EXOR

Exor: thoughts post 2020 annual shareholder meeting

Summary

Quite reassuring shareholder meeting, even though management rarely discusses serious issues at a public forum.

Key messages:

- Insurance business is seeing significant improvement in industry conditions (looks like PartnerRe profits should be higher in the mid-term).

- FCA / PCA merger on track including special dividend of EUR5.5bn to be paid by FCA.

- Exor remains committed to building great companies, but are ready to wait for the right opportunity (current capacity is to deploy c. EUR1.5bn of cash on new investments, although this should rise after special dividend by FCA).


PartnerRe

Positive outlook for the industry and PartnerRe. Believe that the value of PartnerRe is now higher than pre-COVID.

Insurance market is hardening, policy prices are improving. This follows a three-year period of soft market. One reason for stronger market is capital scarcity.

Solvency ratio is one of the highest in the industry at 250% (SwissRe – 200%, SCOR – 210%).

Liquidity in excess of EUR10bn.

COVID-19 losses at just EUR18mn so far (mainly due to events cancellation), expect more losses in 2020 (but not material and less compared to peers due to different mix of policies).

Expanding Life & Health business which is a priority, underexposed to mortality risk and pandemic.

Confirmed that the bid came from Covea. Not interested in merger discussions with other partners as the market looks so much more attractive now.


FCA / PSA merger

Good progress so far, on track. Regulatory process as planned. Timeline for completion confirmed as previously indicated – deal closing in 1Q21 at the latest.

Do not see any changes to the terms of the deal including special dividend to be paid by FCA. Referred to public commitment to the deal by both companies as well as Peugeot family.

Reiterated that deal terms are final including cash dividend to be paid by FCA to achieve 50/50 structure. Exor to hold 14% interest in the combined business.


CNHI

Looking for a new permanent CEO following disappointing 2019, chairman Suzanne Heywood stepped in as CEO.

Process of separating into off-highway and on-highway businesses on its way.


Financials

Gross debt EUR4.2bn, short-term – EUR0.5bn. Average maturity – 7 years, average cost of long-term debt – 2.5%. Gross debt went up by EUR790mn in 1 year.

Cash levels expected to remain broadly unchanged at EUR500mn by end of 2020 (vs EUR423mn as of end 2019). Key sources of cash – dividends (EUR96mn) and new debt (EUR782mn); key uses of cash – investments in Via and Gedi (EUR182mn and EUR211mn, respectively), interest and G&A (EUR108mn), dividends to shareholders (EUR100mn) and debt repayment (EUR200mn).


Targets

-        NAV per share ahead of MSCI World
-        Gross debt not more than EUR2bn, LTV under 20%
-        Generate FCF in excess of dividends paid
-        Cash holding costs less than 10bps (measured as % of Gross Asset Values)


Other points

Committed to building great companies.

Set up third-party capital to manage liquidity of Exor and PartnerRe. Will be focusing on investing in top 50 family run companies. Expect to outperform the market this way and also learn about best practices of running family businesses. Confident that family companies have more resilience which is crucial during crisis times.

Markets are not cheap. Some pockets of value in tourism and leisure, oil & gas / commodities. Have been capturing some of the opportunities through Exor’s financial investments. Willing to be patient to wait for the right opportunity to invest.

Firepower of about EUR1.5bn to invest.

On FCA loan (as reported by media recently) – the loan would support local jobs in the auto industry in Italy which implies that it should not affect FCA’s ability to pay dividends after that.


Summary of Exor investment case

Exor is a publicly listed investment vehicle of the Agnelli family (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.

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 – legendary CEO of Fiat Gianni Agnelli. Elkann understands the crucial role of capital allocation for shareholder value creation and is often refers to Berkshire Hathaway as a corporate model.

We expect discount of Exor to the sum of values of its portfolio companies to narrow over time which provides the first source of upside to its shareholders.

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

In highly uncertain times of 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 stands out in taking long-term view and focusing on building great businesses, paying special attention to corporate culture of its investee companies. The company has strong alignment of interests between management, shareholders and holding companies.





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.