Exor: undervalued family holding, long-term compounder

April 10, 2020

Thesis

Exor is a publicly listed investment vehicle of the Agnelli family (the founding family of Fiat which holds 53% in Exor). Its core holdings include reinsurance business PartnerRe (100%), Ferrari (23%), FiatChrysler (FCA) (29%), CNH (27%), Juventus football club (64%) and a number of smaller private investments. After a market correction in March 2020, its stock is down 33% and it is trading at a 40% discount to NAV (Net Asset Value measured as the sum of market values of its holdings less debt and head office costs), while key listed assets are themselves trading at depressed prices (down 50% on average, from their 2020 highs).

Exor offers over 100% upside if its listed assets recover to their normal values and the discount at which Exor's shares trade relative to the NAV disappears.

Exor has delivered 18.9% annual compound growth of NAV per share since it went public in 2009 beating MSCI World Index which grew 10.8% per year over the same time period. Total shareholder return was higher boosted by annual dividends (0.5-1% yield).

For the past 10 years, Exor has been led by a young, ambitious CEO – John Elkann who was groomed for this role by his grandfather – a legendary CEO of Fiat Gianni Agnelli. Elkann understands the crucial role of capital allocation for shareholder value creation and often refers to Berkshire Hathaway as a corporate model.

The second source of upside comes from the continued growth of NAV – should it match its historic average, Exor's NAV would double in four years.

In highly uncertain times of the pandemic, the additional benefits of holding Exor is the value of its wide network of contacts across Europe which should help it to find new attractive deals that are unavailable to an individual investor.

Exor's management as it takes a long-term view and focuses on building great businesses, paying special attention to corporate culture of its investee companies. The company has a strong alignment of interests between management, shareholders and holding companies.

Valuation

Exor's market capitalisation is $12.9 which is less than the value of combined interest in four core listed businesses ($14.9bn). Exor's interest in the same four listed companies was worth $19.4bn pre-COVID pandemic (in February 2020). In addition to the listed assets, Exor has interests in private businesses, the largest of which is reinsurance company – PartnerRe. The European insurance company, Covea, made an offer in March 2020 to acquire PartnerRe for $9bn. Under the terms of the deal, PartnerRe will pay USD50mn of dividends to Exor before the deal is closed. Other private businesses have a fair value of $0.7bn, based on historical acquisition costs and/or average historic multiples.

In total, the current Gross Asset Value (GAV) of Exor is $24.6bn. After deducting net debt of $2.8bn and our estimated NPV of head office costs ($0.3bn), I arrive at market-based NAV of $21.5bn. Exor's shares outstanding (excluding shares bought during buyback from 2018) is 236.1mn. Exor NAV per share is $21.5 (EUR83.7).

EXOR valuation table by Businesses including Total and Net Asset Value
Given sharp declines in market values of core companies since the start of the pandemic, I think it is more reasonable to use a normalised valuation for the listed assets. I think such values could be achieved when macro conditions recover and market psychology changes from fear to a more conservative optimism.

Using the same methodology, I arrive at $101.8 NAV per share which is 104% higher than the current share price of Exor.

Given the company's track record of achieving 18.9% compound annual growth rate for NAV per share, there is a good chance that Exor's NAV could materially increase in the future (e.g. it could double in 4 years at the past growth rate). This growth represents additional upside to valuation coming from re-rating of core businesses as the macro environment normalises.

I think the current uncertain environment provides particularly attractive opportunities to deploy new capital for a company like Exor which has an extensive network of contacts among European businesses, bankers, private equities, regulators. $9.05bn of cash proceeds from the sale of PartnerRe as well as EUR1.6bn special dividend before completion of the FCA / Pegeuot Citroen (PSA) merger would be quite handy in this regard.

Why the opportunity exists? What the market may be missing?

I think the market is focusing on near-term challenges and lacks patience. It mistakenly associates Exor with a cyclical auto sector, with presence in the economically weak Europe and particularly Italy. With few analysts covering its stock and relatively small liquidity, such inefficiencies are not surprising. I review each of such 'misconceptions' below and explain why I have a different view.
        • Market is focusing on short-term uncertainty (time arbitrage). While the final impact of COVID-19 pandemic on the global economy remains unclear, I think the situation would normalise in the medium-term. It may take 6 months or 2-3 years, but it is unlikely that the world has changed for ever and the values of Exor's core businesses have been permanently impaired.
        I think investors may be paying too much attention to the possible risk of Covea walking away from the deal to acquire PartnerRe as well a risk of the FCA / PSA deal breaking up. I think the current price of Exor does not take into account the full price Covea is paying for PartnerRe as well as the benefits from the FCA/PSA merger. So even if neither of the deals goes ahead, the downside risks are quite low.

        • Exor is not just about a cyclical auto sector. The market mistakenly associates Exor with its traditional legacy business – FiatChrysler car manufacturer. In reality, FCA accounts for just 21% of Gross Asset Value, with Exor's asset portfolio having significantly diversified across different sectors and geographies. Ferrari accounts for a higher, 27%, of GAV. Even though Ferrari also produces auto cars, it is actually in the business of selling ultra luxury goods. It has the outstanding profitability (53% gross margin, 20% net income margin) thanks to a very strong brand, pricing power and super loyal customer base. PartnerRe which currently accounts for 37% of GAV provides Exor with an important float and cashflows.
        • Exposure to Europe / Italy. While Exor has indeed Italian roots, its business exposure is global. Ten years ago, two-thirds of its revenues were generated in Europe while today it is less than a third. US is the largest single market for majority of companies in its portfolio.

        • Exor does not have wide research coverage, while liquidity of its stock is fairly low. A typical large cap company in the US has 30 and in some cases 50 analysts following it (in addition to numerous articles on retail platforms). Exor is only covered by just 4 international brokers and 5 local brokers. Its daily average liquidity is about $20-25mn which is considerably less than the liquidity of more popular stocks which is often measured in 'hundreds' and 'billions'. With less investor focus, such significant undervaluation can exist. In other words, it is possible to buy an attractive portfolio of assets at a significantly discounted price.

        Risks

        • Macro. In the near-term, as key economies suffer the consequences of the lockdown, Exor's major businesses will face inevitable deterioration of financial performance. However, gross debt ($3.8bn) is relatively small compared to Gross Asset Value (15%), and has an average maturity of 7 years (at 2.6% average cost). Exor has EUR1bn of credit lines and cash position of $0.9bn.

        • Challenges faced by individual businesses. Besides a near-term economic recession, a number of portfolio businesses face mid-term and long-term challenges. For example, FCA has to address the rise of electric cars (and possibly autonomous driving later in the future). For now, this challenge is relatively moderate and should not be exaggerated. FCA has a partnership agreement with Waymo (subsidiary of Alphabet) to develop driverless cars. Reinsurance business (PartnerRe) is negatively affected by low interest rates and the recent increase in competition as new players have entered the industry in the past few years. In the near-term, insurance industry is facing risks of rising business interruptions claims following the COVID-19 outbreak.

        • Track record will be harder to replicate. I realise that 18.9% CAGR in NAV per share delivered by EXOR since 2009 can be partially attributed to a general period of rising asset prices and strong economic growth. Moreover, a significant value has been created by a single person – CEO of FCA, Sergio Marchionne. He merged Fiat with Chrysler, spun off Ferrari, CNH and several other businesses from Fiat, achieved radical improvement in operational efficiency and reduced leverage – all at the same time. In a way, 'low-hanging fruit' opportunities have been captured and delivering future value would rely more on new investments. The risk of inefficient capital allocation is higher than previously, although still insignificant, given the fact that the governing principles of Exor are similar to those of Berkshire Hathaway and other great capital allocators.

        • Single person risk. John Elkann, the largest shareholder and CEO/Chairman of Exor, has been instrumental in transforming Exor. I think it would take some time for Exor to expand its 'benchmark' creating risks in case of an unexpected departure of Mr Elkann.

          Thank you for taking time to go through this piece, dear reader. I hope your time was not completely wasted. I would be interested to hear your feedback which you are welcome to send to ideas@HiddenValueGems.com.
            DISCLAIMER: this publication is not investment advice. The main purpose of this publication is to keep track of my thought process to better assess future information and improve my decision making process. Readers should do their own research before making decisions. Information provided here may have become outdated by the time you read it. All content in this document is subject to the copyright of Hidden Value Gems. The author held a position in the stock discussed above at the time of writing. Please read the full version of Disclaimer here.

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