No Investment advice: Following a sale of their Burger King Restaurants, Ibersol will have a big cash position and still a decent business. I find it small, cheap and potentially overlooked. Any feedback appreciated.
Thanks for the article! I was just a while ago looking at the company.
I invested in $DOM in London, the master franchise for Domino's. They sold their ownership in their business in Germany, but the share price did not much react to it in my opinion. I'm not sure how they will use the cash.
I think Ibersol has a lot more self-operated restaurants which have/will face big cost pressures - hopefully the cash won't be burned in the kitchen. Considering to open a small position though!
Ignore me - just seen they disclose it! 2.8% sales.
In that case EBITDA - lease costs - maintenance CAPEX - tax = ~32m EUR. Gives me a roughly 50% owner earnings yield (excluding negative working capital benefit).
Worst case scenario you assume all CAPEX = maintenance as need to "replace" closed restaurants. That gives ~17% yield.
I would say maintenance capex is around €10m per year including BK (it was €8m in 2020, €4m in 2021 and €8m in 9M22).
EBITDA - leases (including BK) will reach c.€63m in 2022 so c.€53m excluding maintenance capex and c.€40m net of a 25% tax rate (they have some tax losses carried forward probably in the Spanish business).
In Mexico we have Alsea $ALSEA, owner of franchisees of Domino's Pizza, Starbucks, Burger King, etc. Currently ratios are 3.5x EV/EBITDA and 8x EV/EBIT (and is already really cheap way beyond 5yr averages), so yeah I do think that 2x EV/EBITDA would be a bargain.
The thing is if valuation is accurate, but I couldn't really help with that. Anyway great special situation idea!
it is my #1 position and I find it very asymmetric at the moment. Some comments to your analysis:
• In my view, the capital increase at the end of 2021 was not so much due to a stretched B/S situation (the company was already generating a nice amount of FCF from 2Q21) but to deliver on the development contract with Burguer King (they had a commitment to open a number of restaurants). Unfortunately, Burguer King terminated the development contract because Ibersol did not deliver on a couple of openings (which were postponed by 3-4 months). I think the new owners of BK in Iberia were just seeking for an excuse to terminate this contact and push for a more aggressive expansion plan and the whole situation was a bit unfair with Ibersol.
• Accounting with IFRS 16 is a bit tricky in this case, net debt excl. leases is at €40m in 9M22 which I think is the right way to look at it (I think Ibersol has some power of negotiation on their leases if things turn sour as showed during the pandemic). For comparison purposes and to have a proxy of the underlying FCF, I tend to use EV/EBITDA pre IFRS 16 (i.e. net of leases) which implies around 4.0X before BK transaction, coming down 0.1x when adjusting for the proceeds of the sale of BK.
• I agree with the €54m estimate for 2022 EBITDA from continuing operations (post IFRS 16). The company confirmed me that no capital gains tax is expected from the sale of BK. In addition, Ibersol should benefit for 2 additional months of CF from BK restaurants (Oct and Nov which were quite strong).
• Another point on IFRS 16 is that the impact of the lease financial expenses is not linear in the P&L (it decreases over the lease term). I normally use the reported EBITDA and remove lease payments showed in the financing activities part of the CF statement. The results using both adjustments (P&L impact of leases vs. CF impact of leases) are similar but not exactly the same (happy to receive feedback on what is the right approach).
• On the use of proceeds from BK, not distributing at least the capital gains for the disposal of BK (€140m or €3.3/share) will be disappointing to me. I think they have the option to reduce the capital contributed by shareholders in the 2021 capital increase leaving €40m (€0.94 per share) tax free for shareholders.
• They had a bad M&A experience last time around (Eat Out Group in Spain acquired in 2016) so do not see them embarking into M&A (they seem to be willing to focus on the counter segment in Portugal). They have a lot of room to grow their network of restaurants in Portugal (they target 16 openings in 4Q22) from existing brands (KFC, Taco Bell and Pizza Hut) and have the know-how. In addition, they have recently signed an agreement with Pret à Manger to launch the brand in Iberia (70 restaurants in 10 years) which goes in the same direction (organic growth). I think all these initiatives can easily be funded with operating cash flow so do not see a reason why they would not distribute. Buybacks will be difficult given the very limited liquidity of the shares.
Ringo23, thanks a lot for sharing your thoughts and it is great to get your additional input. I was not aware of the backgroundon the BK transaction / capital raise but given the timing it makes sense that they were already cash-generative again by then. Was not sure though if it was needed to meet certain covenants.
Really appreciate the points you make on taxation. If there is no capital gains tax on the BK sale, this would be a huge plus compared to my calculation ( I did not know and was just trying tobe conservative).
On your last points, how much they will distribute is a major value driver from my perspective. Do you know if mgmt has commented on this anywhere? I could not find it but would be an important puzzle piece.
Hi Carlsten, management have not commented on the potential distribution after the BK sale. I would expect to see something on the FY2022 results. They will also have to call for the AGM in early May to approve the distribution.
Hi, €160m was the original capital gains based on 2021 accounts. On the basis of the Q2 accounts, the updated capital gain is now €140m. I think it is reported to know the impact on FY2022 P&L and BV. I raised the question because it is not clearly stated as a gross or net capital gain and the company confirmed that "the capital gains are not expected to be taxable".
Under the participation exemption regime, capital gains and capital losses realised on the transfer of shares can be exempt from taxation. This rule applies to all types of Portuguese companies (holdings and operational companies) and includes capital gains on the transfer of shares derived from a non-tax-neutral merger, division, transfer of assets, or exchange of shares, and also in case of a transfer of supplementary capital entries. The regime applies provided that, at the date of the transaction, the following requirements are met:
- The shares are held for a consecutive period of at least one year.
- The taxpayer directly, or directly and indirectly, holds at least 10% of the share capital or voting rights in the entity from which the shares are transferred.
- The taxpayer is not covered by the tax transparency regime (i.e. imputation of profits to individual or corporate shareholders, regardless of effective distribution).
- The entity from which shares are transferred is not resident in a black-listed jurisdiction.
- The assets of the entity from which shares are transferred are not directly or indirectly comprised of more than 50% of real estate located in Portugal and acquired on or after 1 January 2014 (except real estate allocated to an agricultural, industrial, or commercial activity that does not consist of buying and selling real estate).
Btw, seems that IBS has 8% of the equity capital in own shares :)
"Ibersol SGPS SA HAS PURCHASED 40,442 SHARES FOR AN AVERAGE PRICE OF EUR 5.68. ON THIS DATE IBERSOL SGPS HOLDS AN ACCUMULATED TOTAL OF 3,640,423 OWN SHARES, REPRESENTING 7.914% OF ITS SHARE CAPITAL" (December 15, 2022)
Thanks for the article! I was just a while ago looking at the company.
I invested in $DOM in London, the master franchise for Domino's. They sold their ownership in their business in Germany, but the share price did not much react to it in my opinion. I'm not sure how they will use the cash.
I think Ibersol has a lot more self-operated restaurants which have/will face big cost pressures - hopefully the cash won't be burned in the kitchen. Considering to open a small position though!
Great write up and v interesting situation.
Any insight into ongoing CAPEX requirement? I can’t tell if the ~31m EUR CAPEX in 9m to Sep 22 includes the discontinued Burger King sites or not.
Very cheap on EV/EBIT but potentially not on EV/EBITDA - CAPEX if the above CAPEX numbers are reflective of ongoing CAPEX need.
Ideally what I’m trying to estimate is maintenance CAPEX, to give me a "steady state" EBITDA - CAPEX - tax yield %
Ignore me - just seen they disclose it! 2.8% sales.
In that case EBITDA - lease costs - maintenance CAPEX - tax = ~32m EUR. Gives me a roughly 50% owner earnings yield (excluding negative working capital benefit).
Worst case scenario you assume all CAPEX = maintenance as need to "replace" closed restaurants. That gives ~17% yield.
Very interesting thanks for sharing!
Thanks for commenting. Have been discussing with AnonValueInvestor on Twitter which includes more thoughts on FCF. Thread is here: https://twitter.com/AnonValue/status/1611186361083596800
very helpful thanks
I would say maintenance capex is around €10m per year including BK (it was €8m in 2020, €4m in 2021 and €8m in 9M22).
EBITDA - leases (including BK) will reach c.€63m in 2022 so c.€53m excluding maintenance capex and c.€40m net of a 25% tax rate (they have some tax losses carried forward probably in the Spanish business).
Was there a blog post on Muehlhan?
There is a pretty long threadon Twitter, see here:
https://twitter.com/CapitalShipyard/status/1610559148365586433
In Mexico we have Alsea $ALSEA, owner of franchisees of Domino's Pizza, Starbucks, Burger King, etc. Currently ratios are 3.5x EV/EBITDA and 8x EV/EBIT (and is already really cheap way beyond 5yr averages), so yeah I do think that 2x EV/EBITDA would be a bargain.
The thing is if valuation is accurate, but I couldn't really help with that. Anyway great special situation idea!
Excellent write-up, Carsten. My sincere thanks for the post.
Glad you liked it
Thanks for covering Ibersol!
it is my #1 position and I find it very asymmetric at the moment. Some comments to your analysis:
• In my view, the capital increase at the end of 2021 was not so much due to a stretched B/S situation (the company was already generating a nice amount of FCF from 2Q21) but to deliver on the development contract with Burguer King (they had a commitment to open a number of restaurants). Unfortunately, Burguer King terminated the development contract because Ibersol did not deliver on a couple of openings (which were postponed by 3-4 months). I think the new owners of BK in Iberia were just seeking for an excuse to terminate this contact and push for a more aggressive expansion plan and the whole situation was a bit unfair with Ibersol.
• Accounting with IFRS 16 is a bit tricky in this case, net debt excl. leases is at €40m in 9M22 which I think is the right way to look at it (I think Ibersol has some power of negotiation on their leases if things turn sour as showed during the pandemic). For comparison purposes and to have a proxy of the underlying FCF, I tend to use EV/EBITDA pre IFRS 16 (i.e. net of leases) which implies around 4.0X before BK transaction, coming down 0.1x when adjusting for the proceeds of the sale of BK.
• I agree with the €54m estimate for 2022 EBITDA from continuing operations (post IFRS 16). The company confirmed me that no capital gains tax is expected from the sale of BK. In addition, Ibersol should benefit for 2 additional months of CF from BK restaurants (Oct and Nov which were quite strong).
• Another point on IFRS 16 is that the impact of the lease financial expenses is not linear in the P&L (it decreases over the lease term). I normally use the reported EBITDA and remove lease payments showed in the financing activities part of the CF statement. The results using both adjustments (P&L impact of leases vs. CF impact of leases) are similar but not exactly the same (happy to receive feedback on what is the right approach).
• On the use of proceeds from BK, not distributing at least the capital gains for the disposal of BK (€140m or €3.3/share) will be disappointing to me. I think they have the option to reduce the capital contributed by shareholders in the 2021 capital increase leaving €40m (€0.94 per share) tax free for shareholders.
• They had a bad M&A experience last time around (Eat Out Group in Spain acquired in 2016) so do not see them embarking into M&A (they seem to be willing to focus on the counter segment in Portugal). They have a lot of room to grow their network of restaurants in Portugal (they target 16 openings in 4Q22) from existing brands (KFC, Taco Bell and Pizza Hut) and have the know-how. In addition, they have recently signed an agreement with Pret à Manger to launch the brand in Iberia (70 restaurants in 10 years) which goes in the same direction (organic growth). I think all these initiatives can easily be funded with operating cash flow so do not see a reason why they would not distribute. Buybacks will be difficult given the very limited liquidity of the shares.
Ringo23, thanks a lot for sharing your thoughts and it is great to get your additional input. I was not aware of the backgroundon the BK transaction / capital raise but given the timing it makes sense that they were already cash-generative again by then. Was not sure though if it was needed to meet certain covenants.
Really appreciate the points you make on taxation. If there is no capital gains tax on the BK sale, this would be a huge plus compared to my calculation ( I did not know and was just trying tobe conservative).
On your last points, how much they will distribute is a major value driver from my perspective. Do you know if mgmt has commented on this anywhere? I could not find it but would be an important puzzle piece.
Hi Carlsten, management have not commented on the potential distribution after the BK sale. I would expect to see something on the FY2022 results. They will also have to call for the AGM in early May to approve the distribution.
Thank you kindly for the exceptional insights, Ringo23. Do you by chance have a Twitter handle that I can follow? Much appreciated, Tony.
Hi Tony, my Twitter account is @Ringo72849575. I am not super active but we can always liaise on stuff. Best, Ringo
Hi, €160m was the original capital gains based on 2021 accounts. On the basis of the Q2 accounts, the updated capital gain is now €140m. I think it is reported to know the impact on FY2022 P&L and BV. I raised the question because it is not clearly stated as a gross or net capital gain and the company confirmed that "the capital gains are not expected to be taxable".
I think the following rule applies (based on the following PwC report: https://taxsummaries.pwc.com/portugal/corporate/income-determination)
Under the participation exemption regime, capital gains and capital losses realised on the transfer of shares can be exempt from taxation. This rule applies to all types of Portuguese companies (holdings and operational companies) and includes capital gains on the transfer of shares derived from a non-tax-neutral merger, division, transfer of assets, or exchange of shares, and also in case of a transfer of supplementary capital entries. The regime applies provided that, at the date of the transaction, the following requirements are met:
- The shares are held for a consecutive period of at least one year.
- The taxpayer directly, or directly and indirectly, holds at least 10% of the share capital or voting rights in the entity from which the shares are transferred.
- The taxpayer is not covered by the tax transparency regime (i.e. imputation of profits to individual or corporate shareholders, regardless of effective distribution).
- The entity from which shares are transferred is not resident in a black-listed jurisdiction.
- The assets of the entity from which shares are transferred are not directly or indirectly comprised of more than 50% of real estate located in Portugal and acquired on or after 1 January 2014 (except real estate allocated to an agricultural, industrial, or commercial activity that does not consist of buying and selling real estate).
Hi, thanks you so much!
I'm reading your piece and this other one on Ibersol too
https://stayingrational.substack.com/p/ibersol-a-special-sit-under-the-iberian
Have you read it?
Kind regards from Madrid,
Darío
Thanks Darío, yes saw it thanks to your comment :-)
Interesting situation, thanks for sharing!
Btw, seems that IBS has 8% of the equity capital in own shares :)
"Ibersol SGPS SA HAS PURCHASED 40,442 SHARES FOR AN AVERAGE PRICE OF EUR 5.68. ON THIS DATE IBERSOL SGPS HOLDS AN ACCUMULATED TOTAL OF 3,640,423 OWN SHARES, REPRESENTING 7.914% OF ITS SHARE CAPITAL" (December 15, 2022)