Some thoughts on positions

Odet, Funkwerk, Delfi and more...

Disclaimer: This is not investment advice. The author is long the shares mentioned in this article which has been written for entertainment purposes only. He may buy or sell shares at any time without notification. Views expressed by be biased and / or wrong. Do not rely on this article when taking financial decisions.

With the Q3 earnings season largely over, I thought I might do an update on some positions I hold and had previously written up. Largely doing this for myself to track where some positions stand and see if the thesis is still intact, but also interested in any feedback people may provide. I will not cover all the stocks in the portfolio but rather an arbitrary selection. Here we go:

Compagnie de l’Odet: Still one of my top two positions, the holding company of Bolloré, named after a smallish river in Brittany, already reported briefly on Q3 here . More relevant was their H1 report published in September. I had written up Odet in April and it stands out for its highly complex group structure. The best pushback I thought I received was on SOTP stories rarely working without a hard catalyst which can defer value realization for a long time and therefore cause huge opportunity cost. This argument, in my view, is correct for a lot of situations. And it is also true, that the hard catalyst one might hope for, i.e. the unwinding of the holding structure and significant cash-out to shareholders is not on the horizon. The reason I still see Odet/Bolloré slightly differently ist that there is still a lot of activity going on and in my view, management is taking steps which in my view enhance shareholder value: In June this year, Bolloré completed its tender offer and repurchased 3.4% of its shares, increasing the stake held by Odet. Following the repurchase, Odet owns 69.2% of Bolloré, up from 66.8%. There have also been other (small) intra-group purchases of shares in the galaxy this year.

In another significant move, Bolloré announced the sale of its Logistics activities to CMA for 4.65bn enterprise value, expected to close in early 2024. Note that Bolloré SE as a standalone reported Net Cash of 1.415bn EUR per 30 June, after repurchasing its shares in the tender. Given that Bolloré consolidates Vivendi, of which it owns 30%, the real net debt/cash is somewhat difficult to grasp, but I took this figure from their presentation. It looks likely that Bolloré SE will have about 6bn EUR in net cash soon. As a thought experiment, there are 2.96 bn Bolloré shares outstanding and at 5.40 EUR per share the market cap is 15.6 bn. Odet owns a bit more than two thirds of that. So at current prices, Bolloré could buy back all its outstanding free float and still have a net cash position of a few hundred millions. Odet (current market cap of 9 bn EUR) would own 100% of the Bolloré capital and thereby 18.1% of UMG, 29% of Vivendi (combined currently worh 10.5bn EUR) and the Bolloré Energy and industry segments. In addition, there are more self-holdings in shares of Odet (6% held by Bolloré, 19% by Cambodge and so on).

So the net cash gives a lot of firepower for doing more to simplify the structure and return capital to investors or invest in a new business. While the first would be preferred from any investor’s perspective, and there is a lot of shareholding simplification or further buybacks that might easily lift shareholder value. I am not afraid of Bolloré doing more M&A, given the capital allocation track record of the Bolloré team in the past.

With the Logistics segment divested, an interesting question is what will happen with the other two big assets, the participations in listed Universal Music Group (18.1% at the Bolloré level, 0.3% held by Odet and 10% by Vivendi) and the 30% stake in Vivendi.

UMG is essentially a royalty stream on people listening to music and in my view, a fairly defensive and wide-moat business. UMG has a 44bn EUR market cap, assigning an 8bn EUR value to the Bolloré share. Just listed two years ago, I expect UMG to grow revenues and profits by around 10% p.a. The company this year introduced a fairly big (in my view lavish) stock-based compensaton program which is hurting profits, but they should be doing better again next year. In H1, we saw Bolloré purchasing some UMG shares probably below 20 EUR versus a current price of 24. Still, the question remains what Bolloré is planning to do with UMG in the long-term. In the separation, the group overall lowered its share in UMG and it may not hold UMG forever. Might UMG be for sale? At the right price, it is possible. However, I see UMG as a long-term compounder and would not minding holding for a long time.

Vivendi is an SOTP story with in the big Bolloré SOTP complex. A lot is happening at the Vivendi level which also still holds a 10% stake in UMG, but may soon complete the Lagardere takeover and holds a portfolio of listed and unlisted media assets. In my view, Vivendi might be worth 13-14 bn EUR as compared to the 8.3bn market cap and I believe this process will be driven by the Bolloré family. This week, Vivendi announced that it is considering to split up into three different entities , so we may well see some spin-offs here which might unlock the value at the Vivendi level.

In summary, UMG is a pure-play high quality business that I am comfortable with, Vivendi is cheap on an SOTP basis and undertaking steps to spin-off some divisions.. I would be happy to hold either.

A couple of days ago, Odet once again started buying shares in Bolloré, thereby gradually buying out minorities and making a simplification of the group easier. Given its strong financial position and the large discounts, there are a lot of levers the company can pull to create shareholder value without taking much risk and I remain confident in my position in Odet. Finally, here are my current estimates of Fair Values / discounts in the Bolloré galaxy, after considering cross-holdings.

Funkwerk: The German train equipment company recently reported its Q3 numbers and they were a bit better than I had expected. The integration of Hörmann KN is responsible for growing revenues and even though margins remain behind the traditional Funkwerk business, they seem to improve. Funkwerk has also been investing in external growth by acquiring Poland’s Radionika Sp and in growing its facilities at the headquarters in Thuringia. Moreover, Funkwerk lifted its sales and EBIT expectations for the year, even though they remain behind 2022 which was influenced by extraordinary positive effects. At an equity ratio of 57% and with a net cash position, Funkwerk remains conservatively financed. For this year, I see the company trading at an EV/EBIT of around 7, but I think chances are good that we mightt have better times ahead. Therefore, I remain comfortable with my Funkwerk position,

Delfi: After a steep climb over most of 2022 an H1 2023, Delfi shares recently came back, in particular after posting Q3 earnings which were weaker than expected by the market. In my view, the biggest Indonesian chocolate distributor is still in pretty good shape. The company generates RoEs in the high-teens. Its balance sheet shows a net cash position and it still trades at an EV/EBIT close to 6. Delfi’s strengths are in its distribution network for products which require cooling in a difficult geography of Indonesia as well as in it having turned into a manufacturer of branded products which are even market leading in Indonesia. While sometimes forgotten, Indonesia is the world’s fourth-largest country by population and one of the more successful emerging markets. Over time, Indonesia’s economy and middle class should be growing and Delfi might either grow organically or be taken out by the likes of Mondelez, Nestlé or Mars. While I think the company should secularly do well, there may be effects affecting a single quarter and in my view, that happened in Q3 when EBITDA retreated and the company blamed higher selling and distribution costs as well as strategic and brand-building initiatives. I try not to assign to much importance to quarterly results, so I am pretty relaxed here. However, I might be inclined to buy more Delfi shoud the price retreat more.

Spirit Airlines: I continue my basket of event-driven stocks in legal situations Liquidia, Burford Capital and Spirit Airlines . The recent weeks saw closing arguments for Spirit/JetBlue and a decision is expected by early January. If the merger is permitted, there may still be some risks of JetBlue getting out of the contract or demanding a price cut but the Spirit should trade materially higher. This is no sure thing but the large spread (current share price around 15 USD, closing price around 30 USD) to me makes it attractive on a risk/reward basis. Fingers crossed.

I am looking to update my portfolio overview per COB today for the last time this year and am also planning one or two more in-depth write-ups on positions which I see barely covered on other blogs/substacks.

This may be my last post for the year and I would like to thank all of the readers of the Augustusville substack for the support and feedback in 2023. Happy holidays and have a great start to the new year!