This is a sample of the Premium Content. This Monthly Stock Idea Lab was initially published in January 2024 exclusively for Premium Members of the Hidden Value Gems Newsletter.
The focus is on companies that meet the following five key criteria:
quality of business
financial performance
low leverage
insider ownership
attractive valuation
Two of the four companies are well-established family-owned businesses, one is a monopoly with a 70%+ EBIT margin, and another is enjoying strong demand exceeding pre-COVID levels, while its stock is still 19% below 2019.
Let's dive in.
Wilh. Wilhelmsen Holding ASA
Wilh. Wilhelmsen (WWI) is a Norwegian maritime holding company founded in 1861 by Morten Wilhelm Wilhelmsen. It is majority owned by the Tom Wilhelmsen's Foundation (52%) and is managed by the grand-grandson of the founder, Thomas Wilhelmsen, who is currently the CEO of the company.
The company’s market cap is less than the combined value of its net cash and public investments. In other words, the value of its private operations has an implied negative value (-$299mn) despite generating $82mn of EBITDA in 9M ’23.
Put differently, WWI is trading at a c. 40% discount to its NAV (if private operations are valued at 7x EV/EBITDA).
The company has three strategic and fully-owned businesses: Port Services, Ships Service and Ship Management. In addition to that, Wilhemsen owns stakes in five publicly listed companies with a combined market value of $2.2bn.
Its largest investment is a 37.9% interest in Wallenius Wilhelmsen, a market leader in the shipping of cars and trucks (the segment is commonly referred to as RoRo logistics). This business is also listed in Norway with a market cap of $3.7bn.
The second largest investment is an indirect stake (8.6%) in Hyundai Glovis, a Korean logistics company with a market cap of $5.5bn.
A few other stakes are held in private companies, including several joint ventures. All businesses operate within marine services and recently added a New Energy segment (e.g. offshore wind).
It is worth noting that the core operations are generally cyclical and have recently benefited from the strong market environment. The normalised earnings are lower than the recent performance. This may explain why the market values Wilhemsen at a discount, but it is still excessive, in my view.
The company pays stable dividends of about 20% of FCF (c. $20-35mn annually), which corresponds to c. 1.5% dividend yield. Occasionally, Wilgemsen carries out small share repurchases.
Most of FCF is spent on bolt-on acquisitions in the maritime sector.
Whitbread Plc
Whitbread operates over 900 budget hotels in the UK and Germany. It is like Ryanair in the hospitality business.
The company pursues a unique vertically integrated model starting from ownership of its property, managing hotels, proprietary pricing model, and selling directly to customers (its rooms are not shown on Booking.com or similar websites).
Its extremely low costs and high-quality service remind me of Costco. By maintaining a substantial cost advantage over its competitors, the company reinvests profits in further scaling and improving the quality of its services, which reinforces its advantages and value to customers even more.
The company has been consistently adding rooms and gradually expanding its returns on capital (see the chart below).
Source: Whitbread Plc
I came across Whitbread’s business (Premier Inn hotels) several times recently when I was looking for accommodation in smaller UK cities. Its prices are one of the lowest in the market with good quality and overall pleasant experience. It suits travellers on a short business trip who do not want to overpay for the luxury 5-star hotels but want the convenience of a traditional hotel (24-hour reception, breakfasts and dinners, room service, easy access, WiFi and other benefits). Staying in AirBnB or at less-known hotel brands often brings unpleasant surprises and requires more complicated check-in and check-out procedures.
Source: Whitbread Plc
Growth
Whitbread has ambitious growth plans focusing on further market share gains in the UK and replicating its success in Germany, having committed £1bn of capital to the largest European economy. It runs 57 hotels in Germany with 32 hotels in the pipeline (compared to 840 hotels in the UK).
In the UK, it has doubled the number of its rooms since FY-10 from 42k to 84k in H1 FY-24. The company has recently raised its target to reach 125,000 rooms in the UK and Ireland (with an 83% occupancy rate) compared to c. 83,000 rooms currently.
Source: Whitbread Plc
Capital allocation
Despite formally raising its top line by just 3% annually for the past ten years, its shrewd capital allocation policy has allowed the company to grow its FCF per share from just £0.44 in FY-10 to £2.44 in the last twelve months (13% CAGR).
Back in 2019, the company returned £2.5bn of cash to shareholders via share repurchases using the proceeds from the sale of Costa Coffee for £3.8bn to Coca-Cola.
The company has historically distributed £140-180mn in dividends and has a policy to raise dividends in line with the growth of its operations.
In addition to dividends, management is currently carrying out a £300mn share buyback programme announced on 18 October ’23 (5% of the market cap).
Whitbread has net cash of £67mn and a strong freehold property portfolio (57% of UK estate is in freehold, 51% at the Group level).
Valuation
The company is currently trading at 15x PE compared to its historical average multiple of 20x. Its stock is trading 19% below pre-COVID levels while its earnings have already recovered. Consensus estimates imply 14% and 5% sales growth in '24 and '25, respectively, with a 22-23% EBIT margin.
Rightmove Plc
Rightmove is a classified business operating the most prominent online portal in the UK residential property market.
The company benefits from long-term structural tailwinds such as steady population growth and continuous inflow of immigrants and international students, which adds further mobility, growing property values and inflation.
It has enjoyed essentially a monopoly position, accounting for 84% (in 2022) of all traffic (with two main competitors, Zoopla and Primelocation, accounting for the rest). Its market share has been over 80% for about a decade. Its business is a classic example of the benefits created by network economics. The more properties are listed on Rightmove, the more individuals visit its website. Higher traffic reduces advertising time for real estate agents, encouraging them to list more of their properties on Rightmove and strengthening its pricing power.
The above-average revenue generated by Rightmove is used to improve the features for consumers and customers and bring other market participants (e.g. mortgage brokers and developers). Essentially, Rightmove has become the go-to place for UK residential real estate, and this position has been strengthening over time with the growth of the company’s network.
The time consumers spent on the company’s portal increased from 11.7bn minutes in 2016 to over 16bn in 2022. This has translated into annual sales growth from £220mn to £333mn in the same period, with more than £1.2bn returns for shareholders via dividends and share buybacks.
One of the key financial advantages of the classified business model is its fixed-cost nature with close to 100% incremental margins (the profit made on every new customer). This allowed Rightmove to expand its net profit margin from 53% in 2013 to 56% in 9M ’23.
Another advantage is a low capital intensity with a 10-year historical Capex/Sales ratio at just 0.5%, falling from 0.6% in 2013 to 0.2% in 9M ’23.
Rightmove has historically distributed a third of earnings through dividends, with excess cash returned via buybacks. The company follows a progressive dividend policy, although it skipped dividends in 2020.
The stock is down almost 30% from its December 2021 peak and is trading at about 20x forward P/E below its historical average multiple of 25x. While Rightmove’s stock has historically tracked its earnings (see the first chart above), the share price and earnings have decoupled from 2022.
Apart from the recent disconnect between the share price and fundamentals, the recent change in management is also quite interesting. The new CEO, Johan Svanstrom, took over in early 2023, having worked as a partner at an investment firm, EQT, as well as at Expedia (president of Hotels.com) and McDonald’s (senior executive in charge of various digitalisation projects).
At the latest Investor Day (27 November 2023), the company outlined the three core new segments that should contribute 27% to the overall revenue growth: 1) Commercial, 2) Mortgages, and 3) Rental Services. Management also plans to increase its share in marketing spend with agents (the core segment) as well as add new features to capitalise on its vast digital database.
For 2023-28, management targets a more than 67% increase in revenue to over £600mn (5-year CAGR of 11%) and a double-digit growth in operating profit.
Regarding risks, there is at least one short-term and one long-term issue. High interest rates and a softer real estate market are temporary headwinds for the business.
A more long-term issue is executing growth plans in new areas, which may require sacrificing margins in the mid-term while facing potentially stronger competitors. For example, in 2023, a US-based property data group announced an acquisition of a UK rival - OnTheMarket, operating in the commercial segment.
Increasing advertising revenue per traditional customer in the residential segment (real estate agents) may also prove challenging due to above-average prices and complaints from agents about the high fees they have to pay Rightmove.
From my experience, classified businesses possess unique strengths, allowing them to maintain and possibly even increase market share in the long term despite numerous attempts by the competition to challenge their positions.
Vidrala
Vidrala is a family-led manufacturer of glass containers for food and beverage products. The company was founded in 1965 by Isidoro Declaux, focusing on glass bottles for wine companies with whom the founder had good relationships. Over time, the company has expanded in Western Europe, including plants in Portugal, Italy, Ireland and the UK. With annual sales of €1.6bn, its global market share is about 4%.
The current plan is to strengthen international operations, starting with expansion in Latin America.
In 2023, the company expanded its presence in Brazil through an acquisition of a local bottle producer - Vidroporto. The latter has c. 20% market share in Brazil with expected revenue of €160mn and EBITDA of €56mn (35% margin). The deal consideration was €384mn, translating into a 6.9x EV/EBITDA acquisition multiple (below Vidrala’s own trading multiple of 8.5x). Following the transaction, Vidrala’s pro-forma leverage will be at a reasonable 1.1x level (Net Debt/EBITDA) compared to 0.6x at the end of 2022. Vidroporto has two modern plants in Brazil with additional capacity launched in 2024.
Source: Vidrala
The company has delivered a 12% sales growth rate p.a. on average over the past 10 years and has increased its net earnings by 16% on average. It has also been periodically repurchasing shares, reducing the share count from 34.6mn in 2011 to 32.3mn by the end of 2023.
Vidrala has operated with a high gross margin of 61% (10-year average) and 15% average operating margin. Profitability has been under pressure since 2021 due to higher energy prices, although it has started to recover recently.
FCF conversion is around 100% which is a further sign of the strength of the company’s business model.
Vidrala’s share price is now close to an all-time high, but due to stronger earnings growth and more upside from Brazil’s assets, the company’s P/E is at the lower end of the historical range (12.5x vs the 5-year average of 16.6x).
Key risks
The three main challenges include reliance on key customers, strong competition and the global need to improve energy efficiency via new investments.
The 24 core customers account for 50% of sales, with 32% of sales coming from the Top 10.
The market is fairly competitive. Vidrala produces c. 8bn bottles and accounts for 4% global market share. It is the second largest producer in Europe, roughly half of the top player. The leading company in the region is the French Verallia (a former subsidiary of Saint—Gobain) with production of more than 17bn bottles. Its current fwd P/E is c. 8.5x. Other players include US-focused Owens-Illinois (O-I Glass) with a foerward P/E of 8x, a more diversified packaging company Ardagh Group (21.8x), producer of glass containers for pharma Gerresheimer AG (fwd P/E 18x), Anchor Glass and others.
The third challenge for the overall sector is the need to reduce CO2 emissions and improve energy efficiency, which will require higher capex in the future.
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