who, especially the “western” financiers who are not insiders with the HNA’s owners/Communist party, would probably start to suspect whether HNA will also “illegally weaken” their position too i.e. stop paying their debt back or any other trick in their sleeve.

And when you have big debt load and are under liquidity squeeze, the trust of financiers is pretty much the only asset you have which should not be weakened under any circumstance, especially if the potential gain is small (as it would be in Rezidor’s case).

Imagine for example that significant number of HNA empire’s western subsidiaries’ suppliers, customers and financiers would start suspect whether the HNA owned subsidiaries will keep meeting their commitments as agreed in the contracts or governed by law or good by business practices.

Suppliers would start to demand prepayments or stop cooperation altogether, financiers would demand higher interest or not provide new loans and customers would stop prepaying or move to other service providers.

In such liquidity squeeze scenario in the western subsidiaries, the cash flow from them to the parent HNA’s Chinese headquarters would stop or be significantly weakened.

The potential benefit of behaving badly in their small overseas outpost somewhere in the western frontiers (like the Sweden listed Rezidor in this case) for HNA empire would be very small relative to the the worst case domino effect it could lead to.

I have not read Sun Tzu but I’m sure there is something about hurting yourself in the foot.

In addition to the practical limitations to loot the minorities that make it seem like a low probability event, there are few actions by the majority owner that make it seem even less probable:

A) Dividends and debt swap

HNA became the majority owner of Carlson and Rezidor in the end of 2016.

If HNA would have wanted to channel cash out of Rezidor past minorities directly to themselves, they could have stopped paying dividends and then channel the cash out of the company by some other way. They did not do so.

Recently, HNA pledged about 5 % of the Rezidor’s shares to financiers to secure loan.

If they wold have wanted, they could have taken the cash out of Rezidor or take the loan for Rezidor’s name, and then channel the cash to the parent HNA either illegally past the minorities or legally by paying “special dividend”, but they did not do it.

That they did not decide to benefit the majority shareholder at the cost of minority shareholders in these occasions when they had clear opportunity do so, at least apparently, is in my mind evidence against the thesis that there would be high probability for such scenarios in the future

E) Management seems to be focused on the business

After HNA took over Carlson and Rezidor, they immediately started restructuring programs to improve the business. Carlson has had it own initiatives and Rezidor their own.

For example Rezidor will be publishing their “five-year plan” for investors in January. There is also new joint committee to coordinate Rezidor’s and Carlson’s global business activities, like IT, marketing and growth (the new goal is to be among the top 3 hotel companies in the future).

If HNA’s goal would be just looting minorities instead growing the business, it’s doubtful that they would be using so much effort to various development activities.

And listening to Rezidor’s management conference calls after HNA became the main owner, and comments from Carlson’s manager in the article linked earlier, I get feeling that both respect the HNA people and think that they are the real deal.

Both for example point to potential revenue synergies with other parts of HNA empire, namely various airline, airport, hotel etc. holdings, which could be utilized in channeling more Chinese tourists to Carlson’s/Rezidor’s hotels and expansion in Africa, one of the fastest growing hotel markets in the world.

2) Majority owner’s debt problems spreads to Carlson and Rezidor

As said, HNA has a lot of debt and is under liquidity squeeze.

While Rezidor and Carlson are independent legal entities, it could be possible that their suppliers, financiers and customers would perceive that they cannot or don’t want to keep their commitments by associating HNA’s liquidity problems to them.

This could happen if the suppliers, financiers or customers would perceive that the cash produced by Carlson/Rezidor flows to the problematic HNA parent company instead to them.

This could happen without any illegal or questionable activities, just perception anyone associated with Chinese/HNA are not trustworthy.

If such perception would spread to Rezidor/Carlson, doing business would become almost impossible and thus cash flows and value of both companies would decline.

Like the “looting scenario”, spreading of the HNA’s problems to Carlson/Rezidor seems unlikely because both are independent legal entities from HNA and thus they are not responsible of HNA’s debt, and because, at least so far, there are no signs that HNA would be channeling cash flows from their subsidiaries to benefit them at the cost of their financiers, suppliers or customers (or minority owners).


As Rezidor’s valuation multiple is about third of the peer companies, market seem to put very high probability for some combination of the “Majority looting the minorities” and “Majority owners debt problems spreading to subsidiaries” -scenarios (as there doesn’t seem to be big business related differences between the peer companies and Rezidor).

As seen from the simplified scenario analysis valuation sheet below, if there is

A) 50 % probability that Rezidor is “normal company” and its fair value is based on the “hotel portfolio weighted peer valuation EBITDA multiple”,

B) 25 % probability that HNA “semi-loots” 50 % of the “as if normal value” of Rezidor to themselves, and

C) 25 % probability that HNA loots 100 % of the “as if normal value” of Rezidor to themselves,

then Rezidor’s “probability weighted value” is 46,3 SEK/share or almost 90 % higher than the 24,7 SEK stock price currently:

But per my thinking, the practical limitations preventing HNA for looting the minorities, and the HNA’s past actions indicating they don’t want to do so, make it seem much more likely than a coin flip that Rezidor is closer to the “normal” company rather than being a target for some form of looting, thus indicating that the upside is even higher than the valuation sheet implies.

The one thing market might be missing due to the turmoil regarding HNA and the uncertainty about their intentions regarding minorities is the successful turnaround in the core business in recent years, that is starting to show in the profits in this and next couple of years.

Another positive aspect of the situation is that there are some “smart money” involved. Special situation and distressed investing specialized investor Polygon Global Partners is among the top 3 owners and has member in the nomination committee.

Potential catalyst of the situation is that HNA’s problems get worse and they have to sell their stake in Carlson/Rezidor to pay down debt. While being “partner” with potential forced seller is not the best place, the current valuation is so low that there would probably be some upside even in forced selling scenario.

And if HNA settles its debt issues, it will probably buy out the minorities and continue as independent company. Last time HNA offered the minorities 35 SEK and they didn’t sell, so in the future it could be even higher.

If neither of the scenarios materialize and HNA stabilizes its financies, there is some chance that market will start pricing Rezidor somewhere closer to the peer multiples.

Disclosure: Long ~10% position

Edit 25.12.2017 00:03: Fixed few bigger writing errors for sake of clarity.


Trading diary entry: Purchase of Kotipizza

This post continues my unpolished “Trading diary entry” series, this time about Kotipizza, which I bought about two years ago and erroneously sold by end of 2016 “because high P/E”, and now bought back of continued good performance.

My original and more detailed writeup from 1,5 year ago can be found here

6.10.2017: Bought Kotipizza shares @ average ~14,2 eur/share

I made the purchase because the growth this year has been 18% and in september the growth accelerated to 25 %, yet the forward P/E per my own extrapolation based estimate is only 16.

This is too low relative to theoretical value because of low beta, no reinvestment needs and growing very fast, justifying 20+ P/E multiple.

The position is now 5%. The trade execution was 2,5% at the time two times a row, so it was barely within the 2,5% per trade rule.

But the first trade was made as I was looking at the stock at work after the (excellent) september system sales release, and the boss came to the office, so I panicked and pushed the purchase button.

So the trade was made emotionally which is bad (but to my defense I have been following the stock for years and more deeply yesterday and this week, so the actual decision had probably been made by some side of my brain earlier and the situation just being the trigger for action).

The second trade, few hours after the first trade, after the work day, I played around with Kotipizza’s numbers more, which basically confirmed my earlier earnings estimate for 2017E and thus implied 16x forward P/E.

I compounded my earlier trade execution error, as the decision was also made emotionally, but this time probably from “fear of missing out” because “the forward multiple is so low, because the online channel is getting traction and because the store network is expanding again and because I’m fan of the concept”.

So, I like the brand and it’s potential but dislike the management, because excess salesmanship, focus on EBITDA and strategy to purchase new concepts, not focus on Kotipizza which is unique.

The multiple is quite low and DCF models with 8% wacc and high growth in first years and then slowing growth after that, points to well over 20 eur valuation i.e. significant upside.

The question, rather than the exact revenue forecasts, is the growth trajectory and durability of earnings/market position.

The growth trajectory is partly function of appeal of the physical store concept and related marketing.

These are working excellently currently and there is plenty of room for new stores (say 50, implying 20 meur more system sales with 0,4 meur average store sales, which is probably too low estimate of current average store performance).

Restaurant concepts come and go, generally, but there are some that seems to last for decades, the likes of MCD, Taco Bell, Dominos, Pizza hut, Burger King, AND KOTIPIZZA.

Kotipizza has brand equity from the eighties and it’s the ONLY big nationally known fast food chain focused on PIZZA in Finland.

And few years ago, when Kotipizza was failing, the failing meant slower relative performance to market, not some sudden death or loss of competitiveness scenario, re the well published retail deaths recently.

People are sticky for good food and promise of consistency, that the 30+ year Kotipizza brand gives, IMO.

The store concepts are cheap to build (70 keur) so they work profitably in smaller towns, where they have big advantage because the markets are too small for big international brands and because they are the only BRANDED fast food chains option on smaller places.

This has all kinds of advantages and some people want that experience and status signaling, not kebab.

And for out-of-town people, who don’t know to what local kebab you can actually go, the branded fast food chain might be the only option.

In big cities, most of the stores are in populated living areas, not in prime retail/city center locations serving mostly the eating home market, either by store pick up or home delivery.

They are smaller local micro markets where there is no big fast food chains to compete but local kebabs and equivalents.

Now that, with the new concept and marketing and brand focus on signaling quality and sustainability, the customer might perceive that Kotipizza’s higher prices are actually justifiable, as against the old concept, marketing and brand, where the prices were higher but the (signaled) quality image low.

Actually, I think the main explanation for the sudden change in Kotipizza’s performance is the new congruence between premium prices and high quality image, as opposed to old incongruence of premium prices but perceived low quality.

As now Kotipizza’s concept, marketing and brand image is evidently working, each of the micro local Kotipizza franchises relative advantage has improved especially as the franchisees’ marketing association pounds Kotipizza’s message in national television at prime time.

Local kebabs do not and will not have this weapon.

The big growth case is the online channel, which has changed the international pizza markets where the big international brands have been winners and local kebabs the losers, per my perception based anecdotal evidence from reading stuff online and UK Dominos annual reports – main reason being lack of marketing and home delivery capabilities, and also to some extent proprietary online application where they control the channel (Kotipizza has hybrid approach, it has own app and 3rd part app called Wolt).

Kotipizza is growing 30%+ online and more and more franchisees are offering the home delivery option.

The big question regarding the valuation is how long can the growth continue and it’s difficult to give definitive answer to that.

There are a lot of local kebabs from who Kotipizza can take market share.

General retail is in trouble which will open better and cheaper locations in the prime retail areas.

When competing from the leases, Kotipizza as national brand as a lessor is an attractive partner.

In the prime retail areas the average store sales could be significantly higher than they are in the outskirts, where most stores are currently located.

In the prime retail positions the stores would be within delivery distance of lot of office workers, which could, with the online channel, boost sales significantly.

The online sales are currently 10% of sales while international at fast food chains the share is 50%.

Kotipizza will have the same IMO, just don’t know when.

The nice thing about the shift of sales to pizza apps is that people order more often and with bigger average tickets than in eating in store/via phone, at least it’s the Dominos UK experience – it’s just so low friction and so much easier to make the orders than alternatives (Kotipizza has panic button in their app, so when you have cravings the warm pizza arrives at your home with one push of a big red button within half an hour).

So, because of the growth trajectory and the low valuation, the I bought the shares

“Trading diary”: Danske Andelskassers Bank

So, I keep trading diary of (almost) all investment decisions to keep track of them and to remember why I did what I did.

This is not “polished” blog post but quick thoughts on what was running at my head at the time of my decision. I usually don’t publish them because they are not mostly readable, but this one I decided to publish to keep the blog alive and it became readable with quite little editing:

28.8.2017 Bought additional 5% position of DAB shares @ 5,45

Today I bought additional 5% position of Danske Andeelskasser bank @ 5,45 €/share because 2017E P/E was under seven and PB 0,64.

Earnings have increased significantly as loan write downs have decreased significantly, on back of improved situation in agriculture market.

The bank has horrible underwriting history and it almost went under in financial crisis and had to be bailed out by government and later by new shareholders.

The thesis is that the bank is worth 10x earnings(2017E) or book value or 7,9-8,5 € share, vs. the 5,65 closing price. With the target prices the upside is 40-50 %.

The earnings forecast is based on Q2’17 net interest and fee income, 2016 OPEX and slightly lower net write downs than annualized H1’17 net write downs would indicate (this because they are trending down and were actually zero in Q2’17).

The risk is that the agriculture economy turns back to declining trend as opposed to improving trend, thus affecting net write downs.

The positive risk is that the improving trend continues and there is significant write down reversals, which would improve book value.

Other risk is owners and management. DAB was “cooperative bank of cooperative banks”, or something like that, and now majority holders are some funds owned by the owners of the old cooperative banks(31%). The board is selected for two years and the same guy has been the chairman for ages.

The annual reports look like political campaigns to serve the local agricultural communities, which are DAB’s main customers.

There are regional “shareholder committees” which I don’t know what they are. It’s probably some reminiscence of the old cooperative system for the mostly local shareholder-customers to “communicate with the bank”.

The bank uses its own funds and time to arrange some concerts and parties for the committee.

For non-Danish outsider it seems that the shareholder-customers hang out together occasionally and then give loans to themselves to keep their (mostly agriculture) businesses running, but I’m probably exaggerating.

Positive is that there is activist investor, Lind Invest, as a shareholder (20%) but they failed to get their rep to the board recently.

Positive is also the recent improvement in performance, which seems to have some wings. At least the management has positive outlook.

If so, there is some serious potential for multiple expansion. Someone on twitter calculated that if Q2 core earnings are annualized the P/E 4 (thank you for the idea!). My forecast is based on higher write downs so “my” P/E 7.  Nevertheless, the multiple looks low.

The business model is based on high net interest and fee income, high OPEX, high write downs and low leverage as opposed to Handelsbanken which has low net interest and fee income, low opex, low write downs and high leverage, so some discount to good bank multiples is certainly warranted, but I’m not sure it should be this high.

DAB is a local bank with 10,9 BDKK balance sheet and most of its loans are for local agricultural communities.


Apetit: Food Conglomerate Turnaround (Part 2)

….continuing from Part 1.

4. Problematic parts that seem well contained

As said in the Part 1, after the Seafood business disposal Apetit has only one problematic part, namely the Food Solutions segment.

But it was also shown that the Food Solutions segment includes the highly profitable Frozen Food business.

Therefore, it must mean that something else than the Frozen Food business is causing the losses for the Food Solution segment.

By cleaning out the Frozen Food business EBIT and allocated concern costs from the Food Solutions segment, it can be seen that the “something else” is losing some serious money:

Food solutions mystery

And looking at the Fresh Food business, in all likelihood it has been the main contributor for the losses, although there is only information up to 2015 (in addition to other restructurings the Fresh Food business was merged to Frozen Food business in Q1’16):


So, the Fresh Food business has been deteriorating fast and in 2015 operating loss was -3,7 meur.

As the table shows, in 2016 the losses were probably significantly higher:

Firstly, revenues have declined compared to the 2015 partly because the legacy HORECA business is in difficulties due to weak market and partly because according to the new strategy business focus has been shifted to consumer products in retail channel.

(By clipping and gluing the merged subsidiaries it can be estimated that the revenue decline has been at least 2 meur.)

Secondly, distribution, marketing, product development and other reorganization costs have probably increased because of the shift in business focus and especially because of the new prepared vegetable mix and fresh salad product launches.

(Similarly to the revenues, it can be derived with some accuracy that the Fresh Food segment’s EBIT contribution was about -7 meur but estimate is very rough as during the Fresh Food/Frozen Food merger unknown amount of some other costs were also shifted to the new subsidiary.)

While the business reorganization seems to have caused double whammy of declining revenues and increasing costs, the effect will most likely to be temporary.

The mentioned new products are targeted for consumers and management has very high expectations for them. They play a key role in achieving Apetit’s new ambitious 20%/~20 meur revenue growth target for the Food Solutions segment by 2018.

To get indication of the opportunity, competitor (and potential acquisition target) Fresh Servant Oy AB, that services the same HORECA customers and makes the same salads and vegetable mixes for consumers as the Fresh Food business, has about 42,8 meur revenues and 3,2 meur EBIT (7,5% margin).

With the same margins and the 40 meur target revenue (20 meur existing revenues + the ~20 meur growth target), the Fresh Food’s EBIT could be about 3 meur. Add that to the Frozen Food’s 4 meur concern cost adjusted EBIT and the Food Solution segment’s EBIT could be 7 meur in the future (vs. the current -2,5 meur and vs. the management’s 5 meur vision by 2018).

More over, management’s policy to not tolerate unprofitable businesses and rationalizations made in the Seafood business before disposing it indicate that the management is willing and capable of cutting cost and getting rid of businesses that are not working out.

Therefore my conclusions is that the Fresh Food business losses should be interpreted as temporary and thus not capitalized in valuation (by say taking historical average earnings and multiplying them by x).

But to account for the likely future losses from the Fresh Food business somehow, I haircut my original valuation by arbitrary 10 meur (say 5 meur annual losses for two years).

All parts EV

The negative valuation for the Fresh Food business is slightly unfair because for sure the management is incurring the temporary losses because they think that the NPV of future profits will greatly exceeds the accumulated losses and investments.

After taking into account the net debt and proceeds from the Seafood business equity valuation looks as follows:

All parts equity value

Compared to the current 86 meur market cap the baseline upside is about 26%.

Add in the 5% dividend yield, potential catalyst from the management actions to fix the problematic business units by 2018 and significant discount to book value, the short-term risk/reward profile looks pretty reasonable to me.

5. Excess liquidity for acquisitions as result of the divestments

The previous valuation was based more or less on current facts and situation.

But as mentioned many times, the management has ambitious growth and profitability targets for 2018:

Management vision

The stated vision is to grow revenues in the Food Solutions segment by 20% mainly through the new product launches and in the Grain Trading by 25% mainly through Baltic expansion.

There are also new profitability targets for each segment.

For the Food Solutions segment profitability targets seems realistic as the Frozen Food business is already exceeding the whole segments target margins and peer companies in the problematic Fresh Food business indicate that it can be very profitable business.

As for the revenue growth target, early signs are good and the vegetable based food trend surely offers nice tail wind.

On the face of it, the Grain Trading and Oil Seed Products segments’ goals seems achievable too.

By increasing consumer products’ share in the Oil Seed Products business revenue mix the profitability “should” increase and by expanding Graind Trading capacity in Baltic by 25% the revenues (and margins) “should” grow.

But rather than try to guess what will happen I have tried to get grasp how achieving the goals would affect the valuation.

Management vision valuation

Using management’s vision numbers and same valuation multiples as in my original valuation, except for the Grain Trading business where I use 1,1xNAV instead of 1,0xNAV to reflect the management’s envisioned 14% ROIC, the share would be worth 24,5 eur/share. That’s 77% more than the current share price.

More over, if achieving the goal would take 1-3 years the 0,7 eur/share annual dividend wouls add up to 2,1/share.

Together the “best case” exit value 24,5 eur/share and the 2,1 eur/share cumulative dividends would bring the potential pay off to 26,6 eur/share and upside from the current 13,9 eur/share market price to 90%+.

Because of the new management’s clear strategy and past actions following the strategy (new products, cost rationalizations and non-core business divestments), achieving the envisioned goals seems like being decently probable outcome.

More over, after the Seafood business disposal Apetit will have approximately 20 meur excess liquidity to do growth acquisitions.

The cash could be coupled up with say 45 meur financial debt to stay at management’s target of 40% equity ratio (actual leverage potential to stay within the self imposed 40% equity ratio depends of the target companies’ balance sheets).

The 65 meur potential purchasing power would buy some serious value enhancing earnings if done in the fragmented SME market where valuation multiples are very low compared to public markets.

To get some indication of the opportunity, if the 65 meur purchasing power would be used to buy private businesses with say 8x earnings multiple, the hidden earnings potential behind Apetit’s over capitalized balance sheet is 8 meur.

That’s almost 60% increase relative to the envisioned 14 meur EBIT for 2018. Value effect would be even higher if the incremental earnings would be valued with say 10-15x earnings.


From decent return perspective the question is whether Apetit is worth a book value.

With all of the core businesses being profitable, growing and leaders in their industries the answer is resounding yes. More realistically, they are probably worth significantly more.

But currently the profitable core is hidden under the Fresh Food business losses. As Fresh Food business is at heart of the management’s growth strategy I’m not too worried that the losses would continue for very long.

If the book value or my base line sum of parts value, which are almost the same, is reached the base line upside is 26% +5% from dividends.

With the new management as a catalyst the short term expected return look reasonable.

But the real icing on the cake is if the management vision will be realized and if the excess liquidity provided by the Seafood business disposal is utilized in earnings and value enhancing acquisitions. For if both of them happens the potential return easily exceeds 100%. More over, given the time frame we are speaking here, it could happen within few years (for example the management vision is for 2018).

With high subjective probability for making reasonable return in the base scenario and decent probability of making high return in the management vision/acquisition option scenario the outcome distribution seems attractive for me. This coupled with margin of safety from profitable core businesses, dividend commitment and sub-book value market price.

(Part 1 of the post can be found from here).

Disclosure: Long Apetit with 7% position

Ferronordic prefs update: IPO conversion special situation

In its Q1’17 report Ferronordic Machines, a Swedish Volvo construction equipment dealer operating in Russia, announced that it’s taking first steps to (long waited) IPO for their common stock on back of excellent performance in recovering construction equipment market (volumes up 90%).

This is good news for preference shares as they are convertible to common stock if and when the common stock is IPOed.

Technicalities are a bit complex but essentially the preference share has 1300 SEK/preference share purchase power to buy the common stock in the event of IPO.

Assuming the IPO price for the common is close to fair value, then with current 1070 SEK/preference share market price one can buy the common shares with about 20% discount to fair value by definition.

In addition the preference share has constantly increasing dividends, which from next dividend payment onwards (next October) will be 120 SEK/preference share annually (60 SEK semi-annually).

The exact words of the IPO-plan announcement were that “the Board has decided to initiate the process of evaluating a potential listing of the company’s ordinary shares on Nasdaq Stockholm.”, so the IPO is not certain and the date is not known.

If the IPO is one year from now, assuming the 120 SEK/preference share total dividends and that the received common stock from the preference share conversion can be sold after the IPO (and the related lock-up period) at the same 1300 SEK total price as they were purchased through the conversion, the upside from the situation is 30%+.

With good growth prospects (Russian turnaround, growing Volvo/Renault truck aftermarket business and new product representations) and profitable operations (especially the stable after market segment) the common stock might be worth owning as emerging market cyclical growth/turnaround case even purchased at fair value.

With the preference share the common stock can be purchased with nice discount.

Disclosure: Long Ferronordic Machines with 19% position.

Older writeups:

Portfolio and blog situation update Q1/2017

Ferronordic Machines Q3: Russia turning?

Ferronordic Machines: Russia, P/E 5 and 30% growth

Cheapest stock of the week: Ferronordic Machines




Apetit: Food Conglomerate Turnaround (Part 1)

This post got a bit long so I decided to divide it to two parts. Part 2 can be found here.

Month or two ago a reader sent me a question about my recent purchase of Apetit, a Finnish food conglomerate, which was one of the first stocks I wrote about when starting the blog about two years ago.

Saw your recent tweet on buying Apetit – what changed in your opinion since this write-up where you passed? Will they actually divest any of the underperforming businesses? EBIT has continued to decline every year since 2011… Are management’s targets of 20m in EBITDA by 2018 realistic?

At the time of first the writeup Apetit was low P/B underperformer with many unprofitable businesses. The decision was not to invest because I didn’t see catalyst that would change the situation.


But now the situation has changed as Apetit has

1) New ROE focused management and strategy

2) Divested underperforming assets

3) Profitable and growing core

4) Problematic parts that seem well contained

5) Excess liquidity for acquisitions as result of the divestments,

leading to my purchase based on thesis that the current discount to book value is no longer warranted (P/B 0,8).

More over, Apetit could be worth significantly more than the book value if the management’s new vision will be materialized.

1. New ROE focused management and strategy

Apetit’s new CEO is from StoraEnso where he was one of the architects of their turnaround.

He’s a dry engineer, sets clear measurable goals, follows them and is seemingly a cost guy; he was managing StoraEnso’s declining printing and paper business, where the focus was on cost and constant restructuring.

Apetit’s new mission is to “create wellbeing from vegetables” and vision to be the “leader in vegetable-based food solutions”. The strategy is to capture the fresh, vegetable and organic food trend which are winning shelf space in retail stores.

Biggest change is that Apetit is no more just frozing and packaging peas and carrots, but developing new higher value added products (few examples later). Slide from last CMD deck pretty clearly shows the new direction:


New products in existing businesses (like juices and berries), expansion in fresh products, new processed products in grains and new food based services and digital solutions.

Strategy is to expand organically and through acquisitions in the fragmented market.

2. Divestment of underperforming assets

In addition to shifting focus to vegetables and product development one of the key messages has been that Apetit will only tolerate profitable businesses.

From segment reporting it can be seen that there is a lot of work to do in the Food Solutions and Seafood segments:


Just recently, the Company made announcement that the Seafood segment will be sold (for about book value, which is surprisingly good price given that the segment has never made a profit), so clearly the management is living up to their words on focusing on vegetables and profitable businesses.

After the Seafood business divestment the Company is left with

1. Unprofitable Food Solutions business

2. Profitable Grain Trading business

3. Profitable Oil Seed Products business

4. Cyclically profitable JV interest in sugar production business (not shown in the segment reporting)

That is, there would be only one problematic part in Apetit i.e. the Food Solutions segment. But let’s look at the profitable parts first.

3. The profitable and growing core

Frozen Food

The crux of my investment thesis is that the “problematic” Food Solutions segment is significantly better than it looks from the surface (-2,6 meur operating profit in 2016, biggest loser in the concern).

For the Food Solutions segment is actually many different businesses/subsidiaries; a Frozen Food business (Apetit Ruoka Oy), a Fresh Food business (from 2016 onwards in Apetit Ruoka Oy but before in Caternet Finland Oy), Service Sales business (before the divestment in the Seafood business through Apetit Kala Oy, but currently probably through Apetit Ruoka Oy) and some other supporting and real estate holding companies (Apetit Suomi Oy and Kiinteistö Oy Kivikonlaita):

And looking at the most important unit in the Food Solutions segment, the Frozen Food business, it seems to be the largest profits center and highest quality part of Apetit:

Frozen food profitability

The business comprises of frozen vegetable products (mixes of carrots, peas, corn etc.) and frozen ready meals (soups, pizzas etc).

In 2015, the business had 4,5 meur operating profit with high margins and ROIC. In 2016 management said that revenue grew 5%, and if EBIT-margins were at the same 10% level as they were in Q1’16 (last known numbers) then EBIT in 2016 has been about 4,9 meur.

Reason behind the growth after many years of stagnation is the new product development strategy and the new product launches (for example the new vegetable based ice cream, vegetable based meat balls and vegetable based hamburgers).

Apetit Kasvisjauhispyörykät 240 g

Apetit Mexican kasvispihvi 170 g

As low beta branded consumer product business focused on booming vegetable sector it could be worth a high multiple (look at the international FMCG business multiples and you see what I mean), but I will go with more conservative valuation.

With standard 10xEBIT multiple enterprise value would be about 49 meur and if all of the Food Solution segment’s 0,9 meur concern costs are allocated for the Frozen Food business and capitalized with same multiple, about 40 meur.

Grain Trading

The grain trading segment buys and resells half of domestic grains in Finland and has 40% market share in exports, so it’s a major player in the Finnish food supply ecosystem.

Currently it distributes around 0,8 Mt of grains and targets about 1,0 Mt in 2018 by expanding business to Baltic and by utilizing its new export terminal in Finland.

Grain Trading

Profitability varies with grain prices and volatility. Currently grain prices are historically low so 2016 profits are probably at low-end of the potential spectrum.

If the Baltic expansion succeeds, grain prices improve and future 14% ROIC target materializes earnings could be significantly higher in the future.

The growth prospects, important strategic position in Finnish food industry and with most assets being liquid grain inventories it would be hard to believe valuation below net asset value for the segment (26 meur).

Oilseed Products

Oilseed Products segment is Finland’s most significant producer of vegetable oils as the segment has the only large-scale vegetable oil production factory in Finland. The output is sold mainly to Finnish food industry (low margin) but also to consumers and for pets (high margin).

Oilseed produc pictures

The business is nicely profitable and the revenues have been growing in recent years.

Oil Seed Products

The segment will put more focus on higher value added consumer packaged products in the future, which management expects to have significant positive impact on the profitability (target EBIT 6%).

As with the Frozen Foods and Grain Trading, the Oil Seeds Product segment has excellent market position. It’s stable, growing and profitable, so it’s clearly worth at least the net asset value but probably significantly more. With standard 10x EBIT multiple the segment would be worth 27 meur.


Sucros operates sugar factory in Porkkala and beet sugar factory in Säkylä and Apetit has 20% JV interest in it. Sucros is the only company producing sugar in Finland so it has very good market position domestically.

The business is more or less function of international sugar prices and has been consistently profitable, excluding 2015 when sugar prices were at historically low levels.

Apetit’s share of the Sucros profits have averaged 2,6 meur in last 10 years.

Apetit’s share of Sucros net profit (Source: Inderes):

In 2016-2017 prices have recovered so Inderes analysts are estimating improving profits for 2017-2018.

EU sugar price trend 2006-2017 (Source: EU sugar price dashboard):
sugar prices

Apetit’s share of current book value is about 22 meur.

Apetit’s share of Sucros equity (Source: Inderes):

In my first Apetit post in 2015 I wrote about Apetit’s existential threat. At the time, according to the  Finnish agricultural research institute, sugar production in Finland was under threat because EU was abolishing sugar production quotas.

As of today, I have very little new to add to my original discussion except that the plant closure seems like more distant risk. There has been significant investment to production capacity and there is new contract with sugar beet farmers to secure raw material supply for few years.

The management has said that they see the 20% JV interest as “portfolio investment” and that they are currently watching where the European and World sugar market is going(@27:10). My interpretation is that it will be sold eventually as the relationship with the 80% owner Nordzucker has not been easy.

As the average net profit (>2 meur) implies good ROE for the current book value (~22 meur) so P/B=1 valuation seems appropriate.


So per the math and thinking just presented Apetit’s “profitable and growing core” is worth about 115 meur, which is significantly more than the current 86 meur market cap.

Good parts EV 2

But before diving in to that, let’s look at the problematic parts in Part 2.

Disclosure: Long Apetit with 7% position

Millet Innovation (and self rant on value/tech investing controversy)

Quick administrative thoughts

In my last week’s portfolio update I promised to do a writeup on Millet Innovation, a French light orthopedic company, to get back on reading and writing routine after having complained about my big cash position and lack of new investment ideas for quite some time.

The public promise to come up with something in writing, good or bad, seems to be working as I have been consistent in throwing one or two hours of research every day during the work week. (It was lighter than usual work week though.)

To get some context on this weeks writeup which is about growth and not traditionally low P/E, I have been primed by value investing canon to not consider growth and tech investing as serious endeavour. How ever last week I read two important articles that seem to have expanded my thinking on the matter.

First, Wexboy came with a great piece on Google and second, Scott Hall wrote a post on his transition from traditional value investor to also include growth/tech investing in his repertoire.

Of course the same topics have been on the table recently as famously non-tech investor Warren Buffett surprised the investment world with his big position on Apple.

What the articles did was that I recognized an automatic shut down mechanisms of ideas in my head, which were based on arbitrary rules like “if it’s tech or if the P/E is more than 10, forget it”, creating a non-productive tunnel vision.

Now I recognize better that’s a learned habit, form of laziness and sign of lack of imagination, for if you kill an idea automatically, you don’t have to think about it (brain likes it easy).

Sure, the arbitrary rules can save your ass few times but when you kill every potential idea automatically you lose many opportunities and are actually not thinking about them seriously ever. And hard thinking by yourself is the most important thing to do to improve as an investor.

In the future I will try to stay more open for any idea and to not categorically kill them. With that self rant, here is my this week’s promised writeup on Millet Innovation (and let it be my first attempt to expand my thinking to new areas).


Millet Innovation is a French light orthopedic product company focused mainly on feet. They have full lineup of products under “Epitact” brand, which the company claims to be the leader in its niche in France and in other European countries.

Their main product is corrective and protective products relating to foot deformation called “Hallux Valgus” or “bunion”. As non-medical expert’s explanation, the deformation is about big toe’s bone movement to point to “wrong” direction, causing pain.

Akseli Gallen Gallela _Akka ja Kissa.PNG

Source: Akseli Gallen-Gallela “Akka ja Kissa” (“Old lady and a cat”)

Millet Innovation’s products try to prevent the movement of the bone, release pressure and protect the foot:


Source:  Millet Innovation

Products differ from competition by being “thermoformable” to users foot and by being light and comfortable material, so that they can be used in any situation anywhere with any shoe.

With quick inconclusive google analysis competitors’ products seem to be heavier and more complex or seemingly uncomfortable to use.

Competing products:

Vaivaisenluun yötuki

Vaivaisenluun sidetuki

Vaivaisenluun suoja ja varpaanerottaja

Source: (A Finnish feet care specialist webshop)

About third of people have some form of Hallux Valgus and it’s correlated with age, unused muscles and too tight shoes and is more probable with women.

Given the prevalence of the deformation there seems to be big market potential but I don’t at this point know what percentage needs medical treatment and what percentage of those can be addressed with Millet Innovation’s products.


Before the corrective products, Millet was focused on protective and other foot products which brought the company up to 15 MEUR revenues in 2010.

The first corrective “Hallux Valgus” products were launched in 2012 and they have been the main growth driver up to 2015, when the revenues were about 22 MEUR. The company’s communications imply that the current Hallux Valgus product range might have reached its maturity in the pharmacy channel.

There is how ever new night related Hallux Valgus product released recently, so the growth history seems to be far from over.

Furthermore in 2015 the company launched totally new sport related lineup (for knees, shins, ankles, Hallux Valgus, toes etc.) as a new leg of growth.

Protections tibialesGenouillère Sports de GlisseProtections ongles bleusProtections anti-ampoules

Source: Millet Innovation

Financials and growth

In my mind what makes Millet Innovation interesting is that essentially they take a piece of (in-house developed state of the art patented) fabric, puts it in to a package and slaps a brand on it, and then sells it with high profit margin for consumers (mainly through pharmacy channel).

For example the Hallux Valgus product pictured at start of this post retails for 20 euros in Millet Innovation’s own webshop and the concern level gross profits after material costs are about 85%.

My understanding is that the Hallux Valgus and similar products last for few months in constant use so there is element of loyal customers and repeated business, making Millet Innovation interesting also as a stable consumer product company, not just as a growing product development company.

High profit margins continue to the bottom line. Operating margins have been 12-20% in 2010-2015 and ROE 20%+ at all times. Revenue growth has been 7% a year as new products has been constantly developed and launched.

Millet Innovation Key Financials 2010-2015

Current situation

Millet Innovation is a growing small cap with both technological product development company and stable loyal consumer product company characteristics in it.

Market cap is 49 MEUR and earnings were 3,3 MEUR in 2015 and according to management’s estimate will be “about”3 MEUR in 2016.

Thus, P/E is about 15-16 and excluding the 3 MEUR net cash ex. cash P/E about 14-15.

The valuation doesn’t imply screaming bargain but given the decade long consistent profitable growth track record it doesn’t seem like very expensive either.

In H1 revenue grew 8,8% and EBIT 5,6% but you might have noticed that the management’s earnings estimate for the 2016 was actually lower than the actual earnings in 2015. The decreasing earnings forecast despite good first half could be taken as first signs of stalling growth and that the stock is too expensive.

There was however some seasonality in the H1 revenues as the channel happened to fill their inventories, which the company is apparently not expecting to continue in the second half.

And the profits are probably expected to be pressed down in 2016 because the company has decided to increase their marketing and sales spending, which should convert to revenue and profit growth later.

Personally I’m not too worried about the expected decrease in 2016 earnings because near term growth prospects looks still attractive:

1. New light orthopedic products

Millet Innovation has recently launched new “Hallux Valgus” product for night use and similar product for thumb.

Sales started in France and Italy in H1’2016 and the launch continues in other European countries in H2’2016 and onwards.

According to the management’s verbal commentary, in France the new product launch was successful and they are expecting significant growth in the future.

One key element in the expected growth in France is that the new products were accepted to the social security fund’s “refundable product list”.

I don’t know the details of the French social security system but my understanding is that  the customer gets some money back from the fund if he/she decides to buy products that are in the list.

The company says getting to the list is “turning point” for the  Epitact brand, suggesting that the effect to revenues and profits could be significant.

2. New Epitact Sport lineup

I earlier commented that the new sport product lineup could be Millet Innovation’s next leg for growth.

It has been in the French market since H1’2015. In H1’2106 the company reported of new initiatives and investments to marketing and distribution channels, suggesting from reading between the lines that the launch has not been overnight success.

To me slow development doesn’t actually sound like very surprising if they have tried to sell the sport products through pharmacies (as is my understanding) instead of where people usually by sport stuff.

How ever, the lineup was launched in other European countries in H1’2016 which according to management’s verbal comments developed particularly well in Spain so there seems to be some variation how well the products are received in different countries and thus that the apparently slow start in France is not conclusive of the sport lineups overall potential.

Good news in the H1’2016 report was that the Epitact Sport brand/products was accepted as official partner with National Institute of Sports in France, which the company says helps build the brand.

In addition to marketing investment they have opened new distribution channel in sport stores, which for me seems to be right place for the products, so it seems that they really are trying to make the product work and that the they are adapting to the new situation and that the launch is moving forward.

3. New distribution agreement in Germany

The company signed a new distribution contract for two of its Hallux Valgus products with “major” pharmacy chain Germany in 2015 because the cooperation with the old distributor was not working.

There was no sales in 2015 in Germany which is probably the biggest potential market in the Europe, suggesting big growth opportunity in the future.

In H1’2016 the company verbally reported good progress with the new partner but mentioned that the “data doesn’t make it possible to determine full potential of the contract”.

The reports are in French and I understand very little French but my interpretation is that “full potential” could be very significant.

Just for context, if we take Millet Innovation’s revenues in France as a guide, which is similar size market to Germany,  the revenue potential could be ~10 MEUR.

The 10 MEUR increase in revenues would be about 50% from the 20 MEUR group revenues in 2015, very significant potential increase.

(But note that the 10 MEUR revenue potential in Germany would require that the distribution agreement will be expanded to include all Millet Innovation’s 50 or so products, which doesn’t seem impossible if things go well with the current products.)


Millet Innovation is a growing product development company. They have their own R&D department which comes up with new materials, products and patents constantly. The historical growth indicates that the R&D is high quality and thus that it’s reasonable to expect new products in the future also.

There are also some immediate catalyst that could drive the near term growth (the sport lineup, the new night Hallux Valgus products, the acceptance of some products to social security refund product list and the new distribution agreement in Germany).

More over, the products are high margin, branded, patented and differentiated consumer products that needs to be replaced with constant intervals, making the demand seem predictable and repeatable and thus potentially worth a premium multiple.

Given the historical consistent growth and the near term prospects the 14-16 PER doesn’t seem like a bad deal.

Millet Innovation is a family company. About 70% of the shares are under Millet family’s control and liquidity is thus very low, advantage for small investor like me. Salaries are reasonable (about 200 KEUR for the family member CEO) and the company pays dividend every year. Reports are surprisingly open extensive for French company.

For me Millet Innovation is very potential investment in the future because of the growth potential, branded consumer product characteristics and reasonable valuation. My french is so bad that I haven’t yet fully understood the company’s situation and products and would love some feedback from French colleagues if there is anyone familiar with the situation.

Given the language barriers I’m happy about this week’s result of meeting my goal to do a writeup, good or bad, from random stock I stumbled on this week. I’m happy that it happened to be very interesting case and I’m happy that the publicly stated goal  kept me focused on one thing for the whole week.

With that, I will continue with the publicly stated goals and promise to come up with another writeup by next Sunday before midnight Finnish time. I will keep focusing on the Millet Innovation’s growth prospects and try to get better grasp of what is happening in the company.

Happy hunting,


20.3.2017 Edit: Few bigger writing errors corrected.