Expected Large Capital Return – Upside TBD
Augustusville and Staying Rational have recently covered this small Lisbon-listed stock with an interesting ‘large asset sale + large potential capital return’ setup taking shape. Similar situations have historically worked out pretty well at SSI – BCOR, LAUR, BSIG, DII-B, etc. Daily trading liquidity is about €50k-€70k.
Restaurant operator Ibersol sold its portfolio of Burger King restaurants for €260m vs €275m current market cap. The sold business accounted for 50% of total Ibersol profits and the sale closed at the end of Nov’22. The proceeds (€244.5m cash and potentially €15.5m earn-out) will transform company’s balance sheet from the previous net debt position to a €200m net cash position (ex. lease liabilities). Management hasn’t provided any details on the intended use of this cash yet, however, a large capital return is probably in the cards. Two controlling shareholders (chairman and vice-chairman) own a combined 61% stake and this sale seems to be the culmination of their 20+ efforts in building the business. During their reign Ibersol revenues have grown at 10% CAGR (until COVID) with minimal dilution to equity and with a steady dividend stream. The controlling shareholders are already not in their youth (70 and 75 years old) and therefore less likely to use the sale proceeds to build the business further. Ibersol is set to report its annual results next month and it will be the first financials reflecting large cash position on the balance sheet.
The RemainCo looks cheap and would likely re-rate if the sale proceeds are paid out to shareholders. After the sale of the Burger King business, the rest of Ibersol’s portfolio includes 463 restaurants in Portugal, Spain, and a few more in Angola. 175 of those restaurants are large global fast-food franchises (KFC, Pizza Hut, Taco Bell) and the rest of the portfolio is mostly private, proprietary brands, some of which (about 69) are operated by franchisees. Excluding the pro-forma net cash, the RemainCo trades under 4x run-rate EBITDA. Burger King portfolio (158 restaurants) was sold for 6.9x run-rate EBITDA. Peers EAT.MC and ALSEA.MX trade at c. 5.5x TTM EBITDA. However, these peers are much more levered than Ibersol.
Although the sale of the Burger King business, the honorable age of the controlling shareholders as well as their 61% ownership seem to point towards capital return, management has not mentioned anything regarding the strategic direction since the sale was closed 4 months ago. The funds might also be spent on further business expansion. The company has been focusing on growing the portfolio of its KFCs/Pizza Huts/Taco Bells. In mid-2022 Ibersol signed a new contract with British chain Pret A Manger to open 70 stores in Portugal/Spain over the next 10 years. I would expect further details on the intended capital use to be unveiled together with the annual report next month.
According to their financial calendar they were meant to present their 2022 annual accounts yesterday; has anyone seen/heard anything on this because I can’t find any information about this.
I check the calendar but there’s no annual report information except for report of Q1 23 at 30 May. Strange…….Hope annual report will be released before that.
I think the annual report just got released, but I haven’t been able to glean anything insightful from it as yet.
From TIKR:
Ibersol To Implement Share Buy-Back Programme For Up To 32.7 Mln Euros
12:16 pm | 5 May 23 | reuters
May 5 (Reuters) – Ibersol SGPS SA
SAID ON THURSDAY, BOARD APPROVED IMPLEMENTATION SHARE BUY-BACK PROGRAMME FOR UP TO 32.7 MILLION EUROS.PROGRAMME TO BE IMPLEMENTED UNTIL END OF MAY 2024, WILL HAVE TO AIM OF REDUCING SHARE CAPITAL THROUGH CANCELLATION OF 4.4 MILLION ORDINARY OWN SHARES TO BE ACQUIRED BY THE COMPANY.PROPOSES DISTRIBUTION OF A DIVIDEND OF 0.70 EUROS PER SHARE.
So based on the above we’re talking about a potential buyback of 10% to go along with a 0.70 dividend (i.e. ~10% based on a EUR 7.0 price)….
Said another way they are returning ~ 62.38m to shareholders…
Yeah, IBS annual report is out. It seems that earnings have improved significantly in Q4. EBITDA from continuing operations during Q4 was €61.2m vs €54m Q3 run-rate used in the write-up. Given the limited disclosures, it’s not exactly clear what drove the earnings improvement. IBS currently trades at just 3.6x 2022 EBITDA (btw, I’m adding lease liabilities to debt).
However, the size of the announced capital return is a bit underwhelming and it seems that management intends to use a larger portion of the current cash for further expansion instead. Despite €167m net cash position as of Dec’22, the company announced buy-back program that targets only up to €32.7m of common stock until May 2024 (around 11% shares outstanding). IBS will also pay an €0.7/share dividend (about 10% of the current market cap). Total capital return will amount to €64.9m or 21% of the current market cap. The market has clearly expected stronger and, more importantly, faster moves from the management. After the buyback announcement yesterday, IBS shares went up only by 3.6% on a rather high volume.
Overall, the company is cheap and continuing to grow (in Q4’22 20 store count increased by 5%). However, further catalysts and timeline for the re-rating are no longer clear, so the company can just stay cheap for a long time.
Annual report: https://www.ibersol.pt/investidores/relatorio-contas/2022/Ibersol_2022_EN_vf.pdf
Buyback announcement: https://econews.pt/2023/05/05/fast-food-chain-ibersol-approves-share-buyback-programme/
Hi DT,
I am just trying to understand the ramifications of the annual results, the proposed capital return and your comments.
I am trying to get a sense of the current EBIT/EV over the next 12 months by making adjustments based on what we know and was hoping you could point out my mistakes (no doubt I’m making some).
1. Dividend Yield at current price (7.0) will potentially be 10% (0.70/7). Based on your capital return number (64.9m) I think it implies shares outstanding of 46m, but from the AR I believe shares outstanding is 42.36m (refer section 8.1.2).
2. Buybacks: 32.7m at current price (7) could result in the repurchase of 4.67m shares (32.7m/7.0) for a buyback yield of 4.67/42.36 = 11.0% . New shares outstanding potentially 37.7m
3. Debt Paydown Yield = 310m (31-Dec-21) to 161m (31-Dec-22) (i.e. 149m) / 264m (Mkt Cap = 37.7m * 7) = 56.4%
Shareholder Yield = 77.4% (sum of 1, 2, 3)
So when the debt reduction is included and looked at with respect to the market cap adjusted, for the potential share count reduction, I think their capital return/allocation looks better.
EBIT: I don’t know what to do; I really can’t be bothered with normalizing expenses, margins, working out how much inflationary increase can be passed on etc. etc. Now, the TTM EBIT for the continuing operations I understand to be 22.1m (pg 201). So I’ll simply use that.
EV: so a few adjustments here: I’m using the potentially reduced share count (37.74m) to get market cap 264m, and I am deducting the allocation for buybacks (32.7m) from my cash to get 204.4m (237.1m – 32.7m). The total debt including leases is 161m. This results in an EV of 220.6m.
EBIT/EV (“forecast”) = 22.1m/220.6m = 10% (i.e. EV/EBIT multiple of 10).
Now it seems as though with new store openings (assuming there will be based on your comments) EBIT should go up, but then cash for those new store investments would result in the EV going up too thanks to the reduction in cash; so basically I’m just assuming EBIT/EV = 10% (relatively cheap).
Overall all then, we have a cheap company with a lumpy pre covid ROE of about 10% that has gone from net debt to net cash while proposing a 10% dividend yield at a potential 10% reduction in share count.
I guess it could remain cheap but EUR 7.0(current price) doesn’t seem the ‘right price’. Were you able to find any information of their ‘dividend policy’? I couldn’t. I am thinking that if they committed to a high payout ratio resulting in a continually high dividend yield then the stock price would have to appreciate to reduce the dividend yield.
Please let me know if you see any mistakes or have any further thoughts or guidance.
I am concerned that I’m changing my thesis and falling prey to the endowment effect now that this is no longer a special situation. At the same time, the Shareholder Yield and EBIT/EV suggest the stock trading below is current price of EUR 7.0 (market volatility aside) isn’t reasonable, and therefore the alternative (it trading higher) seems, probabilistically, more likely….
(apologies for the inevitable typos which I’ll be sure to detect only after posting)