Para tratar de clarificar un poco dónde estamos parados y cuál es el potencial de la compañía, es obligatorio remangarse, bucear en los informes de la SEC y calcular la valoración sobre una base completamente diluida (Fully Diluted). Con ese objetivo en mente, he preparado una tabla resumen, que espero que ayude a tener algo más clara la valoración actual. En la tabla desgloso la estructura de capital post-adquisición, el estado real de la deuda neta y la valoración actual (que sitúa al negocio cotizando a un múltiplo actual de ~15x EBITDA 2026 bajo un prisma totalmente diluido).

Además, proyecto dos escenarios de asignación de capital de cara a 2030 bajo una premisa muy clara: mantener los pies en la tierra. Mientras que el mercado tiende a pagar múltiplos de software o de distribuidoras premium de nicho (15x-20x), he preferido aplicar un enfoque conservador de 11.5x EBITDA (más alineado con el sector tradicional de la construcción), construyendo así un estricto margen de seguridad. Si Jacobs ejecuta su manual a la perfección, el mercado ya se encargará de expandir el múltiplo; mientras tanto, prefiero que los números jueguen a nuestro favor.

Adjunto el siguiente cuadro, que compartí en X hace unos días, desglosando estructura de capital y número de acciones totales, estructura de deuda, valoración actual, y dos escenarios conservadores de valoración de cara a 2030:

El precio actual ya exige ejecución: cotizar a un múltiplo actual de ~15x EV/EBITDA (calculado de forma realista sobre los ~1,600 millones de acciones totalmente diluidas) demuestra que el mercado no está comprando un distribuidor de materiales tradicional. Se está pagando por adelantado una parte del “efecto Jacobs” y la prima de crecimiento.

Asimetría en los escenarios a 2030:

• En el Caso 1 (Base Orgánico), asumiendo un EBITDA de ~$4,000 millones y un desapalancamiento agresivo (deuda neta de ~$2,000 millones), un múltiplo conservador de 11.5x nos proyecta un precio por acción de ~$27.5. Esto representa prácticamente duplicar el capital desde los precios actuales (~$13.89).

• En el Caso 2 (Optimista + Adquisiciones), elevando el EBITDA a ~$5,250 millones pero manteniendo una estructura de deuda neta más realista para un modelo de rollup (~$10,000 millones), el precio objetivo se sitúa en ~$31.5.

El verdadero margen de seguridad está en el múltiplo: Mientras que los líderes indiscutibles de la distribución en otros nichos distintos a los materiales de construcción cotizan a múltiplos que superan holgadamente las 15x-18x EBITDA, anclar nuestro modelo en 11.5x nos protege contra los riesgos inherentes del proyecto: el riesgo de ejecución en la transformación operativa, el apalancamiento financiero y la evidente dependencia de una figura clave (Key Person Risk) como Bradley Jacobs.

QXO ofrece una opcionalidad alcista asimétrica muy atractiva. Si Jacobs ejecuta su manual con la misma brillantez que en sus proyectos anteriores y logra que el mercado reclasifique la empresa con el múltiplo de los mejores distribuidores, el rendimiento real destruirá por completo estas estimaciones conservadoras. Pero como inversores, nuestro trabajo es exigir que el margen de seguridad se encuentre en el precio que pagamos hoy, no en las promesas del mañana.

DISCLAIMER: Este análisis no es una recomendación de compra o de venta, cada inversor debe hacer su propio análisis antes de hacer cualquier tipo de inversión.

(La información de la empresa ha sido obtenida de presentaciones de resultados, conferencias de resultados, y su página web corporativa).

1. Breve historia de la empresa.

Fundada en 1965 por Gerald D. Stephens en Peoria, Illinois, RLI Corp. nació originalmente como Replacement Lens, Inc., una empresa cuyo único propósito era cubrir un nicho extremadamente específico y desatendido: asegurar lentes de contacto (que en esa época eran caros, rígidos y fáciles de perder).

A medida que el mercado de las lentillas se transformó en un mercado de productos desechables y baratos, la directiva demostró la que sería la cualidad definitoria de su historia: la capacidad de adaptación y el pragmatismo absoluto. Stephens utilizó el capital generado por ese nicho original para expandirse hacia los seguros comerciales especializados y de líneas excedentes (Excess & Surplus o E&S). En las décadas posteriores, RLI se consolidó como una corporación diversificada de seguros de nicho, cotizando en la Bolsa de Nueva York y construyendo uno de los historiales de rentabilidad más consistentes y duraderos de toda la historia del capitalismo estadounidense.

2. Modelo de negocio y propuesta de valor.

2.1 Rama de seguros.

El modelo de negocio de RLI Corp. es el de una aseguradora pura de líneas excedentes y especiales (E&S). A diferencia de las aseguradoras estándar o “regulares”, que venden pólizas altamente reguladas a clientes comunes, RLI opera en el territorio de los riesgos inusuales, difíciles de valorar o que requieren coberturas a medida. Mientras el top 95% de las aseguradoras se pelea por el “seguro común” basándose en el precio, RLI se queda en el 5% de los riesgos huérfanos. Tienen la libertad de no usar formularios estándar y, lo más importante, libertad de tarifa. Si el riesgo sube, ellos suben el precio instantáneamente. En el mercado estándar, tienes que pedir permiso al regulador para subir un 5% el precio; RLI puede subirlo un 50% mañana si los datos lo justifican.

El negocio se divide estrictamente en tres ramas operativas independientes:

• Casualty (Responsabilidad Civil - ~62% de las primas netas): Protege a empresas e individuos contra demandas de terceros. No cubre automoción personal general, sino flotas de camiones comerciales pesados, coberturas de responsabilidad civil “paraguas” para patrimonios elevados, y seguros de responsabilidad para directores y administradores (D&O) de sectores complejos.

• Property (Propiedad - ~29% de las primas netas): Cubre daños materiales físicos en infraestructuras comerciales e industriales ante riesgos catastróficos (terremotos, inundaciones, incendios) e incluye un segmento especializado en seguros marítimos y de transporte de carga pesada.

• Surety (Fianzas de Cumplimiento - ~9% de las primas netas): RLI garantiza contractualmente que una de las partes cumplirá con una obligación legal o comercial. Si una constructora quiebra a mitad de la obra de un puente público, RLI indemniza o financia la finalización del proyecto. Es un negocio de análisis crediticio riguroso con tasas de siniestralidad estructuralmente bajísimas si se gestiona bien.

Información obtenida de la presentación a inversores - Q4 2025.

La propuesta de valor de RLI no se basa en competir por precio, sino en ofrecer soluciones a medida para riesgos complejos con una solvencia inquebrantable (Calificación A++ de A.M. Best). Para el cliente o el bróker, RLI es el socio que tiene el conocimiento técnico para estructurar contratos que el mercado masivo rechaza o no sabe tarificar, asegurando la supervivencia del asegurado ante siniestros severos.

Mencionar también otro punto importante, el reaseguro. El reaseguro es el “seguro de la aseguradora”. Al operar en líneas excedentes (E&S) y cubrir catástrofes de propiedad (Property) o demandas masivas (Casualty), un solo evento catastrófico (un huracán categoría 5 o un accidente múltiple de camiones de carga peligrosa) podría evaporar el capital de RLI si no estuviera protegido. RLI mitiga esto mediante una red de reaseguro minuciosamente estructurada que persigue dos objetivos: limitar la pérdida máxima por un solo evento y estabilizar los resultados. RLI diseña sus contratos bajo la estructura de Exceso de Pérdida (Excess of Loss). Esto significa que RLI paga el 100% de los siniestros hasta una cantidad fija (su retención), y el reasegurador paga todo lo que supere esa cifra hasta un límite máximo. Diversifican sus contratos entre gigantes mundiales del reaseguro (como Swiss Re, Munich Re o la propia Berkshire Hathaway), asegurándose de que, si ocurre un desastre de mercado, las promesas de pago se cumplan al 100%.

2.2 Rama de cartera de inversiones.

El float es el dinero que los clientes pagan por adelantado y que RLI mantiene en su balance en forma de reservas hasta que se paga un siniestro. En RLI, el float no es un coste; es financiación gratuita (o mejor dicho, con “tipo de interés negativo” gracias a sus 30 años de beneficios técnicos). La cartera de inversión de RLI (que ronda los $4.600 millones) se gestiona bajo una premisa inquebrantable: la cartera de renta fija representa el 76% del total y debe cubrir holgadamente las obligaciones con los asegurados, mientras que el patrimonio neto de los accionistas se puede poner a crecer en renta variable.

La duración de la parte de renta fija de la empresa oscila entre los 4 y 5 años. La calificación media de su cartera de bonos es de AA- o A. RLI no busca rentabilidad extra comprando bonos basura (high-yield). Prefiere bonos del Tesoro de EE. UU., agencias gubernamentales y bonos municipales de alta calidad.

Información obtenida del informe 10-K de RLI.

3. Ventajas competitivas o en qué se diferencian del resto de aseguradoras.

Las principales ventajas frente a otras aseguradoras son la siguientes:

• Ventaja de datos en “Riesgos de Datos Escasos”: La mayoría de los competidores o los nuevos modelos informáticos automatizados necesitan millones de datos homogéneos para funcionar. Los nichos de RLI carecen de esa simetría; cada riesgo es particular. La base de datos interna de siniestralidad acumulada por RLI durante 50 años en esos micromercados específicos actúa como una barrera de entrada casi insuperable.

• Libertad de forma y tarifa en el nicho E&S: Al operar fuera del mercado tradicional regulado, RLI no requiere aprobación regulatoria previa para alterar sus precios o los términos de sus contratos. Si el coste de los siniestros sube en un sector específico un martes, RLI puede doblar el precio de su prima el miércoles. Esta flexibilidad quirúrgica es imposible para una aseguradora estándar.

• Estructura de distribución eficiente (Asset-Light): RLI utiliza brókeres independientes externos para originar las pólizas, lo que minimiza sus costes fijos. Sin embargo, RLI retiene el control absoluto, ya que la cultura de suscripción no se negocia: el bróker solo propone el riesgo, pero el suscriptor interno de RLI tiene la última palabra sobre el precio y la aceptación, blindando la rentabilidad de la cartera.

• Descentralización Total: Cada unidad de negocio de RLI opera casi como una empresa independiente. Los expertos en seguros de transporte no tienen que pedir permiso a los de fianzas. Esto les da una agilidad que las aseguradoras burocráticas simplemente no tienen.

• Mantenerse pequeños, ágiles y disciplinados. Esto se entiende mejor cuando se analiza su cultura de suscripción, y la retribución de dividendos especiales. Más adelante lo comentaré.

4. El foso defensivo. La cultura de la empresa.

Para que una aseguradora se mantenga décadas generando altos retorno sobre el capital y de ratios combinados bajos, se debe poseer una cultura empresarial muy definida, sólida y excelente.

El 90% del éxito en este sector se basa en la correcta ejecución basada en la experiencia, en la constancia y en la disciplina. Como diría Charlie Munger: “Normally, an insurance business produces mediocre results, even when it is very well managed”.

Puede parecer un negocio sencillo, pero las empresas tienden a querer estirarse y querer crecer siempre un poco más, evitar reconocer los riesgos en mercados blandos, y competir por crecer más rápido que el resto. Pero amigo, al final el float conseguido no es tuyo, son tus deudas y tus promesas de pago. Y si te has estirado de más, el mercado te pondrá en tu sitio tarde o temprano. Su CEO, Craig Kliethermes, en sus conference call siempre nos deja “perlas” de la cultura empresarial de RLI:

“We don't measure success by how fast we grow, we measure it by how well we grow and whether today's decisions stand the test of time”. Craig Kliethermes.

El mayor activo invisible de RLI es su arquitectura de incentivos, la cual da forma a una cultura corporativa obsesionada con el beneficio de suscripción (Underwriting Profit) en lugar del volumen de ventas.

En el mercado de seguros, los ciclos se mueven entre mercados duros (poca competencia, primas caras) y mercados blandos (mucha competencia irracional, primas baratas). La mayoría de los equipos directivos destruyen valor en los mercados blandos porque se niegan a ver caer sus ingresos, de modo que bajan los precios para mantener el volumen, sembrando pérdidas masivas futuras.

RLI funciona como un acordeón. Veamos estos tres puntos clave de su cultura:

• Mecanismo de Incentivos (El Bono del Suscriptor): Los bonus del equipo directivo, mandos intermedios y de cada uno de los suscriptores en el terreno de RLI no se calculan según el volumen de primas que venden, sino en función del beneficio técnico neto que esas pólizas generan una vez restados los siniestros y gastos. Si un suscriptor genera pérdidas, su compensación variable se reduce a cero.

• La capacidad de encogerse: Gracias a esto, cuando el mercado se vuelve blando e irracional, los suscriptores de RLI prefieren dejar marchar a los clientes antes que recortar los precios por debajo del nivel técnico seguro. La empresa está culturalmente diseñada para reducir su tamaño operativo si las condiciones no son favorables. (Este es el entorno actual de buena parte de sus nichos de negocio, por eso el mercado la está penalizando).

• La alineación del accionariado (ESOP): El Plan de Propiedad de Acciones para Empleados (ESOP) y la directiva ostentan de forma conjunta entre el 10% y el 12% del capital total de la empresa. Los empleados son dueños reales de las acciones, por lo que entienden que proteger el capital de la firma es proteger su propio patrimonio de jubilación. En RLI no hay “empleados”, hay “socios”. Eso elimina la burocracia y la negligencia que suele hundir a las aseguradoras grandes cuando el mercado se vuelve blando.

Información obtenida de la presentación a inversores - Q4 2025.

5. Retorno sobre el Capital (ROE), ratio combinado y crecimiento del valor en libros.

El reflejo contable de este modelo y su cultura es un Retorno sobre el Capital (ROE) estructuralmente superior al de la industria.

Mientras que una aseguradora estadounidense promedio suele generar un ROE de entre el 8% y el 11%, RLI ha promediado en las últimas dos décadas retornos sobre el capital de entre el 14% y el 18%, alcanzando picos del 23% en fases recientes del ciclo.

A continuación incluyo una gráfica de TIKR donde se muestra el ROE del negocio total (el gran pico de ROE del año 2022 se debe a que vendieron su participación en Maui Jim, generando una plusvalía gigantesca):

A continuación incluyo una gráfica con el ROE operativo. La diferencia con el gráfico anterior, al mostrar su “ROE Operativo”, elimina los aciertos de su cartera de inversión y eventos extraordinarios para evaluar solo las pólizas. Este es el gráfico que demuestra que no es una aseguradora con enfoque “investment-led”, ya que deja patente que se centra en los beneficios del sector de los seguros.

Este rendimiento no se logra mediante un apalancamiento financiero excesivo, sino a través de la excelencia operativa medida por su Ratio Combinado (Siniestros + Gastos operativos / Primas cobradas):

• Un ratio combinado inferior al 100% indica beneficio de suscripción puro.

• RLI acumula un récord único en el sector: 30 años consecutivos manteniendo su Ratio Combinado global por debajo del 100%.

• RLI ha proporcionado un ratio combinado inferior a 100, en 39 años de los últimos 42.

• Su consistencia es tal que, en el último año reportado, el ratio combinado se situó en un extraordinario 86.1%, lo que implica que de cada dólar cobrado en primas, 14 centavos van directos al beneficio neto operativo antes de contabilizar las ganancias generadas por las inversiones de su cartera (el float).

Información obtenida de la presentación a inversores - Q4 2025.

El crecimiento del valor en libros por acción e incluyendo dividendos, ha crecido a tasas anuales del 22.2% en la última década.

El secreto para mantener un ratio bajo es:

• Suscripción sobre Volumen: Estar dispuesto a escribir menos seguros si el precio no es el adecuado. La mayoría de los CEOs no pueden soportar ver caer sus ingresos, pero en seguros, a veces el mejor negocio es el que no haces.

• Gestión de Siniestros: No basta con cobrar bien; hay que pagar lo justo. Una gestión eficiente y rápida de los reclamos evita que los costes legales se disparen.

• Selección de Riesgo: Usar datos y experiencia para identificar qué clientes tienen menos probabilidades de tener un accidente.

6. ¿Por qué el precio de sus acciones ha caído un 45%?.

La cotización de RLI Corp. sufrió una corrección severa desde sus máximos históricos por encima de los $90 por acción hasta bajar de los $48.

Mercados Blandos vs. Mercados Duros.

• Mercado Blando (Soft Market): Hay mucho capital queriendo entrar al negocio. Las aseguradoras, con los bolsillos llenos, compiten bajando precios y relajando las condiciones para atraer clientes. Es el momento peligroso: se siembran las pérdidas que se cosecharán años después.

• Mercado Duro (Hard Market): Ocurre tras una serie de catástrofes o años de pérdidas acumuladas. El capital huye, algunas empresas quiebran y las que quedan suben los precios drásticamente y se vuelven muy selectivas. Es aquí donde las empresas bien gestionadas, como RLI o Berkshire, hacen una fortuna.

No estamos en el pico de un mercado duro (donde puedes seguir subiendo precios), pero tampoco estamos en el fondo de un mercado blando (donde se regalan las pólizas). En muchos de los nichos aseguradores, se ha terminado el mercado duro, y estamos en esa etapa donde solo los suscriptores más inteligentes y disciplinados logran mantener esos ratios combinados envidiables, y a los que no son disciplinados se les verán los errores dentro de unos años.

Podríamos decir que el mercado ha activado el modo de “penalización por prudencia”, ya que en las últimas llamadas de resultados, la directiva ha manifestado explícitamente una postura de extrema cautela, ralentizando la emisión de pólizas en ciertas líneas y diciendo que estaban teniendo que ser muy selectivos y dejaban pasar muchas opciones de suscripción.

Cuando RLI decide reducir volumen voluntariamente para proteger sus márgenes, los analistas interpretan esto como un enfriamiento del negocio y un regreso a un mercado blando sectorial que erosionará el ROE futuro.

Los inversores de corto plazo venden sus posiciones al ver estancarse los ingresos brutos, sin comprender que en el sector de seguros de nicho, encogerse temporalmente es la única forma de garantizar la rentabilidad a largo plazo. El mercado prefiere un crecimiento ciego con riesgo oculto a una contracción inteligente con beneficio asegurado.

Revisando las llamadas de resultados, vemos como nos indican que están siendo selectivos, están dejando de suscribir pólizas muy poco rentables, y están viendo como otros están rebajando las condiciones y los precios para seguir suscribiendo. Las MGAs (Managing General Agents) son intermediarios que tienen poder para emitir pólizas en nombre de grandes aseguradoras o fondos de capital, pero con una diferencia vital: las MGAs cobran una comisión por cada póliza que venden, pero no pagan los siniestros si las cosas salen mal. El riesgo final se lo come el proveedor de capital que está detrás de ellas. Pues bien, están viendo como estas MGAs están en una fase muy agresiva de competencia.

Podría rescatar una frase de la cultura empresarial de RLI, que su CEO nos recuerda de vez en cuando:

“Jerry Stevens, our founder, used to remind us that you don’t win the long game by swinging at every pitch, you win it by knowing which ones to let go by. That mindset is deeply ingrained at RLI”. Craig Kliethermes.

7. Rentabilidad histórica y el poder oculto de los dividendos especiales.

La compañía no acumula capital de forma ociosa en su balance. Si un año experimenta pocas catástrofes y la suscripción es sumamente rentable, como suele ser, devuelve el exceso íntegro a los accionistas. No soy para nada un fan de los dividendos, ya que prefiero que las empresas tengan opciones de reinvertir toda su caja a buenos retornos sobre el capital en su propio negocio. Pero en una cartera hay espacio para todo tipo de empresas, si la rentabilidad total es buena.

• El hito de los Dividendos Especiales: RLI lleva décadas pagando dividendos especiales masivos de forma recurrente al final de casi cada ejercicio fiscal. Si sumamos la cantidad agregada de todos los dividendos especiales distribuidos por RLI en los últimos 15 años, la cifra de efectivo devuelto supera con creces la capitalización de mercado de la empresa en aquel momento. Eso dejando a un lado el dividendo ordinario y la revalorización de la acción.

• Dividendo ordinario: RLI lleva 51 años consecutivos incrementando su dividendo ordinario. (Dividend Yield aproximada = 1.3%).

Información obtenida de la presentación a inversores - Q1 2026.

• Comparativa de Rentabilidad Total: Durante las últimas dos décadas, la rentabilidad total compuesta (retorno del precio de la acción + reinversión de dividendos normales + dividendos especiales) está en el entorno de un 12-15% anual compuesto.

Miremos los rangos de rentabilidad que mostraban en la presentación de inversores del Q1 2024 (antes de la caída de la cotización):

Miremos los rangos de rentabilidad que mostraron en su última presentación de inversores del Q1 2026 (después de la caída de la cotización):

8. Valoración.

Hemos visto anteriormente la información más importante, que es: la cultura de la empresa, el enfoque en la durabilidad del negocio, la disciplina en la suscripción, la mentalidad de propietario, y que huyen de ser la típica empresa de seguros centrada en el “investment-led”.

Sólo una vez que hemos validado eso, podemos proseguir con la valoración. Para este tipo de empresas, me gusta centrarme en la relación entre la rentabilidad generada (ROE) y el múltiplo pagado por sus activos netos tangibles (Price-to-Book Value o P/B).

Ratios históricos y actuales —> P/B, ROE.

• Valor Contable Actual (Book Value Per Share - Q1 2026): $19.54

• Múltiplo P/B Promedio Histórico (20 años): Entre 2.8x y 3.0x.

• Múltiplo P/B en Máximos ($90 por acción): Excedió las 4.6x (precio excesivo que asumía un entorno perfecto).

• Múltiplo P/B Actual ($49 por acción): Con la acción cotizando a $49 y un BVPS de $19.54, el múltiplo actual es de 2.51x.

Pero el P/B no dice mucho si no lo asociamos a un retorno del capital ROE.

• ROE actual: >22%

• ROE promedio últimos 30 años: 16-17% (Habitual promedio a lo largo de un ciclo completo).

• Hemos pasado por un mercado duro con grandes ROE, y estamos pasando a un mercado blando, donde RLI deja de batear aquellas bolas no rentables. Pero el mercado da por hecho que el mercado blando bajará mucho el ROE de RLI, y por ello ajusta si valoración.

Valoración actual:

• Precio por acción: 49 $

• Valor en Libros (Q1 2026) = 19.54 $

• P/B actual = 2.51x

• ROE actual = 23%

• ROE / [P/B] = 9%. (Esto me sirve para comparar la potencia del motor contra el precio de la máquina, pero no es la rentabilidad del accionista).

• El múltiplo alto actúa como un “peaje” que frena el interés compuesto de tu inversión. La directiva de RLI sabe perfectamente que cotizan a un P/B muy alto. Si se quedaran con todo el dinero dentro de la empresa, la rentabilidad de sus accionistas se diluiría por el alto precio pagado en bolsa. ¿Qué hacen? Devolver todo el capital que no necesitan vía dividendos especiales. Al sacarlo de la empresa, evitan que ese dinero sufra el “peaje” del múltiplo alto y te lo entregan limpio para que lo inviertas tú en otra cosa.

Valor intrínseco en un escenario neutral de ciclo completo:

• Dada la impecable cultura organizativa de RLI, la demostrada capacidad de fijación de precios, el ROE normalizado a lo largo del ciclo completo de un 16%-17%, y que hace crecer su valor contable a doble dígito (22.2% anual incluyendo dividendos, en los últimos 10 años), merece un múltiplo mínimo de mercado de 3x su valor contable (y en línea con su valoración histórica). Por tanto, para mí, el valor intrínseco sería:

• Valor intrínseco = Valor en Libros (Q1 2026) * 3 = 19.54 $ * 3 = 59 USD/acción.

• Tenemos un 17% de margen de seguridad para el escenario supuesto conservador de ciclo completo. Si RLI consigue mantener niveles de ROE elevados como en estos últimos años, y por tanto por encima del ROE normalizado del ciclo completo, pues mejor para el inversor y margen de seguridad más grande.

• Por tanto tenemos un negocio que ha proporcionado rentabilidades totales al accionista, durante las ultimas dos décadas del 12-15% (reinvirtiendo dividendos), con un margen de seguridad del 17%.

9. ¿No te ha convencido la valoración? ¿Buscas un valle de valoración?

¿Crees que podrías esperar y comprarlas más baratas si el entorno empeorase? ¿O incluso te quieres guardar algunas balas para recomprar más barato si Mr. Market entra en pánico? Pues vamos a intentar adivinar un valle de valoración.

Vamos a mirar un período muy desfavorable como la gran crisis financiera y ver como valoraba el mercado las acciones de RLI y ver cual era su valor en libros. Eso puede dar una idea de suelo de valoración de Mr. Market, aunque a mi eso personalmente no me interese mucho, más allá de un dato curioso. Hay que mencionar que la empresa en base el gran histórico de retornos ofrecidos, desde aquel momento ha justificado rangos de valoración más altos. Además vamos a añadir información sobre el ratio combinado de aquellos años para ver si la posible sobrerreacción de Mr. Market tenía un fundamento sólido o sólo pánico. (Información obtenida de los 10-K de la empresa. No liarse con la evolución de los datos en sí, ya que hubo splits de acciones y como siempre dividendos especiales altos).

Podemos ver desde el año 2004 hasta el año 2013 como evolucionan los P/B por orden cronológico: 1.68x, 1.84x, 1.81x, 1.62x, 1.85x, 1.40x, 1.43x, 1.94x, 1.73x, 2.52x. El ROE promedio fue del 15% en ese período (anteriormente adjunte grafico de ROE en últimos 30 años).

Y podemos ver además la evolución del ratio combinado en aquel entorno, que como veis fue muy buena.

Vemos que la cultura empresarial les permite siempre tener buenos ROE, buenos ratios combinados en cualquier escenario,…así que un valle de valoración a día de hoy tras haber demostrado ser una empresa muy sólida y rentable en las últimas décadas, sería unas 2x valor en libros. Eso sería un precio por acción de 39 usd/acción.

El valor en libros de RLI, a lo largo de los años sólo ha caído debido a las grandes salidas de dividendos especiales. Pero no ha caído por malas suscripciones de seguros ni por caídas en sus sólidas y aburridas carteras de inversiones.

DISCLAIMER: Este análisis no es una recomendación de compra o de venta, cada inversor debe hacer su propio análisis antes de hacer cualquier tipo de inversión.

(La información de la empresa ha sido obtenida de presentaciones de resultados, conferencias de resultados, y su página web corporativa).

In this article I will indicate which are the top 10 stocks in my portfolio at the moment. Before doing so, I will mention some groupings of companies since I personally like to categorize them.

Companies with long-term ownership vision.

This group of companies are those that allow me to have a clear and real long-term vision of the business. The first thing I need is to know that they will not disappear, and then that they will have a good annual return of 8-12% or a very good >15%. But the most important thing in this group is durability and knowing that I could go 5-10 years without seeing its results and be calm. The world changes very quickly but this group could adapt and endure over time. What would be desirable for me would be to own only this type of companies in several years. I have identified and have a watch list of these types of companies, but based on their valuation, I will have to wait. I know I'll have to pay a reasonable to mid-high price for them, but I won't pay a premium price. When markets fall, I won't buy very cheap value companies, I will buy these types of companies (excellent companies at reasonable prices). This year I have been able to buy a few companies of this type, but they still represent a small percentage of the portfolio.

Medium-term investments. (Don't run away, I explain this term below).

As I have mentioned, it would be desirable for me to only have companies from the previous group, but I cannot spend my entire life waiting for wonderful prices from wonderful companies. And I cannot be accumulating all the new liquidity that I am receiving monthly nor have the savings generated in previous years waiting to be invested. So, I will have to look at which companies the market offers me at excellent prices from non-excellent businesses or with temporary problems that I have detected and that can be solved internally. These companies may be in the portfolio for <2-4 years, I don't know in advance, and they are companies that will have to be monitored much more than those in the previous group. It is a much less profitable return in terms of the time dedicated to monitoring, but its percentage in the portfolio will be small and there will be a good handful of this type of companies.

These years this group of companies has given me the highest returns and I have received many acquisitions (this year, 7 of these companies have been acquired by private investment funds). But they require a lot of analysis time, monitoring time and when you sell you have to pay taxes. It doesn't seem very efficient, but for me, it has been, since other options in the previous group would not have given me that profitability. For me, in the very long term, owning this group of companies will not be desirable, but they have allowed me to be efficient with my capital in the medium term. [Think when you add participation to an investment fund, perhaps 50% of the companies in the fund are very expensive and the other 50% are very cheap. Of each monetary unit you buy, 50% is not being very efficient].

Great investors say that good companies come once a year and we have to be ready to hit them. I have been investing since 2017, so following that criterion I would only have a portfolio of 8 companies at most. And if someone had acquired three of those companies from me and one had been a mistake, today I would only have 4 companies [For example, a few years ago I had a company called Alleghany Corporation, and to me it was a company with a proprietary vision, but Berkshire acquired it]. So, although each year I only detect one possible investment from the group of companies with a proprietary vision, I will also have to think about investing in other types of companies. Ideally, every year in the month of January they would give you the savings that you would generate throughout the year and buy an owner's vision company (such as paying an insurance fee). But the reality is that every month you generate an amount of savings, and therefore you have to have a purchasing investment discipline, maybe make a purchase every 1-3 months depending on your savings. [I am assuming that you have already created savings for your routine consumption and as your safety net in previous years. And I am only talking about the amount of investable money]. Imagine that you can invest an amount between 3000-5000 eur/usd per month, and that you also have prior savings that could be invested. You have the need to invest constantly to put that capital to work, but offers from companies with an ownership vision do not arrive every month and perhaps they will not arrive this year, so what do you do? Will you wait one or two years?

Therefore, for me this group of companies with a medium-term vision is necessary until you generate a sufficiently large portfolio of shares. [Large enough so that the savings pending investment are not very large compared to the portfolio already formed]. And on the other hand, until enough time has passed for you to have been able to build a portfolio made up only of companies with a proprietary vision.

I only acquire this type of company if I consider that at that moment there is no company with an owner's vision at an acceptable price and I need to put my capital to work.

Medium-term investments with options to be investments with an owner's vision.

As I know in advance what the required criteria for a company with an owner's vision will be and what the criteria will be to acquire a company with a medium-term vision, sometimes you acquire companies that you initially thought would only be medium-term investments and finally end up forming part of the group of companies with an owner's vision (since they have solved temporary problems or have introduced improvements in the business model).

Companies with a very solid balance sheet where I can place my liquidity.

Currently there are options for paid accounts where you can place your liquidity and obtain profitability, but a few years ago this was not the case. For this reason, I personally like to have very solid companies with a very strong balance sheet on my watch list to place my liquidity in the absence of possible investments from the previous groups (they may not have much profitability, but they are solid and the liquidity will be there when the you need it if the price is low.). I don't want to go into this explanation too much but some names come to mind like Inditex, Check Point Software, some SOCIMIs... that I have used in the past because they had a very low valuation and a bomb-proof balance sheet.

Currently a considerable part of my savings is in liquidity in remunerated accounts. But always trying to put it to work for me.

2. Stock portfolio.

After this introduction, let's see top 10 positions in my portfolio. The following are just percentages of my current stock portfolio. I am not considering the total of my assets there (nor the liquidity in remunerated accounts, nor the real estate, nor the timber land,...).

10^th Position. Diageo $DEO.

• 3.00% Portfolio.

• Medium-term investments with options to be investments with an owner's vision.

• Average purchase price: 142.10 USD

• Owner since July 2023. (First buy).

  

9^th Position. Rentokil Initial PLC $RTO.

• 3.05% Portfolio.

• Medium-term investments.

• Average purchase price: 26.30 USD

• Owner since December 2023. (First buy).

8^th Position. Alphabet $GOOGL.

• 3.50% Portfolio.

• Medium-term investments with options to be investments with an owner's vision.

• Average purchase price: 90.50 USD

• Owner since November 2022. (First buy).

7^th Position. Apollo Global Management $APO.

• 4.20% Portfolio.

• Company with long-term ownership vision.

• Average purchase price: 53.23 USD

• Owner since April 2022. (First buy).

  

6^th Position. Tesla $TSLA.

• 4.80% Portfolio.

• Company with long-term ownership vision.

• Average purchase price: 180.20 USD

• Owner since October 2020. (First buy).

  

5^th Position. Eurofins Scientific $ERF.

• 5.10% Portfolio.

• Medium-term investments with options to be investments with an owner's vision.

• Average purchase price: 51.50 EUR

• Owner since September 2022. (First buy).

  

4^th Position. Howard Hughes Holding $HHH.

• 5.90% Portfolio.

• Company with long-term ownership vision.

• Average purchase price: 70.30 USD

• Owner since October 2020. (First buy).

  

3^rd Position. Berkshire Hathaway $BRK.B.

• 6.80% Portfolio.

• Company with long-term ownership vision.

• Average purchase price: 264.90 USD

• Owner since June 2018. (First buy).

  

2^nd Position. Markel Corporation $MKL.

• 8.90% Portfolio.

• Company with long-term ownership vision.

• Average purchase price: 1200.20 USD

• Owner since November 2018. (First buy).

  

1^st Position. Brookfield Corporation and Brookfield Asset Management $BN $BAM.

• 16.70% Portfolio. (15% $BN & 1.70% $BAM)

• Company with long-term ownership vision.

• Average purchase price: 34.10 USD $BN ($BAM obtained as a spin-off of $BN).

• Owner since February 2019. (First buy).

“The number one thing that I would say to anyone that is investing is that there’s never a right strategy. It’s whatever strategy fits yourself and what you want to do. We have always operated in a methodology where we’re trying to walk away from the cliff" Bruce Flatt, CEO of Brookfield.

DISCLAIMER: This article is not a buy or sell recommendation, each person should do their own research before making any kind of investment.

Rentokil Initial PLC is the world's largest pest control company, offering the broadest, most advanced range of pest control solutions and services in the industry. The company also provides hygiene services, including the provision and maintenance of products.  In addition, it engages in the supply and maintenance of workwear and protective equipment.

Rentokil Initial PLC is operating in over 90 countries, approximately 90% of its revenues are derived from outside the UK.

Rentokil started out as the idea of an entomologist, Professor Harold Maxwell-Lefroy, and has grown into the world’s leading commercial pest control services company and the most recognised brand in the industry.

A timeline about the company:

• 1903: Mr A. P. Bigelow introduced a towel rental service to businesses in London. Each towel was marked with the customer’s initials, which ensured that customers only received their own towels, leading to the name, ‘Initial Towel Supply Company’.

• 1906: Danish pharmacist, Georg Neumann of Aalborg discovered a strain of bacteria lethal to rats and mice, which became known commercially as Ratin. The first London sales office opened in 1906.

• 1920: Maxwell-Lefroy, Professor of Entomology at Imperial College London, was asked to study ways of exterminating Deathwatch beetles in Westminster Hall and in time began receiving regular orders.

• 1924: Maxwell-Lefroy started supplying bottles of woodworm fluid from a small factory in Hatton Garden, which he called ‘Ento-kill fluids’ – an amalgam of the Greek work ‘entomon’ meaning insect and the English word ‘kill’.

• 1925: Rentokil is born. The company was registered in 1925 as Rentokil Limited due to trade name objections preventing the name ‘Entokill’.

• 1928: The Initial Towel Supply Company floated on the stock market and during the 1930s.

• 1940: Demand for pest control services began extending beyond rodent control to insect control.

• 1946: Shortly after WW2 Reykjavik found itself overrun with both brown and black rats. Rentokil was called in to deal with the problem and within a few weeks, the rats were eradicated.

• 1957: By the mid-1950s, the synergies between British Ratin and Rentokil Ltd had become obvious and British Ratin acquired Rentokil Ltd and its service arm, Woodworm and Dry Rot Control Ltd.

• 1960: Rentokil Group Ltd. was adopted as the main title of the Company.

• 1962: On 1 January 1962 all the UK trading companies became divisions of Rentokil Laboratories Ltd, shortened to Rentokil Limited.

• 1964: Rentokil launched in Asia, through the acquisition of Anti Pest in Hong Kong and Fumigation & Pest Control in Singapore.

• 1965: Rentokil signed a 10-year contract with the City Fathers of Hamelin – the first since a certain Pied Piper had been called in 1284!

• 1966: Rentokil was awarded a contract to repel birds at Buckingham Palace and pest control at the newly opened Post Office Tower (BT Tower).

• 1969: Rentokil Group Ltd was listed on the London Stock Exchange with one of the largest new issues of shares the City had seen. In the same year, it established the basis of a hygiene division with the purchase of Rashbrooke Chemical Company and in 1970 acquired Thames Services for £1million.

• 1973: Rentokil was called upon to carry out termite treatment to the foundations of the newly completed Sydney Opera House.

• 1979: Rentokil secured a pest control services contract for the newly-built NatWest Tower in the City of London – at that time it was Britain’s tallest building.

• 1985: In the early 80s BET increased its stake in Initial to 40%, and in 1985 BET acquired the remaining 60%. This allowed it to merge Initial with Advance Service’s laundry operations while retaining the Initial brand name.

• 1987: Rentokil acquired Thomas Cowan and cemented its position as the leading pest control provider in Malaysia and Singapore.

• During the 70s, 80s and 90s Rentokil embarked on geographical expansion. A healthcare division (now hygiene) was set up during this period.

• 1996: Rentokil made its largest acquisition to date, BET (British Electric Traction) and the Initial brand passed to Rentokil.

• 2007:  Rentokil launched the world’s smartest mousetrap – RADAR – the Rodent Activated, Detection And Riddance device which combines CO2 and infrared technology.  Rentokil Initial entered Asia’s fastest-growing economies of Brunei, India, and China.

Image made by Nikolett Emmert

• 2012: Operations expanded to new territories with acquisitions in Turkey, Brazil, Abu Dhabi and Dubai. In North America, the acquisition of Western Exterminator made Rentokil one of the largest players in the US pest control market.

• 2015: Rentokil made its 50th acquisition in the US – consolidating its position as one of the largest national pest control companies in the world’s biggest pest control market.

• 2017: Rentokil Initial forms a joint venture with PCI Pest Control. PCI’s operations in 250 locations and 6,900 colleagues join forces with the existing Rentokil team to become the biggest pest control service in India. 

  Rentokil launches Lummia a new generation of energy-efficient LED fly killers designed to attract, kill and encapsulate insects hygienically, eliminating the risk of contamination in hygiene-critical areas.

  Rentokil Pest Control is awarded The Queen’s Award for Enterprise for International Trade, recognising the business’s outstanding achievement in global trade.

Source: Annual reports/Website.

2.    Main sectors and regions of the business.

Main sectors of the business.

1. Pest control.

Rentokil Pest Control is the world’s leading commercial pest control company, operating in 90 countries. This is a growing global market and Rentokil is strongly positioned for growth with leading positions in the UK, continental Europe, Asia, Pacific and South Africa, and a rapidly expanding presence in North America.

Pest control is their priority category in acquisitions to increase density. Rising hygiene standards are driving greater demand for pest control in their markets, particularly in emerging economies.

Its key points of differentiation include the strength of its brands, international reach, innovative products and an excellent operating model. This is helped by their heavy investment in information technology, allowing them to serve customers better, faster and more efficiently. Rentokil maintains a strong portfolio of innovations to drive further growth and develop its leading technical capability. Its unique patented products underpin its differentiation.

2. Hygiene & Wellbeing.

Initial Hygiene is the world’s leading hygiene services brand with leading positions in 22 of our 60 countries. including Pacific, Asia, the Caribbean, Europe, the UK and Africa.

Rentokil provides provide high-quality hygiene solutions and services for washrooms, full premises and enhanced environments that minimise the risk of exposure to pathogens, micro-organisms, air-borne particles and harmful VOCs. This is a complementary business to Pest Control with compatible operational models and a strong profit contribution.

Initial offers a wide range of products including the new Signature and Reflection ranges, together with Colour and no-touch options as well as air purification, surface hygiene, floorcare and SmartHygiene. Their focus is on product and service quality to sell more services per customer; targeting higher-margin customers and increasing retention rates.

Rentokil achieves high levels of customer satisfaction and this is a key competitive advantage.

3. Workwear in France.

Initial Workwear in France specialises in the supply and maintenance of garments, such as workwear and personal protective equipment. Initial also offers a specialist cleanroom service for the pharmaceutical and healthcare sectors. This category has a complementary fit with Hygiene, benefiting from a shared brand, linked service and integrated route-based operations.

Source: Own elaboration

We can see how the company's strategy is advancing, focusing on the pest and hygiene market.

Main regions of the business.

Source: Annual Reports.

• North America.

The world’s largest pest control market. Rentokil provide commercial and residential pest control services and sell pest control products. Rentokil also provide plants to enhance office environments. North America is a key focus for their acquisitive growth as they consolidate their national presence in pest control.

• Europe & Latin America.

Renkotil provide pest control, hygiene, plants and, in France, workwear and textile services. Its largest operations are in France, Germany and Benelux. Other countries managed out of the Europe region include Austria, Switzerland, Italy, Spain, Portugal and Greece.

Its Latin American business is also managed through its European business with the support of our Spanish and Portuguese teams due to cultural and language similarities. Its businesses located in the Caribbean also report through South America.

• UK & Sub-Saharan Africa.

In the UK Rentokil provide pest control, hygiene and plants services as well as a number of smaller specialist services including property care, medical and specialist hygiene. Other countries included in this region are Ireland, Estonia, Lithuania and several countries in Sub-Saharan Africa where we provide pest control, hygiene and plants services.

• Asia & MENAT.

Rentokil offers hygiene and pest control services in many countries in Asia, including Malaysia, China, Indonesia, Philippines, Singapore, South Korea, Taiwan, Thailand, Vietnam and Brunei. They are the largest pest control service provider in India through a joint venture with PCI.

MENAT countries include Saudi Arabia, Turkey, Jordan and UAE where we provide pest control and hygiene services.

• Pacific.

Rentokil provide pest control, hygiene services and plants in Australia, New Zealand and Fiji.

Source: Own elaboration

Location within the pest control industry.

• Manufacturers: Bayer, Corteva, Syngenta, BASF, Sumimoto Chemical, JT Eaton.

• Service providers: Rentokil, Rollins, Ecolab.

• Software providers: Ratsense, Woodstream, Adams Pest Control.

3.    Bussiness model.

Rentokil Initial has unrivalled expertise in the delivery of its route-based business model. Rentokil has a very clear target operating model: single-country management teams leading integrated, multi-service operations with combined back-office functions, all underpinned by common systems and processes such as route optimisation and measurement of customer satisfaction.

Rentokil Initial consider their business model as a “cog” where everything is correlated and is evaluated and controlled through periodic measurements at the group, business, country and branch level. The nature of its business model remains a key determinant of the company's strength and resilience. As a global operator benefiting from highly defensive product and service lines, the Company remains well positioned to navigate macroeconomic and geopolitical volatility.

Main characteristics of the business model.

Source: Annual Reports.

• Operating model. Decentralised, single-country management teams.

This simple decentralised approach features single-country. Each country team leads integrated, multi-local and multi-service operations, using combined back-office functions underpinned by shared systems and processes, such as route optimisation, marketing and brand alignment, and measurement of customer satisfaction.

• Focus on the customers. High customer retention, recurring revenues and pricing power.

They are a subscription-based business, servicing customers from the largest multinational pharmaceutical, industrial and food production companies to local shops, restaurants and homes.

More than 80% of revenues from service customers (rather than product customers) are protected by annual contracts. In most regions we are able to increase prices in line with inflation, while retaining high levels of customer retention.

As a services business, brand trust and identity matter. The company has two power brands in Pest Control – Rentokil and Terminix.

• Focus in organic growth.

Organic revenue growth with new business and additional products and services. Focus on providing high levels of customer service on an ongoing basis through innovation and providing new products.

Organic growth continually drives improvements in business network density.

The strategy with regards to managing pricing and protecting margins involves carefully communicating cost challenges to your customers, ensuring their understanding of why the financial effects of inflationary cost pressures should be passed through into customer prices.

• Focus in profits and margins growth with a low-cost model.

Your business model for profitable growth is focused on capitalization of income, profits and cash growth through organic growth and M&A. Revenue growth along with Their low-cost operating model allows them generate strong growth in the Group's profits.

The company has a fundamental understanding of route density, which helps them consolidate their positions in existing markets and improve margins, in part by focusing on increase the density of your routes, either through organic activity or by acquisition.

• Focus on capital allocation model & returns

The company is a large cash generator and they work to maintain its balance sheet, allowing you the flexibility to reinvest in both innovation and M&A growth.

M&A Acquisitions are a core part of your business model, aimed primarily at city-focused deals to build presence and density in both Pest Control and Hygiene and Wellbeing

Another key objective is to generate long-term profitable growth to help deliver value and strong returns to shareholders. The Group is committed to maintaining its progressive dividend policy with dividend payments, twice a year, related to the level of Free Cash Flow available.

4.    Main competitors and market share.

In this section and to try to focus on the most important business area, we will focus only on the pest market sector. And within the pest market sector, we will focus on the largest pest market in the world, North America. US accounts for c.44% (c.$10.5bn) of the global market.

Source: Own elaboration

In December 2021 Rentokil announced the proposed acquisition of Terminix for $55 per share in a largely equity financed transaction. The purchase will create the market leader in US pest control and adds 84% to Rentokil’s Pest Control revenue taking it to 75% of pro-forma 2020 revenue. Terminix has strong brand equity in residential and termite pest control which is highly complementary to Rentokil’s strength in commercial pest control.

In the graph above, only information from the United States is being included, but the three main companies (Rentokil, Rollins & Ecolab) compete globally and have large economies of scale compared to smaller companies.

Rentokil competes in the highly fragmented termites, residential and commercial pest management markets. Key international competitors of Rentokil include Orkin (Rollins), Ecolab and Anticimex.

Global market of ~75,000 businesses. Highly fragmented market.

Source: Annual Reports.

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5.    Industry growth trend.

The global pest control market is a strong, growing and attractive, non-cyclical market. It is highly fragmented with strong growth drivers fuelling medium-term growth across all regions.

The expected growth for the industry is included below:

• Pest control global market worth c.$23.7bn per annum and is expected to continue to grow at c.5-6% annually to reach c.$31.4bn by 2027.

• US accounts for c.44% (c.$10.5bn) of the market, maintaining a CAGR of c.5% to 2027, driven by strong residential and termite markets and its role as an essential service supporting ‘licence to operate’ businesses.

• Rest of the World has a CAGR of c.6% to 2027, driven by higher growth in Emerging Markets and Cities of the Future

Structural growth drivers.

• Growing population.

• Rise of pests.

• Vector-borne diseases.

• Climate change.

• Standards increasing - Food Safety Modernization Act. (both at the time of consumption and in the agricultural sector).

• Increasing business pressure (reputational risk in bussiness as hotels, restaurants,..).

• Increasing Pest Intolerance Driven by a growing expectations of middle classes.

• Low residential penetration (less than 15% of homes in the US have professional pest care).

• Customer Migration Continued migration to warmer, humid southern states with high pest pressure.

• Regulatory Pressures Increasing role for innovation

• Expanding Pest Footprint As pest move into new geographies there are increased risk in public health.

Expected growth of the global market by segments:

• Commercial accounts for 50% of the global market.

• 55% of the global termite market is in the US alone.

• Consistent growth across each segment globally.

Source: Annual Reports.

Expected growth of the US market by segments:

• Residential is the largest segment of the US pest control market.

• Pandemic benefited Residential as people spent more time at home.

• US accounts for over 50% of the global residential and termite markets.

Source: Annual Reports.

6. Brief quote of competitive advantages

It is important to highlight that Rentokil is a business with several competitive advantages such as:

• scale economics

• good company culture

• low-cost and customer-critical products

Source: Annual Reports.

7.    Performance in the markets since 2000.

I have reviewed company information from the year 2000 to today. And we can say that we have two very different periods in terms of business management and business focus.

From 2000 to 2013, the company was a holding company with a wide variety of businesses (electronic security, surveillance and conferences, control pest, hygiene sector, package delivery business,..).

In that period, the company made several very bad acquisitions that generated large losses. Those acquisitions were made in sectors that had nothing to do with the pest management business. The business that generated the most losses and that led the company to a very delicate situation in 2008 was City Link (package delivery business).

From everything I have been able to read, the CEO between 2004 and 2008 (Brian McGowan) destabilized the company. McGowan was involved in the controversial 2004 ousting of previous chairman Clive Thompson, one of Britain's best-known businessman who was dubbed "Mr 20 Percent" for his record of increasing earnings by this amount when chief executive.

I add some quotes from the press and from the CEO of 2008.

• February 2008.

“A second profit warning in as many months from British pest control and parcel delivery group Rentokil sent the shares plunging by more than a quarter to a 16-year low on 29 February”, said an analyst.

“The conglomerate, best known for its rat-catching roots, said profits this year would fall well below 2007 levels due to weak trading and management failings at its City Link parcel delivery business”, said an analyst.

"Credibility is clearly in tatters and the City Link debacle may herald the eventual break-up of the group in our view", said an analyst.

• July 2008.

“Shares in Rentokil Initial plunged more than 30% on July 25, 2008, after the pest control and services group issued another profit warning, blaming failed acquisitions and a poorly executed business restructuring”, said an analyst.

"We continue to experience operational problems in a number of our businesses, virtually all of which originate from poorly executed restructuring or acquisition integration programmes initiated between 2005 and 2007" its CEO said at the time (Alan Brown. CEO – 2008-2013).

"It's not a good time to sell anything as far as I can see, unless you're into the fine art world. We should first of all improve our business before we secondly look at the portfolio", said Alan Brown.

“A third of the profit downgrade was due to the slowing economy and the rest to the poor integration of acquisitions and misguided cost-cutting plans by previous management”, said Alan Brown.

"We believe the current management team has over a decade of mismanagement to address and, while we feel there are decent underlying businesses in the group, the road to recovery is likely to be much longer than expected." said Alan Brown.

Rentokil Initial announced the sale of City Link after five years of substantial losses in 2013, and has already eliminated other unprofitable sectors.

Therefore, the company made the transition from a large conglomerate with very diverse businesses (electronic security, surveillance and conferences, Citi Link,…) to a company with the clearest focus on the most profitable market niche such as the pest control and hygiene sector.

And the market was quick to recognize the big changes towards a profitable company with high growth. Andy Ransom has been the CEO of Rentokil from 2013 to the present.

From mid-2012 to May 2023, the company had an increase in its share price of almost 800% (Without considering dividends).

Recently after a results warning after a large acquisition such as the company Terminix, Mr. Market has become nervous and the shares have fallen 35%.

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8.    The acquisition of Terminix. Mr. Market's concerns are now about the company.

On December 2021 Rentokil announced the proposed acquisition of Terminix for $55 per share in a largely equity financed transaction.

In October 2022, Rentokil completed the acquisition of Terminix, the largest pest control brand in the US, performing c.50,000 customer visits each day from c.375 locations across 47 states. The company paid an enterprise value – the combined value paid for Terminix’s equity and its net borrowings – of just over £4.5bn. In return, it got a business that was making annual operating profits of £173mn, according to FactSet data. It is a high price but it is a sector with high valuation multiples, and the company saw potential in optimizing synergies and being the market leader.

Terminix is the leading provider in the residential and termite sectors in the US, a market worth an estimated $10.5bn and expected to grow to c.$13.4bn by 2027, a CAGR of c.5%. It serves 2.9 million customers, with more than 80% of their services revenues recurring.

The acquisition brings together two highly complementary and synergistic portfolios creating the largest pest control operator in the US, the world’s largest pest control market, and a clear global leader in pest control.

The combination adds between 75%-80% to the size of Rentokil Initial’s Pest Control business in revenue, and is expected to be highly cash generative. The enlarged business will have a strong platform for growth, particularly in North America, and an attractive financial profile to support future growth, including through acquisitions and continued investment in innovation and technology.

This acquisition means that Rentokil now has more exposure to the North American market and the pest control segment. This acquisition has already been considered in section 2 when talking about geography and sectors of its sales.

The specific scope of business will also vary within the pest control segment. Terminix has strong brand equity in residential and termite pest control which is highly complementary to Rentokil’s strength in commercial pest control.

North America mix bussiness:

Rentokil consider that there is a substantial opportunity to reduce the cost base of the enlarged group by investing to drive efficiencies, and by improving productivity to drive margin improvement through capitalising on the benefits of scale and higher density in the operations.

By the end of year three the Company estimates it will have generated pre-tax P&L net cost synergies of at least $200m, with c.$150m of synergies to be delivered from Selling, General and Administrative (SG&A) expenses and c.$125m to be delivered from Field Operations. Total one-time cost to achieve synergies are expected to be c.$200m, increased in line with annualised go-forward synergies.

Source: Annual Reports.

Now, the company expects its expanded scale to be the main driver of growth, with the objective of exceed market growth by 1.5 times from 2025 (Until 2025, the company will need to adjust and optimize the joint structure of both companies).

Source: Annual Reports.

Other very important considerations:

• I see their ambition of 100bps annual margin improvement for three years after closing as achievable.

• No value has been ascribed to revenue synergies.

• Terminix is benefitting from its self-help program ‘The Terminix Way’ and declining legacy termite claims.

• 2-2.5x Net Debt-to-EBITDA is targeted medium term.

What worries the market.

• The price paid for the acquisition. [A considerable price was paid but the great synergies that will be generated between both companies, being the leader of the American market,... has a price].

• The increase in debt in this macroeconomic environment. [The company is a great generator of cash, so I am not worried either, although it will take a few years to adjust the debt to normal levels].

• Profit warning. Rentokil recently noted temporary lower demand in North America. “It now expects an annual adjusted operating margin for North America of 18.5%-19%, down from its previous guidance of about 19.5%”. [Short-term problems don't worry me either].

• Potential for increased termite damage claims as a result of the Terminix acquisition.  But Rentokil's CEO is already considering these possible effects in his projections and directions for the company: “Greater exposure to legacy termite claims arising from the Terminix transaction will lower our free cash generation over the next few years as we resolve these customer issues”.

I don't want to make this section too long, but I would like to add the mention that Terminix has historically been poorly managed with four CEOs since its IPO in 2014.

9.    Growth through acquisitions.

In in 2022, the company acquired 52 new businesses (excluding Terminix): 46 in Pest Control (with 30 across Growth markets and 16 in Emerging markets), and six in Hygiene & Wellbeing, for an aggregate consideration of £259m (excluding Terminix), as part of our bolt-on M&A programme.

Historically, the company has always been acquiring companies within the sector that is very fragmented.

• 2016. 41 Deals. £140m acquired revenues.

• 2017. 39 Deals. £170m acquired revenues.

• 2018. 56 Deals. £170m acquired revenues.

• 2019. 41 Deals. £140m acquired revenues.

• 2020. 23 Deals. £160m acquired revenues.

• 2021. 52 Deals. £150m acquired revenues.

Rentokil is a serial acquirer and targets 2-5% revenue growth from M&A.

10.    Main figures of the bussiness and its evolution.

Revenues (£m):

Source: Own elaboration

Gross, operating and net margins (%):

Source: Own elaboration

EBITDA (£m):

Source: Own elaboration

Net Debt (£m):

Source: Own elaboration

Free Cash Flow (£m):

Source: Own elaboration

Sales, operating profits and operating margins differentiated by Rentokil's three business sectors.

Pest Control            /       Workwear (France)      /       Hygiene & Wellbeing

Source: Annual Report

11.    Valuation of the company and estimation of future value.

The pest control sector is one of the most defensive sectors that exist. Many defensive consumer companies may suffer if consumers shift to lower-priced products, distancing themselves from their brands during times of crisis. But how long do you want to live with an infestation of rats, mosquitoes, termites, bed bugs and vermins...? Therefore, they are sectors that are very resistant to any economic cycle and are great cash generators. It is one of the oldest, most necessary and most profitable sectors in the world.

It is also a sector where route density and network scale is key. Therefore, the main players can offer the most competitive prices, which is why they increasingly gain more share and are more profitable. This allows them to invest more in improving their products, expanding their defensive moat and gaining market share.

The market recognizes this sector and always demands very high valuation multiples to pay. Personally, I have been following Rentokil's main rival company, which is Rollins, for years, but I have never been able to buy it for the high multiple at which it is listed (even considering its considerable terminal value).

We can see that the usual valuation multiples for market leaders are:

o   EV/EBITDA = 20X-30X

o   EV/FCF = 30X-40X

Below I include a small comparative valuation table of the main players in the American market at this time:

Source: Own elaboration

From 2013 to today, both Rollins and Ecolab have had average valuation multiples similar to those they currently have. Rollins can be considered a company very similar to Rentokil, and not Ecolab, which is within many different sectors and the comparison is more complicated.

As you can see, Rentokil's valuation is very low compared to its main competitors. The acquisition of Terminix brings together two highly complementary and synergistic portfolios creating the largest pest control operator in the US, the world’s largest pest control market, and a clear global leader in pest control. In addition to having a larger global footprint. (Rentokil 34% US market share; Rollins 22% US Market share).

It must be taken into account that as long as Rentokil does not digest the integration of Terminix, it will have lower profitability since it will have: higher temporary expenses, higher debt, lower ROIC,...but this effect will be reversed when the company manages to integrate Terminix into its structure: taking advantage of cost synergies, gaining market share, achieving more scale and network density, generating a lot of FCF, lowering their debt and interest payments to a more normal level. And even with all this, Rentokil is greatly undervalued compared to its peers (EV/EBITDA, EV/FCF, ROE-P/B).

The ROIC will be temporarily low, due to the acquisition of Terminix:

• It will involve additional temporary costs until the end of the integration.

• Limitation of FCF generation capacity.

• The debt has increased considerably and the costs associated with it as well.

• Renkotil is on track for ROIC to exceed WACC by FY 25.

2023 Rentokil current valuation:

• Market cap (today) = 10,740 £m

• Revenues = 5,370 £m

• Ebitda (Adj) = 1,200 £m

• Net Debt = 3,200 £m

• Free cash flow = 450 £m

• Market cap / FCF = 23.87

• EV/EBITDA = 11.62

• NET DEBT/EBITDA = 2.67

Where do I see growth in the next few years?

1. General market growth = 5-6%

2. Bolt-on acquisitions = 2-5%

3. Operational excellence. Their ambition of 100bps annual margin improvement for three years after closing as achievable.

4. Terminix Integration. Terminix integration adds between 75%-80% to the size of Rentokil Initial’s Pest Control business in revenue, and it is expected to be highly cash and FCF generating, allowing debt to be reduce at more typical levels. Additionally, the synergies between Rentokil and Terminix will reduce costs and capex, which will also boost FCF. [By the end of year three the Company estimates it will have generated pre-tax P&L net cost synergies of at least $200m].

5. Adjustment of your valuation multiple compared to your peers. [I do not consider that the difference in valuation compared to Rollins is closed, because Rollins is a company with excellent efficiency and quality, but it is part of the difference in valuation].

I have personally carried out an DCF model, a comparison by multiples against its competitors, and an assessment of its terminal value. And I think there is value here. (You know that I don't like to include a detail of a personal flow discounting analysis, since small changes in the perception of your input provide very different results. But I encourage you to do it).

In a conservative way, I estimate that Rentokil in 2028-2029 could be generating FCF of around £1,000-1,100 million. With an EV/FCF multiple of 30x, the company should capitalize around £30,000m [Current market cap = 10,740 £m]. You already know that I don't like to provide the most bullish scenario possible, since there are things that always go wrong along the way, or the competition does it better,...that's why I emphasize that this valuation is conservative.

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DISCLAIMER: This analysis is not a buy or sell recommendation, each person should do their own research before making any kind of investment.

(Company information has been obtained from the annual reports and website).

Investors Title Company was founded in 1972 by J. Allen Fine. Mr. Fine successfully raised the funds necessary to capitalize the company and take it public.

Investors Title Company, a holding company incorporated in North Carolina in 1973, is the parent company of two wholly owned title insurance underwriting subsidiaries: Investors Title Insurance Company (ITIC) and National Investors Title Insurance Company (NITIC).  The Company’s primary business activity is the issuance of residential and commercial title insurance.

Title insurance dates back to the late 1800s, yet the volume of the title insurance written remained low through the early 1970s. That changed dramatically when lenders began to sell their mortgages on the secondary market, a transformative event that Mr. Fine anticipated. As a result of his foresight, Investors Title was established, has successfully expanded into select markets, and consistently maintains above-average profitability despite economic downturns.

The Company became operational in 1976 when it acquired ITIC as a wholly owned subsidiary under a plan of exchange of shares of common stock. ITIC has been operating since 1972. In 1983, the Company acquired NITIC, formerly Northeast Investors Title Insurance Company, under a plan of exchange of shares of common stock. NITIC has been operating since 1973.

Schedule of notable company events:

• 1972. Investors Title Insurance Company is incorporated in North Carolina and established with a capital investment by J. Allen Fine, followed by an initial public offering of stock.

• 1973. Investors Title Company is established as holding company for Investors Title Insurance Company and other subsidiaries.

• 1985. Investors Title grows to become the leading title insurer in North Carolina.

• 1985. The Canada Goose is adopted as the Investors Title corporate icon. The "V" flying formation of a flock of geese embodies the instinctive trait of innovation that enables collaborative effort to optimize team aerodynamics, supports the ability to thrive in a diverse range of habitats, and provides unwavering stability. It is Investors Title's instinctively client-centric approach to developing innovative business processes and solutions that sets it apart.

  

• 1986. Stock begins trading on NASDAQ National Market.

• 1988. Investors Title Exchange Corporation is established to provide 1031 exchange services and act as a qualified intermediary in tax-deferred exchanges of real property. Investors Title Exchange Corporation was one of the first organizations of its kind specifically structured to handle these types of transactions.

• 1994. Investors Title Accommodation Corporation is established to provide an exchange accommodation title holder vehicle for reverse exchanges.

• 1999. Investors Title Management Services, Inc,. is established to provide management services to affiliate owned title and real estate providers.

• 2001. Launch of EFLITE - an innovative, web-based application for preparing title reports, opinions, and supplemental documents.

• 2004. Investors Trust Company is established in North Carolina to provide investment, trust, and fiduciary services to individuals and entities.

• 2011. Launch of iTracs - a proprietary escrow reconciliation serviceoffered by Investors Title Management Services that features automated 3-way reconciliation, daily reporting of account activity, customized alerts of irregularities or critical errors, monthly third-party review, and audit-ready and state-bar compliant reporting.

• 2014. A.M. Best first assigns a financial strength rating of A (Excellent) to Investors Title Insurance Company. 

• 2017. Investors Title is recognized as second in the list of best-run public companies in North Carolina by the Triangle Business Journal.

• 2019. Investors Title founder and CEO, J. Allen Fine, named as one of the recipients of the Triangle Business Journal's 2019 CEO of the Year award.

• 2020. ClientCONNECT EFLITE is launched to North Carolina customers and enhances the time-saving solutions of the original application.

• 2022. Investors Title celebrates 50 years of operations.

Main geographic locations of the company:

• ITIC is licensed to write title insurance in 44 states and the District of Columbia. ITIC currently writes title insurance as a primary insurer in 22 states and the District of Columbia, primarily located in the eastern half of the United States, and as a reinsurer for NITIC and third-party title insurance companies.

• NITIC is licensed to write title insurance in 20 states and the District of Columbia. In November 2014, NITIC redomesticated to Texas. NITIC currently writes title insurance as a primary insurer in Texas, and as a reinsurer for ITIC.

• Premiums from title insurance written on properties located in North Carolina, Texas, South Carolina and Georgia represent the largest source of revenue for the title insurance segment. In North Carolina, a majority of the Company’s title insurance commitments and policies are issued directly. In Texas, South Carolina, Georgia and other states, title policies are primarily issued through issuing agents.

  In 2022, North Carolina, Texas, South Carolina and Georgia represented 35.6%, 29.0%, 9.4% and 9.2% of total premiums written by the Company, respectively.

2.    Bussiness model and its main areas.

Investors Title is headquartered and has most of its branches in North Carolina. The company subscribes directly and issues title insurance policies and retains the full premium since no commissions are paid to agents. Operations in homes and branches have ranged between 20% and 30% of premiums.

The company operates with many independent title agencies which are responsible for underwriting and issuance of policies. These agencies retain the majority of the premium and remit the remaining amount to Investors Title. Outside In North Carolina, almost all premiums come from agencies.

Investors Title underwrites premiums in exchange for protection against risks. Their goal is to make underwriting profits and earn investment returns for policyholders. This “floating” capital is funds that will be necessary to pay possible make claims in the future. This means that the floating capital can generate investment income for many years.

Therefore, the Company’s primary business activity, and its only reportable operating segment, is the issuance of residential and commercial title insurance through ITIC and NITIC.

The company's business areas are: Title Insurance, Reinsurance, other services.

1. Title Insurance area. (If you have never analyzed a company in this sector, below I explain the title insurance area showing answers to classic questions that we can ask ourselves).

• What is title insurance and what does it protect?

The Company underwrites title insurance for owners and mortgages as a primary insurer. ITIC and NITIC offer primary title insurance coverage to owners and mortgagees of real estate and assume reinsurance of title insurance risks from other title insurance companies. The commitments and policies are predominantly issued using standard forms approved by the American Land Title Association (“ALTA”).

Title insurance protects against losses resulting from title defects affecting real property. Upon a real estate closing, the seller of real property executes a deed to the new owner, and typically, the property is encumbered with a new mortgage. When real property is conveyed from one party to another, occasionally there is an undisclosed or undiscovered defect in the title or a mistake or omission in a prior deed or mortgage that may give a third party a legal claim against such property or result in the invalidity or unenforceability of the insured mortgage. If a claim is made against the title to real property, title insurance provides indemnification against covered defects.

Numerous types of defects could jeopardize the property owner’s or mortgagee’s interest in the property for which a title policy may provide coverage. Such risks include title being vested in an individual or entity other than the insured, lack of a right of access to the property, invalidity or unenforceability of the insured mortgage, or other liens or encumbrances that make the property unmarketable. The policy may provide coverage for defects arising from prior unsatisfied mortgages, judgments, tax liens or confirmed assessments, or encumbrances against the property arising through easements, restrictions or other existing covenants. Title insurance may also protect against deeds or mortgages that were forged or improperly acknowledged or delivered, that were executed by spouses without the other spouse’s signature or that were conveyed by minors or other persons who lack legal capacity.

The Company issues title insurance policies based on a search of public records. The title search documents the current status of title to the property. There are two basic types of title insurance policies – one for the mortgage lender and one for the real property owner. A lender often requires property owners to purchase title insurance to protect the priority of its mortgage loan, but the lender’s title insurance policy does not protect the property owner. The property owner has to purchase a separate owner’s title insurance policy to protect its investment.

• What options are there to resolve a claim?

If a claim is made against an insured property’s title, the insurer can choose to pay the cost of eliminating the covered title defects or to defend the insured party against the covered title defects affecting the property.

In the alternative, the insurer may opt to pay the policy limits to the insured or, if the loss is less than the policy limits, the amount of the insured’s actual loss due to such title defects, at which time the insurer’s duty to defend the claim and all other obligations of the insurer with respect to the claim are satisfied.

• How are title insurance underwriting operations operated?

ITIC and NITIC issue title insurance policies directly and through a network of agents. Issuing agents are typically real estate attorneys, independent agents or subsidiaries of community and regional mortgage lending institutions, depending on local customs and regulations and the Company’s marketing strategy in a particular territory. The Company’s title insurance subsidiaries determine the terms and conditions upon which they will insure title to real property according to the Company’s underwriting standards, policies and procedures. Title insurance premiums written reflect a one-time premium payment, with no recurring premiums.

• How is the premium for internal/external agents managed?

Generally, premiums for title insurance are recorded and recognized as revenue at the closing of the related transaction, when the earnings process is considered complete. When the policy is issued directly, the premiums collected are retained by the Company. When the policy is issued through a non-wholly owned title insurance agency, the agency retains a majority of the premium as a commission and remits the net amount to the Company. Title insurance commissions earned by the Company’s agents are recognized as expenses concurrently with premium recognition. The percentage of the premium retained by agents varies by region and is sometimes regulated by the states where the property is located.

• How long do licenses to issue insurance last?

Each state license authorizing ITIC or NITIC to write title insurance must be renewed annually. These licenses are necessary for the companies to operate as a title insurer in each state in which they write premiums.

• What magnitude do complaints usually have?

The claims are relatively rare and are expected to represent a small percentage of revenue. In terms of administration, the company has tended to overbook, as can be seen if the negative figures in the provision for claims from previous years. In the last years the company has a provision for losses to represent a small percentage of revenue (average 2.5-3% of sales 2023). From 2000 to 2010 the company had a provision for losses of around 10%. (It shot up to almost 24% in 2008). I have been able to read that thanks to digitalization the % of complaints has been reduced in the lasy years, but I cannot be sure by what percentage this is due to that. It could be that they were keeping fewer provisions, but the board has demonstrated a significant degree of conservatism over the years.

2. Reinsurance area.

In the ordinary course of business, ITIC and NITIC reinsure certain risks with other title insurers to limit their risk exposure and to comply with state insurance regulations. They also assume reinsurance for certain risks of other title insurers for which they receive additional income in the form of reinsurance premiums. For each of the last two years, revenues from reinsurance activities accounted for less than 1% of total premium volume.

3. Other areas.

Additionally, the Company provides:

• tax-deferred real property exchange services through its subsidiaries, Investors Title Exchange Corporation (“ITEC”) and Investors Title Accommodation Corporation (“ITAC”).

  • ITEC acts as a qualified intermediary in taxdeferred exchanges of real property held for productive use in a trade or business or for investment, and its income is derived from fees for handling exchange transactions and interest earned on client deposits held by the Company.

  • ITAC provides services as an exchange accommodation titleholder for accomplishing “parking transactions”. These transactions include reverse exchanges when taxpayers decide to acquire replacement property before selling the relinquished property, or “build to suit” exchanges, when improvements must be made to the replacement property before the taxpayer acquires the improved replacement property.

• investment management and trust services to individuals, trusts and other entities through its subsidiary Investors Trust Company.

• management services to title insurance agencies through its subsidiary, Investors Title Management Services (“ITMS”). Investors Trust provides investment management and trust services to individuals, companies, banks and trusts. ITMS offers various consulting and management services to provide clients with the technical expertise to start and successfully operate a title insurance agency.

  

3.    Some important differences between title insurance and conventional insurance.

Differences in relation to operating expenses.

• Since title insurance is an evidence-producing/loss-prevention line of insurance, its loss expense is less than and its operating expense is greater than that of other property/casualty lines of business. Insurance expenses are loss-prevention, underwriting-related and loss-related.

• Operating expenses are the largest component of a title company's costs. A title company's ability to expand its infrastructure and maximize operating profits in good market conditions, and to contract and control costs in poor market conditions, is critical to its long-term financial success and solvency. This isn't necessarily the case with property/casualty companies, where the control of loss costs is more critical to success and solvency.

• Because of title insurers' dependency on the health of the real estate market and favorable interest rates - as well as their being required by law in most states to be monoline writers - title industry revenues and profitability are susceptible to volatility. To dampen this volatility, title insurers have:

  • Improved their technology and work-flow processes.

  • Diversified their operating revenue by introducing new title products and expanding nationally and internationally.

Differences in relation to investments.

• Property/casualty insurers collect premiums in advance and hold them until they must indemnify claimants for losses. These premiums constitute a large cash flow that companies generally invest in intermediate and long-term, investment-grade assets. The investment income generated is reinvested, and a company's asset base grows at a compounded rate until losses on policies materialize and are paid. Claims for the long-tail casualty business lines might take decades to appear and the accruing premiums can add significantly to a company's assets. As a property/casualty company's ratio of written premiums to surplus (equity) increases, the fraction of total assets that are financed by advanced premiums from policyholders also increases. In other words, writing property/casualty insurance can create financial leverage.

• Title companies collect premiums after the largest component of their costs - operating expenses - has been incurred. Title companies' expense ratio typically averages more than 90, while the property/casualty industry's expense ratio is less than 30. The title industry's higher expense ratio results in a significant reduction in available cash flow for companies to invest. Although the remainder of the title premium is available for investment, the relative percentage of premium collected and invested is significantly less than that of the property/casualty industry. As such, the title industry's financial leverage is relatively low.

• Title insurers use much of the premiums collected to cover the underwriting costs associated with the issuance of a title insurance policy. In contrast to property/casualty insurers, title insurers expend premium dollars before collection, and therefore do not retain most of the premium dollars before they are expended in the ordinary course of business.

• On the other hand, the loss tail for title insurers is much longer than that of most other lines of insurance, and it constitutes a form of leverage where some percentage of premiums is set aside and held for future claims. The loss-tail leverage constitutes only a small percentage of the premiums, however.

4.    Main competitors.

The title insurance industry is highly competitive and is a regulated oligopoly. The four largest title insurance companies typically maintain greater than 80% of the market for title insurance in the United States, with smaller regional companies holding the balance of the market. The market shares are as follows (they vary from year to year but this could be an average of recent years):

• Fidelity National Financial 34%

• First American Corporation 25%

• Old Republic National Title Insurance Company 15%

• Steward Information Services 10%

• Others 16%. (Investors Title Company has a 1% market share).

In the United States, there are over 5,100 title insurance companies.

The number and size of competing companies varies in the respective geographic areas in which the Company conducts business. Key competitive factors in the title insurance industry are:

• the financial strength

• the size of the insurer

• the timeliness and quality of service

• the price

• the expertise in certain transactions.

Title insurance underwriters also compete for agents based upon service and commission levels.

Some title insurers currently have greater financial resources, larger distribution networks and more extensive computerized databases of property records and related information than the Company.

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5.    Management team.

J. Allen Fine was the principal organizer of Investors Title Insurance Company and has been Chairman of the Board of the Company, Investors Title Insurance Company, and National Investors Title Insurance Company since their incorporation. Mr. Fine served as President of Investors Title Insurance Company until February 1997, when he was named Chief Executive Officer. Additionally, Mr. Fine serves as Chief Executive Officer of the Company and National Investors Title Insurance Company, and Chairman of the Board of Investors Title Exchange Corporation, Investors Capital Management Company and Investors Trust Company.

Mr. Fine is the father of James A. Fine, Jr., chief financial officer and executive vice president of the company, and W. Morris Fine, president and chief operating officer of the company.

Percentages of participation in the ownership of the company.

• J. Allen Fine 10.39%

• James A. Fine, Jr 9.44%

• W. Morris Fine 4.43%

  

Image obtained from The Demotech Difference magazine’s Legacy of Longevity series (fall 2022 edition) [click here]

It should be noted that he also has a significant stake in the company, in my opinion one of the best capital allocators that exist, such as Tom Gayner (CEO of Markel Corporation). Percentage of participation in the ownership of the company.

• Markel Corp 11.28%

Therefore, we could say that we have 35% of the company's shares in the hands of owners with ownership vision.

6.    Industry growth trend and cyclicality nature. Current state of the real estate market.

About the industry growth trend.

The title industry continues to play a critical role in the U.S. economy by insuring the proper transfer of real estate from buyer to seller and by facilitating the growth of the secondary mortgage market. This enables Americans to have one of the highest home ownership rates in the world.

The industry has grown steadily in the last years. Factors like a robust housing market, low interest rates and increased refinancing activity stoke this growth, despite challenges like intensified competition and skilled worker shortage.

Between 2007 and 2017, the title insurance industry’s direct premiums written increased by about 50%.

The market size of the Title Insurance industry in the US has grown 9.8% per year on average between 2017 and 2022.

The global Title Insurance market is expected to expand at a CAGR of 8-9% during the forecast period 2023-2027.

About the cyclitality and seasonal.

Real estate activity, home sales and mortgage lending are cyclical in nature. Title insurance premiums are closely related to the level of real estate activity and the average price of real estate sales. The availability of funds to finance purchases directly affects real estate sales. Other factors include mortgage interest rates, consumer confidence, economic conditions, supply, demand and family income levels. The Company’s premiums in future periods are likely to fluctuate due to these and other factors which are beyond management’s control.

Historically, the title insurance business tends to be seasonal as well as cyclical. Because home sales are typically strongest in periods of favorable weather, the first calendar quarter tends to have the lowest activity levels, while the spring and summer quarters tend to be more active. Refinance activity is generally less seasonal, but is subject to interest rate fluctuations.

About the current state of the real estate market and factors that affect ITIC's business.

The demand for title insurance products is largely dependent on the demand for real estate transactions, which are, in turn, critically dependent on:

• the financial factors (interest rates).

• as well as on a healthy labor market characterized by low or decreasing unemployment rates and generally increasing wages.

• a stable inflation environment helps to ensure market stability and consumer purchasing power.

I do not intend to include my vision of the American real estate market here, since everything that depends on macroeconomics will be very risky assumptions and I do not have that knowledge. But I can include several pieces of information to reflect on the current state:

• The national average 30-year mortgage rate rose for the sixth week in a row to 7.63% in the third week of October, according to Freddie Mac. Consider whether mortgage rates are more likely to rise or fall. I see it as more likely that they will go down in the medium term favoring ITIC business.

• With many homeowners “locked in” at low interest rates and unwilling to sell, demand continues to exceed for-sale inventory.

• Housing market activity remains weak thanks to rising mortgage rates, elevated home prices and constrained housing inventory—a trifecta of headwinds perpetuating the housing affordability crisis. Home affordability sank to its lowest level in more than three decades, according to the latest Real House Price Index (RHPI) released by First American Financial Corporation.

• In August, 82% of consumers reported putting home-buying plans on hold, according to the latest Fannie Mae Home Purchase Sentiment Index (HPSI).

It’s clear that the home buyers are more affected by the speed of mortage rate changes rather than the spot rate itself.

With the following images I intend to reflect several important aspects of the current state. I will not comment on them so as not to extend the thesis further, and I also think that the graphs are quite clear. (The following images are obtained from a Howard Hughes Holding presentation which in turn obtained the information from “U.S. Census Bureau, NAR, Freddie Mac”).

7.    Performance in the markets since its IPO.

The evolution of the share price in the markets has been as follows.

From 1986 to 2023 (Stock begins trading on NASDAQ National Market). The first years of the company were not excellent as it had to consolidate and adjust its business model.

• ITIC +1,478% (withouth dividend) vs S&P500 +1,642% (Image from Yahoo Finance).

From 2000 to 2023. In the last 23 years the company has improved the profitability of the S&P500 index.

• ITIC +787% (without dividend) vs S&P500 +212% (Image from Yahoo Finance).

The company has had two falls of more than 20% (2007 & 2022), and three falls of more than 15% (1994, 1999 and 2009). (Image obtained from Macrotrends.net).

We can see the returns in the price of its shares without considering dividends.

• From 2001 to 2008. The price per share went from 9.78 USD/Share to 24.46 USD/Share (>12% annualized return without dividend).

• From 2009 to 2016. The price per share went from 24.46 USD/Share to 109.30 USD/Share. (>20% annualized return without dividend).

• From 2017 to 2023. The price per share went from 109.30 USD/Share to 146.84 USD/Share. (>4.4% annualized return without dividend). But we must take into account the enormous extraordinary dividends in recent years, of more than 45 usd/share. During 2020 and 2021, Investors Title earned cumulative net income of $106 million and distributed 69 million dollars to shareholders, through special dividends.

(Image obtained from Macrotrends.net).

8.    Main figures of the bussiness and its evolution.

I include below the main results of the company over the last few years to see its evolution, cyclicality, variation in margins, value creation....

Revenues (Usd in million):

Operating profit, net profit, Ebitda, dividends and others (Usd in million):

It can be recognized that a strong part of the home sales cycle has just happened in the years 2019, 2020 and 2021, but the market has stopped. And that can be seen in the company's results this year or 2022. This affection becomes clearer to me if we look at the sales market for existing homes.

The company pays a regular quarterly dividend equivalent to a yield of 1.2%. Starting in 2017, the company gave several special cash dividends to the shareholders.

Investments (Usd in million):

Currently, the short-term investments represent 50% of investments, the fixed maturity securities represent 30%, the equity securities investments represent 15% and other investments represents a 5% .

Book value and net debt (Usd in million):

We can observe the sustained growth of the book value and always the negative net debt.

Free cash flow (Usd in million):

9.    Bussiness valuation and a comment on the latest results.

As in “section 8”, I have only included results until the end of 2022, I include here the comparison with the most updated 2023 results (last week). We can see how, given a 33% drop in the “Net premiums written", they can easily be freed from the costs of that network of independent title agencies and other costs. It must be taken into account that this network will have to be hired again in the future so it has to be a win-win and not about firing the entire network suddenly from one day to the next. Here you may have some non-productive expenses for a while but the staff in the sector is scarce, so you have to take care of it. But in a survival situation it could be drastically reduced.

The drop in net premiums written has been occurring since 2021, which was the year with the most activity in the real estate market (Sales for the year 2023 estimated with respect to Q3 data). And consequently the reduction of expenses in independent agents. (Units: million USD)

Unrealized gains and losses on capital investments are highly variable in the short term. But, if interest rates rise and the real estate market slows down, they will try to compensate with profits from investments in short-duration fixed income that allows them to adapt to recent rates. As the months go by, they will be able to update investments at higher rates.

I have included this small comparison of the evolution of the last two years to try to indicate how we are in the lower part of the cycle, although we do not know at what exact point. So let's keep this in mind when making the following assessment.

One of the most difficult parts of cyclical stocks can be detecting the current moment within the cycle. It can be recognized that a strong part of the home sales cycle has just happened in the years 2019, 2020 and 2021, but the market has stopped. And that can be seen in the company's results this year. This affection becomes clearer to me if we look at the sales market for existing homes.

2023 Valuation:

With the company’s stock trading at $146.84, Investors Title has a market capitalization of $277 million. Currently the shares trade at 1.12x book value. The company has an investment portfolio of $227 million, and negative net debt of $24.00 millions.

• Market cap (today) = 277 M USD

• Revenues = 230 M USD

• Ebitda = 33.15 M USD

• Net Debt = -24.00 M USD

• Free cash flow = 23.00 M USD

• Enterprise value/ FCF = 11.00

• Free cash flow yield = 9.10%

• EV/EBITDA = 7.67

• NET DEBT/EBITDA = -0.73

• %margin ebitda = 14.4%

• Price to Book value = 1.12x

• ROE = 10%

Conclusion about the company.

• I think the current valuation is attractive regardless of the economic context. But if we consider the current part of the real estate cycle and its strong contraction, I think it can be even better.Investors Title may be a small company in total market size in the United States, but it has a good share in the states that represent the majority of its business and has a proven history of solid and profitable operations.

• Its small size allows it to grow faster than the market in which it operates.

• The company has a proven history of strong balance sheets and profitable operations.

• The company was able to handle the 2008 crisis in an exceptional way.

• The company is well positioned for the future if we look at the areas in which it operates. The largest states in which the company operates experienced significant positive net migration during the pandemic.

• The company has aligned management team with skin in the game and with extensive experience.

• The company's capacity for flexibility with demonstrated experience in crisis situations in the sector.

  • By maintaining a good relationship with multiple independent title agencies, in times of economic prosperity they can deploy a large network and capture large profits (personnel costs increase a lot).

  • And in times of crisis in the real estate sector, they are easily freed from the costs of that network of independent title agencies (personnel costs are greatly reduced).

  • The objective of the directive is to reduce the cyclical nature as much as possible. If interest rates rise and the real estate market slows down, they will try to compensate with greater profits from investments in short-duration fixed income that allows them to adapt to recent rates.

• Business culture with a long-term focus, whose key aspect is survival.

• They have been heavily developing digital tools to further minimize possible insurance claims, despite having less financial muscle than the main players in the market.

• The company has a solid balance sheet, conservative investments, consistently positive free cash flow.

• The claims are relatively rare and they represent a small percentage of revenue.

• The company had the ability to generate returns superior to the S&P500 in the last two decades.

Therefore I consider that it could be an interesting option, at current valuations. Taking into account that it is a small cap, the market offers prices with greater discounts than the current one a couple of times a year. After analysis, I believe that this investment can offer you a return of between 8-12% annually in the next 5-7 years, taking into account dividends, a small adjustment of multiples, and the profitability of the business.

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“My goal was to keep losses down, and if I could catch a few stocks going up, compound returns would work their magic.” Walter Schloss.

DISCLAIMER: This analysis is not a buy or sell recommendation, each person should do their own research before making any kind of investment.

(Company information has been obtained from the annual reports, and the following web pages have been consulted: TIKR.com, Yahoo Finance, Macrotrends).

Musti Group is the leading Nordic pet care company that operates an omnichannel business model to cater for the needs of pets and their parents across Finland, Sweden and Norway.

Company was founded in 1988 when the first Musti ja Mirri pet supply store was opened in Finland by the award-winning dog breeder Matti Varpula. Musti Group entered the Swedish market in 2012. Musti has established a strong platform from which it has driven market expansion on a mission to become the leading pan-Nordic group.

In early 2015, the company expanded its presence in Sweden after acquiring the franchiser of pet specialty chains “Arken Zoo” and “Djurmagazinet”. The add-on also included “Trimmis” grooming salons and the veterinary chain “Vettris”.

In late 2016, Musti Group opened its first stores in Norway.

In 2017, Musti acquired digital competences through the acquisitions of VetZoo and Animal strengthening in-house developer team.

Musti Group was listed in Q1-2020 on OMX Mid Cap Helsinki. The IPO netted a total of EUR 182 million.

In 2023, Musti acquired the pet food factory Premium Pet Food Suomi Oy. The acquisition is a factory producing frozen and dry pet food.

The successful and well-developed concept is based on a wide and curated assortment of pet food, accessories and services in combination with a strong culture of dedicated, knowledgeable and service minded employees. Today, Musti serves more than one and a half million loyal customers enrolled in its loyalty club.

2.    Business model and strategy.

Bussines model.

Its omnichannel business model combines the convenience of in-store and online shopping. The expert advice offered by its store staff is at the core of its business model. They differentiate themselves from the competition due to the breadth and quality of their products offered and have a clear strategy of betting on their own and exclusive brands. As part of their customer proposition, they implement more and more new services.

The company has a focused omnichannel operating model with a network of more than 340 physical stores across Finland, Sweden and Norway and over 20% of the net sales generated through online channel.

Musti Group's one-stop shop strategy is tailor-made for pet owners, as the company offers a wide range of premium products, all available in one place.

Musti Group’s concept has a strong customer focus and is built around trust and the expert advice offered by Musti Group’s store personnel. The Musti Group Loyalty Club is designed to serve as a platform to interact with customers and provide them with better customer service. Through the Loyalty Club, Musti Group can leverage data to truly understand its customers' behavior and provide them with targeted and relevant communication. Also, through the loyalty club, members receive targeted communications and special offers, as well as gaining access to their dedicated online account.

Another characteristic is that they focus on hiring truly passionate staff. The highly engaged, motivated and well-trained Musti staff are a key element of Musti Group’s culture and are fundamental to the success of the company’s business model as well as an important competitive advantage.

Musti Group’s management team has an impressive depth of knowledge with strong retail experience.

Musti Group Strategy.

Its main strategy is to continue developing its value proposition and better serve its customers in the Nordic markets, focusing on pet owners.

• Winning new customers

Musti Group is well positioned to continue its track record of winning new customers from the large and growing Nordic pool of 5.7 million pets. Succeeding in new customer acquisition, especially acquisition of puppies and kittens, is a key driver of continued market share gain across its Nordic markets.

Its share has been augmented by two initiatives, new puppy and kitten clubs launched in financial year 2020 followed by an upgraded breeder club launched in financial year 2022. These investments into early stages of the pet parenting journey are paying off.

The number of loyal customers, Friends of Musti, increased by 12% to 1,454 thousand during the financial year 2022 continuing the steady growth of earlier years. Its pet loyalty club is the largest in the Nordics.

• Grow share of wallet within existing loyal customers.

Growing the share of wallet within its base of 1.5 million loyal customers is a clear opportunity for Musti Group. To deepen the engagement of its customers, Musti is developing an ecosystem approach for Nordic pet parents with the aim to further increase share of wallet and loyalty, with an ‘All you need is Musti’ mentality across the pet lifecycle.

Rolling 12 months average spend per loyal customer was EUR 181.5 in financial year 2022 (EUR 188.3 on 30 September 2021) stabilizing from the pandemic levels and affected by the unfavorable exchange rate fluctuations.

• Expand store network and number of service points.

Over the financial years 2021 and 2022, Musti Group has had elevated focus on increasing the coverage of its directly operated network. This investment comes with longer term benefits, as a significant share of its network is currently at ramp-us stage. It aims to continue investing in their network at a more stabilized pace going forward, while continuing to see ample room for expansion especially in the Norwegian market to support further market share gains by entering new local communities.

The number of directly operated stores increased by net 39 stores during financial year 2022. This included new greenfield stores adding convenience to its existing network and acquisitions of 17 stores, mostly formerly operating under franchising agreements in Sweden.

• Focus on driving gross margins through increased O&E share and leveraging scale.

A core element of Musti Group’s strategy is growing the share of sales of own and exclusive products sold only in Musti Group’s channels. This comes with three main benefits:

1. the uniqueness of your offering

2. loyalty especially in food and other consumable categories

3. higher gross margin profile.

Musti Group has strong historical track record in driving gross margin improvement. Own and exclusive brands are a cornerstone of their high gross margins as these brands typically carry 10-15 percentage points higher margins compared to global brands.

In addition, they are focused on leveraging scale in procurement supported by pricing and category management. In financial year 2022, gross margin increased to 46.4% mainly driven by increased share of own and exclusive brands, efficient campaigning, and favorable product mix developments.

Musti Group continues initiatives to further strengthen both own and exclusive brands and gross margins. Key initiatives in the financial year 2022 included ramping up dry food production in its pet food factory in Lieto (Finland) and launching Smaak line of own pet food and treats. Share of sales of own and exclusive brands increased to 52.7% (51.0%) during the last year.

• Leverage broadly invested platform to drive operating leverage and scale benefits.

Significant investments to Musti Group’s IT, digital platforms and warehouses are expected to drive increased operating leverage and scale benefits to further increase Musti Group’s profitability as topline growth is expected to continue while fixed costs may be spread across larger net sales.

Strategies according to geographic division.

The reporting segment structure is based on a geographical division, on the basis of which Finland, Sweden and Norway have been designated as their own operating segments. Each country has their well-defined country plans to support Musti Group’s growth.

• In Finland Musti Group will continue to focus on serving existing customers better in order to increase share of wallet and winning new customers.

• In Sweden, the most important country level strategic plan is further expansion and convergence in efficiency and own and exclusive products’ penetration towards Finnish levels.

• In Norway, the focus is on continuing the expansion of store network and store ramp-up, as well as margin improvement.

3. Industry analysis and trends.

Musti Group operates in the Nordic pet care market, broadly defined as the sale of pet food, treats, products, services and veterinary care across Finland, Sweden and Norway. The market was estimated to be worth approximately EUR 3.4 billion (in 2021), with Sweden as the largest market, accounting for approximately EUR 1.4 billion, Finland approximately EUR 1.0 billion and Norway approximately EUR 1.0 billion.

Pet Parenting refers to the tendency of people to treat their pets like family members. As a result of this trend, people are spending more on higher quality and more premium food, as well as a more diverse range of products and services. This underlying trend that drives the long-term structural growth of the pet care market remains robust, shifting spend towards higher quality nutrition, a more diverse range of accessories and wider adoption of services.

The pet care market was positively affected by the Covid pandemic over 2020 and 2021, mainly through increased adoption of puppies and kittens and to some extent higher spending on discretionary categories, such as accessories. Puppy adoption rates began normalizing from these peak levels over 2022, while still above long-term averages. The pandemic period resulted in a step-up of Nordic pet ownership rates which increases the addressable market size for future years as the pandemic gains are expected to have a long tail effect.

We are used to seeing how many sectors have suffered a drop in sales after COVID, because they had temporary sales caused by the epidemic (as Eurofins Scientific..). But in this sector, new family members mean recurring sales.

The pet care market is resilient, underpinned by non-discretionary purchasing behavior. Non-discretionary categories such as food, cat litter and veterinary services make up approximately 75% of total market spend and are characterized by repeat purchasing behavior that is consistent through the cycle. Consumers display willingness to sustain spending on non-discretionary pet care purchases even while expenditure on alternative categories has been affected.

Trends in the Nordic pet care market:

• Pet parenting

Pet parenting is a major development in pet care that continues to have a profound impact on the global pet care market. People are increasingly treating their dogs and cats like members of their family, spending more on higher quality and more premium food, as well as on a more diverse range of products and services. Musti Group estimates that Pet Parents occupy close to one third of the total pet owning population but account for one-half of the total market spend.

• Global consumer megatrends

There are several global consumer megatrends that are highly visible across the pet care market. These include increasing environmental consciousness, desire for convenience in shopping, increasing focus on health and wellness, supply chain transparency and increased demand for services.

• Pet population growth and increased number of puppies

The number of pets in Musti Group’s operating markets has been seen to grow throughout the year as a result of an increased number of puppies. This development is driven by the ongoing strong pet parenting trend accelerated by the COVID-19 period and the increase in remote work. These trends form a solid foundation for market growth also going forward. The number of households and the Nordic pet population are expected to continue growing in the coming years.

• Channel shift

The increasing prevalence of pet parents across the Nordic countries has led to a channel shift towards pet specialists. Recently there has been a strong shift towards online boosted by the effects of the COVID-19 pandemic on customer behavior.

• Resilience of the Nordic pet care market

Consumers display a willingness to sustain spend on pet care through economic downturns, preferring to cut expenditure on alternative spend categories. In the Nordic countries this phenomenon has been clearly evidenced during the COVID-19 pandemic in 2020 as well as previously throughout the 2007–2009 economic downturn.

The global pet services market size is expected to expand at a compound annual growth rate (CAGR) of 9% from 2023 to 2030.

But the nordic pet parenting trend motivates a revenue CAGR of 14.5% between 2021-2025.

This rapid growth is attributable to the megatrend of demographic and social change such as:

• the rise of millennials

• ageing population

• growing middle class

• more single people

• global changes in attitudes

4.    The company in numbers.

4.1 Sales by segment, channel and growth.

Musti Group operates 342 stores with approximately 31% market share in Finland, 29% in Sweden, and 13% in Norway. The Company sells premium pet foods, accessories, and services, of which 78% are sold through physical channels and 22% through E-commerce.

Continued steady online growth accelerated most strongly in post-Covid quarters.

Musti Group’s revenue split consists of 77% pet food and 23% accessories.

Sales growth continues, but it is important to take into account what percentage of sales are recurring and what percentage are discretionary. The resilient food category is generating accelerated double-digit growth.

Discretionary and consumable categories faced high year on year comparison figures.

Sales CAGR 15%.

4.2 Market share, margin gross and own and exclusive brands.

Musti Group is the Nordic's largest pet specialist with a market share of 27% (ten times larger than its nearest competitor).

Musti Group offers a wide, curated assortment of pet products in both food and non-food categories and has a broad range of own and exclusive as well as third party brands. 52.7% of sales from own and exclusive brands and 47.3% from third-party brands.

The market share and its scale, its own products, and its high net margins strengthen its pricing power. Own and exclusive brand products are 10-15 percentage points more profitable.

The expansion of own and exclusive brand products combined with the growth of stores will cause gross margin to grow.

Gross margin is being negatively impacted mainly by unfavorable currency exchange rate and sales mix development. (currency weakness in Sweden and Norway).

Musti Group is estimated to generate 59.9% of its topline through sales of their own and exclusive brands in 24/25E.

4.3  Latest acquisitions.

In April 2023, the company announced that it had acquired full ownership of Premium Pet Food Suomi Oy in Lieto, Finland, and the integration work has been progressing very well. The acquisition is a dry and frozen pet food factory.

With this acquisition, the company will have its own factory with products produced sustainably and in its country.

The manufacturing facilities are optimized for raw material supply, as most ingredients are sourced from local producers. Furthermore, the acquisition provides them with the ability to respond to the growing demand for locally and sustainably produced products and the opportunity to increase their profitability by internalizing the production of our own brands. It perfectly supports your strategy. (All energy used in the manufacturing process is fully renewable and factory is equipped with solar panels).

Other acquisitions.

4.4  Main figures of the business and its evolution.

$EUR in million.

• Debt to EBITDA ratio = 2.1

• ROIC = 8-9%

• %Margin ebitda = 16.80%

• Dividend = 1.34%*

(*)  The company always make it clear that any potential dividend will take into account acquisitions, the company's financial condition, cash flow and future growth opportunities.

4.5  30 Year track record.

4.6 Major holders.

Major registered shareholders.

I would like to see more insiders who own shares within the board and employees. Insiders currently own just over 4% of the shares.

5. Valuation.

Once the company has been reviewed for a valuation, I have considered the following conclusions on which I believe can support its growth:

1. Nordic pet breeding trend expected to generate 14-15% revenue CAGR between 2021-2025. Pet owners are defined as a segment of pet owners who treat their pets as part of the family. Nordic pet breeding is growing six times faster than the total pet market and spends, on average, twice as much compared to typical pet owners. All of this is expected to benefit Musti Group's revenue and profits as the company has the largest market share of premium pet products in the Nordic countries.

2. Store network expansion and store growth enable revenue growth. Grupo Musti currently has a commercial network of more than 342 stores. Each store matures, on average, within three years, leading to rapid growth. The stores have a 2-year recovery profile. In 2022, Musti Group increased its number of directly operated stores by 39 and the company continues to open new stores to gain customers.

3. Margin expansion driven by store and new product growth. In addition to the maturation of the recently opened stores.

4. Pricing power. The market share and its scale, its own products, and its high net margins strengthen its pricing power. Own and exclusive brand products are 10-15 percentage points more profitable. The expansion of own and exclusive brand products combined with the growth of stores will cause gross margin to grow. Musti Group has 1.5 million loyal customers who buy unique products only sold by the company (through its own channels).

   In the last quarter, inflation was mitigated by net price increases of 8% and sales did not suffer.

5. The Company is acquiring customers representing 60% of all newly registered puppies, demonstrating that the Company has an effective customer acquisition strategy.

6. Fragmented market creates opportunities for Musti Group. The presence of many small players generates an exceptional scene for main players in the market to increase market share through acquisitions. As the main player in the market, Musti Group is expected to consolidate the market. In 2022 Musti Group acquired 19 pet stores through acquisitions.

7. The Company pursues a one-stop shop strategy, increasing value for customers with educated store personnel that can recommend suitable products based on specific pet needs. The concept is evidenced by the Company's 90% annual retention rate, the highest among the Company’s peers.

2023 Valuation:

• Market cap (today) = 620 M eur

• Revenues = 418 M eur

• Ebitda (Adj) = 70 M eur

• Net Debt = 147 M eur

• Free cash flow = 52.4 M eur

• Enterprise value/ FCF = 14.64

• EV/EBITDA = 10.95

• NET DEBT/EBITDA = 2.10

• %margin ebitda = 16.80%

I am not very in favor of including discounted cash flows because anyone could play with the parameters and draw very different conclusions. Or simply base the analysis on valuation multiples by looking at competing companies such as (Pet at Home Group, Pet Valu Holding, Petco Health & Wellness,…) that are located in different regions, with different models, different market shares, different competitive advantages... There are companies where I do like to do it but companies where I think it doesn't make much sense.

2027 Valuation based on analysis:

• Market cap (today) = 620 M eur

• Revenues = 700 M eur

• Ebitda (Adj) = 140 M eur

• Net Debt = 294 M eur

• Free cash flow = 98 M eur

• Enterprise value/ FCF = 7.82

• EV/EBITDA = 5.48

• NET DEBT/EBITDA = 2.10

• %margin ebitda = 20%

• Share of Own & Exclusive Sales -> 60-63%

Today Musti Group's market price is 620 mill EUR, I have estimated that in 2027 the market price could be 1,300-1,400 mill EUR (I think that is a conservative estimate). I don't like to think that everything will work out perfectly.

I consider that Musti Group could be a good investment idea, because it has a strong base to continue growing, certain competitive advantages, dominates its market share, pricing power, and is not excessively valued. Perhaps the market could go down its valuation even more and make it more attractive, but today it is already a good option. It must be taken into account that it is a microcap and the volatility can be considerable. Which can work in our favor, giving us moments where we can buy or increase the margin of safety.

This article is not a stock buy recommendation. All investors are advised to conduct their own independent research into individual stocks before making a purchase decision.

Diageo PLC is the world’s leading premium drinks business with an outstanding collection of international brands across spirits, wine and beer. Trading in approximately 180 markets, Diageo employs over 20,000 people with offices in 80 countries and manufacturing facilities around the globe.

Diageo, together with its subsidiaries, produces, markets, and sells alcoholic beverages. The company offers scotch, whisky, gin, vodka, rum, ready to drink products, raki, liqueur, wine, tequila, Canadian whisky, American whiskey, cachaca, and brandy, as well as beer, including cider and non-alcoholic products.

Diageo was created in 1997 when Guinness merged with food and beverage wholesaler Grand Metropolitan PLC. The deal was for $15.8 billion. [$15.8 billion was a record amount at the time, making the company the seventh-largest drinks and food holding organization globally].

About Guinness Brewery.

• The father of Arthur Guinness, born in 1725, was a brewer. He learned the trade from him and established his brewery in Celbridge. In 1759, he leased an acre and a half of land near St. James's Gate on River Liffey in Dublin for 9,000 years. Pale and ale beers were not very popular in Ireland; whiskey and gin were, on the other hand, much more common, so he decided to make black beer. He created his black beer using secret ingredients, and it was a huge success.

• In 1868, it was among the first three major breweries, with more than 350,000 barrels. By 1876, it had produced nearly 780,000 barrels. In October 1886, Guinness became a public company with average sales of over one million barrels per year. The company was worth £6 million at the time and the shares were oversubscribed twenty times the issue price, so the share price immediately rose 60% on the first day of trading.

• In 1914, the company had sold over 2.5 million barrels of beer, representing 10% of the British market at the time.

• In 1930, it was one of the seven largest companies in the world.

• In 1986, the company was renamed Distillers Company, which also made it a controlling body in the United Kingdom.

About Grand Metropolitan PLC

• 1934. MRMA ltd is incorporated as a public company (as a hotel business).

• From the accommodation market, it was a natural step forward to open toward catering.

• In 1967, it acquired Bateman Catering and Midland Catering.

• In 1967, it acquired Express Dairies, Berni Inns, and Mecca bingo halls.

• In 1972, it entered the brewing business by purchasing Truman, Hanbury & Buxton, Watney Mann.

• With these new acquisitions, the group held onto quite a few alcoholic beverage brands, including J&B whisky, Baileys Irish Cream, Gilbey's gin, Piat wine, and Croft sherry, and Smirnoff vodka. To reflect the change in direction and the rapid expansion of the company, it was renamed Grand Metropolitan in 1973.

• The 1980s saw a lot of M&A and divestment activities for the Grand Met.

  • It acquired US tobacco and drinks company Liggett Group, which was later sold to Bennett S. Lebow.

  • Warner Holidays and Intercontinental Hotels Corporation were bought

  • In 1987 acquisition of Heublein wines and spirits from RJR Nabisco, Grand Met became one of the largest producers of wine and spirits in the world.

  • In 1988 Through the buyout of the Pillsbury Company and its Burger King chain, Grand Metropolitan entered the fast food industry, later acquiring the Wimpy chain.

  • Haagen-Dazs ice cream and Green Giant vegetables were also part of Grand Metropolitan.

Diageo was created in 1997 although it was not until 2002 when it acquired its current name with the aim of focusing its activity on premium beverages.

In 2000, Diageo sell Burger King and Pillsbury to focus on its fast-growing alcoholic drinks market. It bought Seagram's drinks unit at the end of 2001.

Although Diageo was founded in 1997, its brands date back much earlier, some as far back as the 17th century.

Comments on the history of the oldest major brands:

• Haig Club Scotch Whisky is built on nearly 400 years of distilling heritage and the House of Haig can trace its whisky producing roots back to the seventeenth century. In 1824 John Haig established the Cameronbridge distillery and it was there that he pioneered the art of producing grain whisky in continuous Coffey and Stein stills - an invention which laid the foundations for the growth and success of the modern Scotch Whisky industry. Haig Club is born of that Haig family legacy of innovation and excellence in whisky making.

• Guinness Beer. Arthur Guinness was the first in a long line of Guinness Brewmasters, and the art of brewing at the St. James's Gate Brewery was passed down through the generations. On December 31, 1759, Arthur Guinness signed a 9.000 year lease for St. James's Gate Brewery in Dublin. If that's not faith, we don't know what is.

• Johnnie Walker Whisky. In 1820, the young farmer’s son started his own grocer’s shop in the thriving town of Kilmarnock. His father had died the year before and the farm sold. He wanted his customers to enjoy the same quality and flavor time after time. So he began mixing them together until he produced a whiskey that he was proud to name after himself. Today it is the most widely distributed brand of blended Scotch whiskey in the world, sold in almost all countries.

• Tanqueray Gin. Back in the 1830s, Charles Tanqueray was not afraid to mix up brave ideas in his own unique style. He invented gins with different flavorings.

• Smirnoff’s Vodka. In 1864, Pyotr Smirnoff opens a distillery in Russia and begins making vodka using a revolutionary charcoal filtering process. Smirnoff fled from Russia during the Revolution and re-established the brand in Europe in the early 1920s.

• Crown Royal Whisky. First created in 1939 by Sam Bronfman as a gift for the visiting King George VI and Queen Elizabeth. King George VI and Queen Elizabeth were the first reigning monarchs to visit Canada and Bronfman, a Canadian spirits entrepreneur, meticulously trialled more than 600 blends before he was happy with the final product.

• Baileys Original Irish Cream Liqueur created in 1974.

2.    Business model

The company distil, brew, bottle and distribute its spirits and beer brands through a globally coordinated supply operation, working to the highest quality and manufacturing standards. Where it makes sense, they produce locally. Diageo is organized in a model based on the market, this mean that it is more agile and can better apply it’s strategy to the various needs of the company’s customers in individual countries.

One of the most important keys is the deep knowledge of local markets. It also enables to quickly identify and act on consumer trends to support growth. The company use the local and global market expertise to identify and deliver against the most value growth opportunities. Global supply capabilities enable to manufacture and distribute brands efficiently and effectively.

Main columns of the business model.

1.      Brands. The company has a leading portfolio of iconic brands (>200 brands). Its breadth across categories and price points offers choice for every taste and celebration.

2.      Relationships. From grain to glass, strong, trusted relationships with all stakeholders are essential to your business. (>180 countries)

3.      Insight and know-how. Sales and marketing teams in different countries provide them with greater agility and better knowledge, so that the company can anticipate the diverse needs of its consumers and customers.

4.      Infrastructure. The company has a global network of sites devoted to research and development, distillation, maturation, brewing, warehousing and packaging of spirits and beer. (>132 sites globally).

5.      Financial strength. The company is focused on maintaining and growing margins and free cash flows, as well as having a strong balance sheet that provides the financial strength to execute on its strategic priorities and generate strong long-term shareholder returns.

It is important to understand that it is a business with which operational efficiency is gained by increasing scale.

3.     Global reach and position.

Below are the top 10 beverage companies in the world ordered by sales volume (Considering all kinds of drinks):

If we take into account the above list includes companies that sell water, soft drinks, beer in general, coffee,... it can therefore be concluded that Diageo is the world’s leading premium drinks business.

4.    Industry analysis and trends.

Volume growth in the global beverage alcohol market is expected to slow to +1% per annum over 2023-2027, according to the latest analysis from IWSR. The United States and China remain key to industry value growth. But India, Mexico and Brazil will be the key to industry volume growth drivers.

The fact that the global market does not grow does not mean that certain markets can grow. And the same with products, certain premium brands or new more refined products can grow at great rates.

• The global spirits market grew from $143 billion in 2022 to $153 billion in 2023 at a compound annual growth rate (CAGR) of 6.9%. And the global spirits market is expected to grow to $193 billion in 2027 at a CAGR of 5.9%.

• According to the latest analysis from IWSR, RTD category volumes across the 10 main markets will grow 15% CAGR (RTD=ready to drink beverages).

• The premium Scotch Whiskies market is expected to grow at a CAGR of 6.5% to 2026.

• The premium International Whiskies market is expected to grow at a CAGR of 6.5% to 2026.

• The premium tequila market is expected to grow at a CAGR of 10% to 2026.

• The premium vodka market is expected to grow at a CAGR of 9% to 2026.

• The premium liqueurs market is expected to grow at a CAGR of 10% to 2026.

• The premium rum market is expected to grow at a CAGR of 10% to 2026.

Trend of spirits, and more specifically of premium brands.

• Healthy TBA growth with spirits growing faster driven by premiumisation.

  • Spirits share of TBA in 2010 was 31%. Spirits share of TBA today is 41%. (TBA = Total beverage alcohol).

  • Beer/Malt share of TBA in 2010 was 51%. Beer/Malt share of TBA today is 42%.

• Spirits RSV growth by price point CAGR 2010-2021: +1% value product, +7% value product, +8% premium product, +15% super-premium product.

It is important to differentiate, on the one hand, the growth in sales volume from the growth in prices.

As I mentioned before, one of the most important keys is a deep knowledge of local markets. It also allows you to quickly identify and act on consumer trends to support growth. I summarize the trends below:

• Consumers are seeking new experiences and higher quality products. The consumers want ‘drinking better, not more’. Consumers are increasingly choosing brands and categories that offer superior quality, authenticity, and taste. This premiumization trend is supported by product innovation.

  According to several reports of IWSR: “Higher price spirits tiers grew 7 times faster than the total spirits category for the period 2011 to 2021”.

• Consumers who drink alcohol are increasingly choosing spirits over beer and wine. This is a long-term trend that is happening all over the world. In markets where spirits are a less mature category, leading spirits brands can offer quality and affordability.

• Global economic development is driving the emergence of consumers with higher disposable income.

• Spirits penetration in many emerging markets is still low when compared with developed markets, providing the potential for additional growth.

• Consumers in developed markets are moving towards lower-tempo, food-related occasions. As the on-trade has reopened following the pandemic, high-tempo, late-night occasions are recovering. However, the long-term shift towards occasions before, during and after meals, and in choices that suit ‘at home’ occasions, persists.

• Digital and technology are changing the way consumers find and buy their beverages. Online alcohol purchases are still low compared to other retail categories but continue to be a fast-growing channel that has accelerated dramatically during the pandemic.

5.    An in-depth look at the company.

5.1 Brief quote of competitive advantages.

It is important to highlight that Diageo is a business with several competitive advantages such as:

• Economies of scale in advertising, data analytics, distribution, manufacturing, research and development and procurement of ingredients. Lower average costs mean competitive pricing and higher margins.

• Good company culture.

• Brand power. Positive brand equity allows you to charge more for your product or service.

  • For the final customer. Spirits variants are distinguishable in terms of flavors, provenance, production process, and vintage. Such points of differentiation allow distillers to charge higher prices for luxury categories. Johnnie Walker’s 18-years-toproduce Black Label scotch, for instance, sells at 3.7 times the price of Johnnie Walker Red Label whisky.

  • Better access to distribution channels. Bars, bottle shops, pubs, restaurants, and supermarkets have finite space to display drinks. They prefer brands that sell quickly and deliver higher margins.

5.2 Position of your brands.

If we focus on the premium beverage and spirits sector in the world, the main competitors and their market share are companies as: Pernod Ricard, Brown-Forman, Constellation Brands, Suntory, Molson Coors, Bacardí….

There are numerous small market niches, companies that operate only in some sectors within spirits...so to make a comparison and see their position in their different markets, it seems to me best to see the position of their main brands.

Therefore, I will first break down the company's sales by different types of products and by region, and then I will show the position of its products against its competing brands.

Diageo company revenues breakdown. % revenues by product type in first half of fiscal 23:

• Scotch whiskey 27%

• International whiskey 12% (Other whiskies: Irish, Canadian, Japanese,…)

• Beer 14%

• Tequila 11%

• Vodka 9%

• Gin 5%

• Liqueur 5%

• Rum 5%

• Other 12%

Diageo company revenues breakdown: % net sales in first half of fiscal 23 by region in first half of fiscal 23:

• 37% North America. (+3% organic net sales grew).

• 21% Europe. (+10% organic net sales grew).

• 20% Asia Pacific. (+17% organic net sales grew).

• 12% Latin America and Caribbean (+20% organic net sales grew).

• 10% Africa. (+6% organic net sales grew).
  

Top 5 biggest-selling Scotch whiskies. Listed in order of their nine-litre-case sales.

1. Johnnie Walker. Diageo-owned. (+18.6% sales y/y). Sales 22.7mill

2. Ballantine’s. (+5.5% sales y/y). Sales 9.2mill

3. Chivas Regal. (+26.0% sales y/y). Sales 5.2mill

4. Grant’s. (+2.2% sales y/y). Sales 4.2mill

5. Black & White. Diageo-owned. (+14.5% sales y/y). Sales 3.6mill

Diageo leads the Scotch Whiskies with a value market of 39% (Peer 1: 20%; Peer 2: 8%, Peer 3: 7%, Others 26%).

Top 4 best-selling world whisky brands (not included Scottish Whiskey).

1. Jim Beam (-1.6% sales y/y). Sales 16.7mill

2. Jack Daniel’s (+7.9% sales y/y). Sales 14.6mill

3. Jameson (+15.1% sales y/y). Sales 11.1mill

4. Crown Royal. Diageo-owned. (-5.9% sales y/y). It will increase sales in 2023 and open a carbon neutral distillery in Canada.

Diageo leads the International Whiskies with a value market of 25% (Peer 1: 16%; Peer 2: 11%, Peer 3: 10%, Peer 4: 5%, Peer 5: 4%, Others 29%).

Top 4 biggest-selling Tequila brands.

1. Jose Cuervo (+15.9% sales y/y). Sales 9.2mill. Previously owned by Diageo.

2. Patron (+10.1% sales y/y). Sales 3.5mill

3. Don Julio. Diageo-owned. (+16.9% sales y/y). Sales 3.2mill

4. Casamigos. Diageo-owned. (+42.5% sales y/y). Sales 3.2mill.

Diageo have more than doubled US market since 2019 (from 10% to 22.4%).

Diageo sold Jose Cuervo. This operation, which involved the payment to Diageo of 408 million dollars, also included the right of this company to distribute Smirnoff in Mexico, and to own 100% of Don Julio tequila.

Top 3 biggest-selling vodka brands.

1. Smirnoff. Diageo-owned. (+6.0% sales y/y). Sales 28.1mill

2. Absolut (+10.7% sales y/y). Sales 13.0mill

3. Żubrówka (-2.9% sales y/y). Sales 10.5mill

Top 8 biggest-selling gin brands.

1. Gordon’s. Diageo-owned. (+3.6% sales y/y). Sales 7.7mill

2. Bombay Sapphire. (+28% sales y/y). Sales 5.7mill. Previously owned by Diageo.

3. Tanqueray. Diageo-owned. (+0,0% sales y/y). Sales 5.5mill

4. Beefeater. (+15.5% sales y/y). Sales 3.8mill

5. Seagram’s. (+2.5% sales y/y). Sales 2.5mill

6. Hendrick’s. (+17.9% sales y/y). Sales 1.6mill

7. Larios. (+23.1% sales y/y). Sales 1.5mill

8. Gilbey’s. Diageo-owned. (+14% sales y/y). Sales 1.2 mill

Top 2 biggest-selling liqueurs.

1. Bailey’s. Diageo-owned. (+0.2% sales y/y). Sales 8.8mill

2. Malibú. (-1.8% sales y/y). Sales 4.9mill

Top 4 best-selling rum brands.

1. Tanduay (+16.1% sales y/y). Sales 27.4mill

2. Bacardí (+10.4% sales y/y). Sales 23.4mill

3. Captain Morgan. Diageo-owned. (+1.9% sales y/y). Sales 12.9mill

4. McDowell’s Rum. Diageo-owned. (+5.1% sales y/y). Sales 8.8mill

The company has a leading portfolio of iconic brands (>200 brands). Diageo has a perfect mix between big brands that dominate the market due to volumes and good profitability, but also small brands with small volumes but very large growth rates.

I recommend the following web page to keep up to date with the sector, in addition to the great value that its articles provide. It has helped me to consult and synthesize a lot of information: www.thespiritsbusiness.com

5.3 The growth in sales of 2022.

Growth by product categories:

• Category spirits grew 21%, with broad-based growth across categories, and particularly strong performance in scotch, tequila, vodka, gin and Chinese white spirits.

  • Scotch whisky. 24% of Diageo’s reported net sales and grew 29%, led by Johnnie Walker up 34%, with both growing strong double digits across all regions.

    • Johnnie Walker Black Label grew 39%, with double-digit growth across all regions.

    • Johnnie Walker Blue Label grew 63%, with growth across all regions, particularly North America and Asia Pacific.

    • Johnnie Walker Red Label grew 22%, with double-digit growth in Europe, Latin America and Caribbean, and Asia Pacific, partially offset by a decline in North America.

    • Scotch malts grew 17%, primarily driven by strong growth in Asia Pacific and Europe.

    • Primary scotch brands grew 14%, primarily driven by double-digit growth of Black Dog and Black & White in India.

  • Tequila. 10% of Diageo’s reported net sales and grew 55%, with Don Julio and Casamigos continuing to gain share of the fast-growing tequila category within the US spirits market.

  • Vodka. 10% of Diageo’s reported net sales and grew 11%, with growth across all regions, particularly Europe.

    • Smirnoff net sales increased 10%, with double-digit growth in all regions, except North America, where net sales declined.

    • Ketel One grew 16%, primarily driven by North America, with double-digit growth in the core variant.

    • Cîroc grew 6%, with strong growth in Europe. Net sales were broadly flat in North America, lapping double-digit growth in fiscal 21, with growth from recent innovations more than offset by declines in other variants.

  • Canadian whisky. 7% of Diageo’s reported net sales and grew 6%.

  • IMFL whisky. 4% of Diageo’s reported net sales and grew 7%.

  • US whiskey. 2% of Diageo’s reported net sales and grew 14%

  • Rum. 5% of Diageo’s reported net sales and grew 6%.

    • Captain Morgan grew across all regions except North America, with particularly strong growth in Europe.

    • Zacapa grew in all regions, particularly in Europe.

  • Gin grew 18%, primarily driven by strong double-digit growth in Europe, Africa and Latin America and Caribbean. Tanqueray and Gordon’s both grew double digits.

  • Liqueurs. 5% of Diageo’s reported net sales and grew 10%

    • Growth was driven by Baileys Original in Europe and Latin America and Caribbean.

• Category beer. 16% of Diageo’s reported net sales and grew 25%, primarily due to the strong recovery of Guinness, up 32%, driven by Ireland and Great Britain as on-trade restrictions eased, as well as double-digit growth in Africa.

• Category ready to drink. 4% of Diageo’s reported net sales and grew 18%, with double-digit growth across Europe, Africa, Latin America and Caribbean and North America.

In 2022, Diageo accounted for a highly impressive 21 of the top 100 brands in its Largest Growing Brands list.

5.4 Main areas where the company will focus with a long-term vision.

• Focus on diversified footprint and quality growth:

  • With only 4.6% of global TBA share, Diageo believe they have significant headroom for sustainable, long-term growth, and its ambition is to outperform the market and increase our TBA value share to 6% by 2030. (TBA = Total beverage alcohol).

  • Leveraged RGM in challenging inflationary environment, upweighting strategic pricing capabilities.

  • Expansion of all portfolio and focus in ready to drink portfolio.

  • Launched no-alcohol portfolio in additional markets.

  • Diageo is increasing its position in the fast-growing businesses in India and China. In addition, Diageo is maintaining and slightly increasing its leadership position in the US international spirits market.

  • Diageo has a well-balanced position between developed and emerging markets, gives exposure to the largest consumer growth opportunities while providing some resilience to global volatility.

  • Spirits penetration remains low and even in our largest market, the United States, only around 50% of households purchase spirits every year.

  • An additional 600 million consumers are expected to come of age by 2032, and the continued growth of the ‘middle class and above’ income bracket should enable 600 million more consumers to access our brands.

• Focus on premiumisation:

  • Advantaged portfolio with strong brands underpinned by favorable industry trends of premiumization.

  • Portfolio has been positioned owards fast-growing categories.

  • Premium-plus brands contributed 57% of reported net sales and drove 65% of organic net sales growth.

  • Our super-premium-plus portfolio of luxury brands grew 31% this year, contributing 27% of its reported net sales.

  • As the premiumisation trend evolves, so too has the idea of luxury.

  • Reported net sales by Diageo by segment price (£bn) H1 2019 vs H1 2023:

    • Value segment: 0.6 vs 0.6.

    • Standard segment: 2.7 vs 3.4.

    • Premium segment: 2.3 vs 2.8.

    • Super premium segment: 1.3 vs 2.6.

  • Super premium net sales growth by region % H1 2022 vs H1 2023

    • North America 10%

    • Asia Pacific 13%

    • Europe 13%

    • Latin American and Caribbean 28%

    • Africa 21%

• Focus on efficiency:

  • Continued to scale efficiencies by embedding a new operating model across global supply and procurement.

  • Continued to improve process controls in supply operation to reduce waste, optimise the use of raw materials, and unlock efficiencies through the introduction of additional automation.

  • Optimize the supply chain costs.

• Focus on strengthening the supply chain. (Initiate supply chain agility programme).

• Focus on digitalization:

  • Accelerate the transformation and integration of your digital capabilities, tools and platforms across marketing and global sales.

  • Continue investment in data analytics and automation.

• Continued progress in delivering Society 2030 ESG goals.

• Build loyalty relationships with suppliers of raw materials (barley, agave, wheat, maize, sugar/molasses, grapes,…). The supply of raw materials depends on weather conditions and being a large-scale customer with a long-term vision is key.

5.5 Acquisitions and orientation of the brand portfolio.

The portfolio management has been shaped it towards higher-growth categories, including tequila, international whisky, scotch and gin.

There are four classes of brand value ordered from highest to lowest:

• super-premium plus brand

• premium plus brand

• standard brand

• value brand

Since 2017, acquisitions by £2.2bn have been done as: Casamigos, Chase Destillery, Aviation American, Mezcal Union, 21 Seeds, Don Papa, Seedlip, Balcones Distilling, Vivanda, Mr Black…. These acquisitions have included acquisitions of premium-plus brands (6 companies) and super-premium plus brans (10 companies).

Since 2017, several disposal by £1.2bn have been done as: Archers, Picon, Cameron Brewery, USL Popular Brands, Meta Beer, Romana Sambuca, Booth’s Gin,…These disposals have included disposal of premium-plus brands (4 companies), super-premium plus brand (1 company), standard brand (13 companies) and value brands (36 companies).

The total acquired brands, since its founding, account 22% of total Diageo’s assets.

I have reviewed the valuations of various acquisitions and the future value created for the company and see that the capital allocation is correct.

Casamigos tequila as an acquisition case that might initially seem expensive.

• Casamigos was founded by actor George Clooney along with entrepreneurs Rande Gerber and Mike Meldman in 2013. Even before Gerber and Clooney tried their luck in the liquor world, the two friends were already experts on tequila, which they often drank together at one of the two houses they built next to one another in Mexico. They called the property “Casamigos,” or “house of friends” in Spanish. Missing what they felt was a smoother option - a tequila that could be light enough to drink straight - Gerber and Clooney connected with their friend Meldman, and the three of them found a distillery in Mexico.

• Casamigos was sold to Diageo for a whopping $700 million in 2017, with an additional $300 million deal for expansion over the next ten years.

• Today the estimated value of the Casamigos brand is around $935 million, and it is still at a very high growth rate.

5.6 Share buyback plan.

Diageo return to shareholders through share buybacks:

• Share buy-back programme F20-F23 £4.5bn.

• New F23, up to £0.5b share buy-back programme.

Return of capital cumulative share buyback from 2018 to H1 2023 (£bn) = £8.5bn

5.7 Dividend plan.

Diageo has a track record of growing shareholder value, and have increased its full-year dividend per share every year since 2001, including during Covid-19. Over the last 20 years, its absolute dividend per share has increased 220%. The 5-year full year dividend CAGR +4.1%.

5.8 20-Year Annualized TSR.

Diageo has a 20-year annualized TSR of 12%.

5.9 Strength of your balance.

Diageo has a consistent and disciplined approach to capital allocation.

• Leverage ratio policy. Adjusted net debt to adjusted EBITDA: 2.5x –3.0x. (Ratio of 2.5x as at 31 December 2022).

• Return excess cash to shareholders: Organic growth, M&A and portfolio management, Dividends 1.8x to 2.2x.

5.10 CAPEX investments.

Diageo has increased its investment in CAPEX recently. Although historically it is already characterized by having a sustained investment in CAPEX.

• In 2023 £1.0-1.2 billion* (expected).

• In 2022 £1.1 billion*

• In 2021 £0.6 billion

• In 2020 £0.7 billion

• In 2019 £0.7 billion

• In 2018 £0.6 billion

(*) Invested £0.4-0.5 additional billion of capex in supply capacity, sustainability, digital capabilities, and consumer experiences.

The investments to sustain long-term growth have been increased:

• Increased organic marketing investment by 6.8%, reflecting strong, consistent investment in your brands.

• Additional invested £0.4 billion of capex in supply capacity, sustainability, digital capabilities and consumer experiences.

5.11 ROIC development.

The disciplined approach to capital allocation is driving steady improvement in ROIC while they significantly invest in long-term growth.

• 2022 ROIC 16.8%

• 2021 ROIC 13.5% (covid effect)

• 2020 ROIC 12.4% (covid effect)

• 2019 ROIC 15.1%

• 2018 ROIC 14.3%

• 2017 ROIC 13.8%

5.12 Intercorporate investments.

Diageo has investment in several small companies around the world. But, I will only mention the one that I consider the most important and relevant.

Diageo owns 34% of Moet Hennessy SAS (MH) and Moët Hennessy International SAS (MHI). [There are several significant agreements that contain certain termination rights and other rights for Diageo counterparties upon a change of control of the company. Under the partners agreement governing the company’s 34% investment in (MH) and (MHI), if a Competitor directly or indirectly takes control of the company (which would occur if such Competitor acquired more than 34% of the voting rights or equity interests in the company), LVMH Moët Hennessy – Louis Vuitton SA (LVMH) may require the company to sell its interests in MH and MHI to LVMH].

The personal valuation of Moet Hennessy according to sales or profit indicates by LVHM in its results for Moet Hennessy is:

• Sales 2022: 7,100 bill € * 5x * 0.34 = 12,000 bill € = 10,280 bill £ (estimated)

• Profit 2022: 2,155 bill € * 18x * 0.34 = 13,200 bill € = 11,308 bill £  (estimated)

Considering the Diageo’s market capitalization as 76500 bill £, the investment in Moet Hennessy is a 13,5-14,5%.

6. Main figures of the business and its evolution.

Revenues ($USD in million):

(Year 2016 with Brexit effect and Year 2020 with Covid effect)

(%Change in sales y/y in period 2003-2012)

Gross and operating margin:

(Gross and operating margin are maintained over the years).

Net earnings and net profit margin ($USD in million):

(Net margins are maintained over the years).

EBITDA ($USD in million):

Free cash flow and margin FCF ($USD in million):

7.    Valuation.

For the future valuation of the company I have considered the following:

• the growth expectations by the company.

  • Guide provided by the company for the period 2023-2025.

    New medium-term guidance 2023-2025: expecting organic net sales growth in a range of 5% to 7% and organic operating profit growth in a range of 6% to 9% for fiscal 23 to fiscal 25.

  • For the long term, the company indicates the following:

    Introducing ambition to achieve a 50% increase in total beverage alcohol (TBA) market value share, from 4% in 2020, to 6% by 2030. [Keep in mind that the TBA market will grow, and that in order to gain more market share Diageo will have to grow faster].

• the growth estimates of the market for the different sectors and product classes: value, standard, premium or super-premium. (Analyzed in section 4).

• the breakdown of company sales by product type and its CAGR.

• appropriate valuation multiples according to competitors (P/E = 25, EV/EBITDA =20, NET DEBT / EBITDA = 2.5, Gross margin 60%, Operative margin 30%, Net margin 20%):

Today Diageo's market price is 76,700 mill £, I have estimated that in 2030 the market price could be 200,000-210,000 mill £ (I think that is a conservative estimate). I don't like to think that everything will work out perfectly.

I consider that Diageo is a good investment idea to consider in current economic conditions because it offers a combination of inflation protection and secular growth. Therefore, we have growth, competitive advantages, quality and value in a single company. Perhaps the market can further lower its valuation and make it more attractive, but today it is already a very good option.

DISCLAIMER: This analysis is not a buy or sell recommendation, each person should do their own research before making any kind of investment.

(Company information has been obtained from the annual reports, and the following web pages have been consulted: TIKR.com, thespiritsbusiness.com).

Park Lawn Corporation is a Canadian-owned funeral, cremation and cemetery provider.

In 1892, Park Lawn Company Limited was established with Park Lawn Cemetery in Toronto. In 2002, Park Lawn acquired the assets of Westside Cemeteries Ltd. from Service Corporation International. This acquisition increased the portfolio to 6 cemeteries in Toronto.

And it was not until 2013 that Park Lawn began their history of acquisitions and current growth. In each year since 2013 Park Lawn has acquired numerous small businesses.

Park Lawn has a history of being a fast-growing company in the industry in North America. Since 2013 PLC has grown to a diverse portfolio of properties and businesses operating across Canada and the US.

Currently company continues its strong growth both organically and through acquisitions. According to the last Annual Report, Park Lawn had:

• Canada: 25 Stand-alone funerals, 5 stand-alone cemeteries and 1 on site (British Columbia, Ontario and Quebec).

• U.S: 115 Stand-alone funerals, 104 stand-alone cemeteries and 34 on site (Colorado, Georgia, Illinois, Iowa, Kansas, Kentucky, Michigan, Mississippi, Missouri, Nebraska, New Jersey, New Mexico, North Carolina, South Carolina, Tennessee, Texas, Virginia, Wisconsin and Wyoming).

It is practically impossible to keep up to date with all the small acquisitions that the company makes. In the web site today Park Lawn indicate the following:

2.Business model

Park Lawn Corporation, together with its subsidiaries, owns and operates cemeteries, crematoriums, and funeral homes in Canada and the United States. The company primarily offers cemetery lots, crypts, niches, monuments, caskets, urns, and other merchandise, as well as funeral, after life celebration, cemetery, and cremation services.

Currently, Park Lawn operates in micro markets with an entrepreneurial and adaptable business model and is exposed to markets with dense populations (Toronto, Denver, St. Louis, Nashville, Houston, New Jersey), as well as traditional markets (Mississippi, Kentucky, North and South Carolina, and Georgia).

Organic growth strategy.

The Company’s growth strategy includes organic initiatives, the optimization of product and service offerings, a focus on streamlining and improving its operational efficiencies, and future acquisitions which align with the Company’s culture. Organic initiatives include:

• the build-out of inventory at new or existing cemetery properties

• remodeling of existing funeral homes

• construction of new stand-alone funeral homes

• construction of new funeral homes on existing cemetery properties

These projects unlock new sources of revenue for existing businesses while increasing the useful life of PLC's existing portfolio by allowing certain facility, personnel, and equipment costs to be shared between funeral service and cemetery locations.

Inorganic growth strategy.

The Company’s growth strategy is based on acquiring leading independent businesses in both new and existing markets. Currently acquisitions in high growth markets are being at a rate of $75-$125 million per year. Acquisitions are carried out through the cash flow of the business, debt and equity issuance.

3.Management Team.

The management team has extensive experience in the funeral and cemetery sector.

I summarize its two main figures (CEO and COO):

• J. Brad Green (CEO, since June 2020).

Mr. Green has over 16 years of experience in the funeral and cemetery profession.  Before, Mr. Green served as a founder, owner and the CEO of Signature. Prior to founding Signature, he was the Executive Vice President and General Counsel of another publicly traded funeral and cemetery industry consolidator (Carriage Services NYSE: CSV).  During that time, he was responsible for many corporate functions, including acquisitions.

• Jay Doods (COO, since May 2018).

Mr. Dodds has over 40 years of experience in the funeral and cemetery profession. 

He holds a funeral director’s and embalmer’s license. In addition, he is a certified cremation operator. Mr. Dodds served as founder, owner and President/COO of Signature. Prior to founding Signature, he was the Executive Vice President and COO of another U.S. publicly traded deathcare company (Carriage Services NYSE: CSV) where he served for 17 years.

Bradley Green has only 0.14% of the company's shares, and Jay Woods is not known to me to have shares. I would like them to align their interests with the company by owning a significant level of shares.

Personally, this should give us an additional level paying attention to issues such as:

• review the debt management and review the possible issuance of shares to acquire companies are made in good or bad times.

• valuation of the price paid for acquisitions.

• ensuring that value creation and the progressive improvement of margins are more important than growth.

4.Main transactions undertaken since 2016 and performance in the markets.

Since 2016, Park Lawn has a history of important acquisitions.

Since January 2016, Park Lawn has posted a total return of +122%. Comparatively, the S&P/TSX Composite Index posted a +55% total return over that same period.

Park Lawn plans to continue its acquisition growth strategy where opportunities are attractive and can be integrated with existing operations or provide entry to a new high-growth market. Investment levels in acquisitions are important (currently 75-125 million).

Number of acquisitions and investments in acquisitions in recent years.

Characteristics of the companies to be acquired:

• Very small companies out of the radar of large players (few competitors).

• The sector is characterized by being companies run by older people without continuity of family transition.

• Companies can be acquired at good valuation multiples and then, once integrated, be valued better.

• Based on all the experience acquired by Park Lawn, the operation of the acquired companies can be optimized.

The Internal Rate of Return (IRR) for expansion initiatives, which is established by the directive, is a target IRR 20%.

5.Death Care Industry

In 2022, the market size of funeral homes in the United States was estimated to be just over 19 billion U.S. dollars. This is a significant increase of roughly three billion U.S. dollars since 2021 and indicates the largest annual growth between 2015 and 2022.

Below I include a chart of the industry landscape obtained from Annual Report of Park Lawn Corp.

It should be noted that it is a very fragmented market full of small independent companies. Roughly 80% of funeral home and cemetery locations in the U.S. and Canada are independently owned and operated.

Global market for death care services will grow by 6,1% year on year during the period 2022-2030. And the global market for the funeral homes and funeral services is forecast to post a CAGR of 5.9%.

The rising population of adults aged 55+ will provide many opportunities for the funeral homes and cemeteries with respect to pre-need sales and planning. The increasing death rate accompanying this large population increase will provide opportunities for growth in at-need sales. (Image obtained from Park Lawn Annual Report).

More families are choosing cremation due to its affordability when it's time to navigate death's financial toll. Over the last 15 years, the U.S. cremation rate nearly doubled to 57%, according to industry data.

Affordability has driven the surge of cremations over the last 40-50 years. About 60% of Americans are living paycheck to paycheck, according to data from LendingClub, and household debt hit a record high in 2022. So, when the people faced with an emergency expense like a death, the selected option is the lowest-priced option.

For a cremation with a funeral service and viewing, the average cost is $6,970, compared to $7,878 for a funeral with viewing that also includes burial, according to a 2021 study by the National Funeral Directors Association. Families choosing cremation have two options: direct cremation or cremation with services. Direct cremation means the body is taken directly to the crematory, and ashes are returned to the family without a service or visitation. It’s the cheapest and most common cremation arrangement in the U.S. The average cost for direct cremation is $1,000 to $3,000, depending on whether you use a funeral home or crematory. A cremation with services includes cremation along with a memorial service, similar to a traditional funeral. The family can have an urn with the deceased’s ashes present in lieu of a casket. The cost of this cremation option ranges from $1,500 to $4,000. For a viewing and service, consumers can expect to pay upwards of $6,000, with preparation of the body, embalming, a casket and staffing included among the additional costs.

Park Lawn operate in markets with high cremation rates (Toronto, New York, New Jersey, Colorado, and New Mexico), as well as low cremation rates (Mississippi, Kentucky, North and South Carolina, and Georgia). Park Lawn is the #1 player in cremations in Toronto, conducting >50% of cremations performed in the market. (Image obtained from Park Lawn Annual Report).

6.Main figures of the business.

Revenues ($M):

Net earnings ($M):

Adjusted EBITDA ($M):

Adjusted Net Earnings ($M) and Adjusted Net Earnings per Share ($M):

Capital deployment (Maintenance & growth capital):

7.Plans, future, and expectations.

As indicate above, the death care industry continues to be a highly-fragmented market.

Park Lawn's operating philosophy is to grow 70% through acquisition opportunities and 30% through organic growth.

In 2018, the Company announced its aspirational growth target to reach C$100 million in pro-forma Adjusted EBITDA by the end of 2022, which it has exceeded. In doing so, the Company has achieved the following significant milestones: 

• An increase in market capitalization from C$566M to C$817M

• Growth in Adjusted EBITDA attributable to PLC shareholders from $18.7M to $74.9M, an increase of 302%

• Adjusted Net Earnings Per Share growth of 80.0% to $0.98 in Adjusted Net Earnings Per Share

• Improvement in Adjusted EBITDA Margin by 140 bps to 22,5-23.0%.

This is the Park Lawn’s 2026 aspirational growth target:

• Inorganic growth. Continue to acquire leading independent businesses in both new and existing markets and obtain the necessary financing to complete such acquisitions. Select the best option to complete acquisitions (the issuance of shares, debt,…). The completion of acquisition opportunities in high-growth markets at a rate of $75-$125 million per year.

• Organic growth. continue doing investments in individual businesses to achieve organic growth and in projects and initiatives which yield improved asset productivity, including mausoleum developments, the development of existing and new cemetery properties, and development of on-site funeral homes.

• Create value in past acquisitions.

• Continue to capitalize on ongoing operational improvements to both existing and acquired businesses through the full implementation, deployment and integration of PLC’s proprietary industry software.

• Achieve greater market share penetration in the markets the Company currently operates.

• Target IRR of over 20% on expansion initiatives.

• Improve the business margins.

PLC has set an aspirational growth target of achieving a total of US$150M of pro forma Adjusted EBITDA by the end of 2026 translating into Adjusted Net Earnings exceeding US$2.00 per share.

• Adjusted EBITDA - 14,5% CAGR From 2021 to 2026

• Adjusted Net Earnings per Share - 10,6% CAGR From 2021 to 2026

8.Advantages and tailwinds for the company.

The main scenario on which I visualized the growth, and the creation of value is the following:

• High growth operator in a stable and highly fragmented industry.

• An aging population across North America provides favorable demographic characteristics.

• Fragmentation that allows plugins that prove economies of scale.

• Margin expansion opportunities through increased scale and operating efficiencies.

• High barriers to entry due to zoning laws - particularly in cemeteries - and pricing pressure on smaller operators.

• Conservative capitalization facilitates further growth through acquisition.

• A promising acquisition pipeline should provide a foundation for continued growth, and ongoing portfolio optimization should also yield continued improvements in ROIC.

9.Balance sheet strength.

[Excuse me for this information-dense section, but I think it is the company's main risk].

In the sector in which it operates, companies usually have Net Debt/Ebitda ratios from 2,5x to 4,5x.

• Park Lawn →  Net Debt/Ebitda Ratio = 3.

• Service Corporation International →  Net Debt/Ebitda Ratio = 3,5.

• Carriage Services →  Net Debt/Ebitda Ratio > 5.

Park Lawn (Debt/Adjusted Ebitda)

Debt costs are rising and have already affected the latest results.

• Finance costs increased by $686,637 for the twelve month period ended December 31, 2022, compared to the same period in 2021 as a result of $65,357,678 more debt outstanding on the Company’s Credit Facility year-over-year. On December 31, 2022, the interest rate on the Credit Facility was 5.2% compared to 1.1% on December 31, 2021.

Liquidity and Capital Resources

• The Company’s principal sources of liquidity are cash provided from operations and from the issuance of debt and equity instruments. Investment income from the Care and Maintenance Trust Funds are used to defray eligible cemetery care and maintenance expenses. The Company had a net working capital of $27,625,754 as of December 31, 2022, including $30,277,742 in cash.

• The Credit Facility has an overall borrowing capacity of $240 million and a maturity date of August 31, 2027. In January 2023 Commencing February 21, 2023, in order to provide the Company additional financial flexibility, Park Lawn added a $60 million tranche to its existing credit facility for a term of one-year.

• The Credit Facility requires the Company to maintain a Leverage Ratio of less than 3.75 times and an Interest Coverage Ratio of greater than 3 times. The Company’s Leverage Ratio and Interest Coverage Ratio will fluctuate depending on its earnings, interest rates and the amount of its outstanding debt. As of December 31, 2022, the Company was in compliance with both covenant tests with the Leverage Ratio being 1.83 times and the Interest Coverage Ratio being 21.79 times.

• At December 31, 2022, the Company had $151,941,538 outstanding on the Credit Facility. The Company has an undrawn balance on its Credit Facility of $88,058,462 and $30,277,742 in cash on hand as at December 31, 2022.  

• Through the 2021 Financing, the Company raised total gross proceeds of C$148,548,400, which were used to repay outstanding indebtedness under the Credit Facility and for strategic growth initiatives including acquisitions, organic growth opportunities and general corporate purposes. 

• In July 2020, the Company raised C$86,250,000 in gross proceeds from the issuance of publicly traded Debentures. The proceeds were used to repay a portion of the outstanding Credit Facility. For purposes of testing the covenants under the Credit Facility, the Debentures are not included as part of total indebtedness. The Debentures mature on December 31, 2025 and are not redeemable before December 31, 2023.  

• As at December 31, 2022, the Company had other debt of $25,126,880 comprised of vehicle loans and notes payable to former business owners supporting non-compete and warranty agreements. Further, the Company had $5,763,281 in lease liabilities, and the Debentures balance as at December 31, 2022, was $61,650,585, net of debt issuance costs and accretion expense of $1,934,086. Included in notes payable is $11.5 million that was paid to the former business owner in January, 2023. 

• Effective February 27, 2023, the Company, through one of its subsidiaries, entered into an interest rate swap transaction with one of the Company’s syndicate lenders of the Credit Facility, whereby, the parties agreed to exchange at specified intervals, fixed and variable interest amounts calculated by reference to a notional amount of $50 million. The term of the interest rate swap is three years with a variable to fixed interest rate swap arrangement at 4.372%. 

Management believes that cash from operating activities, future debt financings, and the Credit Facility will be sufficient to support the Company’s ongoing business operations, growth initiatives and debt repayment obligations. The Company’s cash on hand will fluctuate depending on its revenues, timing of receivables, and inflationary pressures resulting in increased expenses and interest rates. Growth through organic initiatives, the optimization of product and service offerings, a focus on streamlining and improving its operational efficiencies and strategic acquisitions may necessitate the raising of funds through debt, equity financings and/or other means. Decisions will be made on a specific transaction basis and will depend on market and economic conditions at the time.

Contractual obligations due by period. The following charts summarize the Company’s contractual obligations, including payments due for each of the next five years and thereafter.

10.Consolidated statements of earnings.

Brief comment and image of the consolidated statements of earnings.

• Revenues up 11% year to year (Sales continue to grow despite having exceeded the exceptional sales of the year of covid 2020).

• Finance costs increased by $686,637 (+9%) for the 12 month period ended 2022.

• General and administrative costs increased by $27,382,690 (+21%) for the 12-month period ended 2022.

• Share based compensation increased by $832,630 (+22%) for the 12 month period ended 2022.

11.Consolidated statements of cash flows.

Free cash flow is used for company acquisitions. Acquisitions of companies are complemented by an increase in debt or issuance of shares (whatever is most convenient at any given time).

The acquisitions of companies are consolidating the business, increasing ebitda, increasing net income, increasing free cash flow…. And by owning more assets and a bigger business, he can access more debt to continue acquiring businesses. This is what allows them to grow faster.

But it is necessary to control how much they earn for the companies they acquire (acquisition multiple) and what returns they obtain, so it is a key aspect to watch as investors. That is what will tell us if the growth is sustainable and creates value in the long term.

Currently the company is deploying a capital around of 90-100 M USD for company acquisitions. If we consider that the free cash flow is 45 M USD, the rest of the capital is debt or an increase in shares.

If the company stopped acquiring other companies and had to repay the debt with the free cash flow of the business, it would take about five years. It would be less time since newly acquired businesses take time to become efficient and give the expected cash flow. In addition, behind the consolidation of companies, there would be an increase in operational efficiency, access to new markets, improve margins,... But we must have an order of magnitude.

Below is an image of the consolidated cash flow statements.

12.Valuation.

Valuation (Last Twelve Months):

• Market cap (today) = 591 M USD

• Revenues = 320 M USD (LTM)

• Ebitda (adj.) = 75 M USD (LTM)

• Net income = 25 M USD

• Net Debt = 222,7 M USD

• Free cash flow = 44,82 M USD (LTM)

• Dividend 2% (I don't like the dividend when you're borrowing at medium interest rates or issuing stock).

• Enterprise value/ Free Cash Flow = EV/FCF = 18,15

• EV/EBITDA = 10,85

• P/E = 23,60

• NET DEBT/EBITDA = 2,97

• %Net margin = 7,8 % (LTM)

• Ebitda Margin = 22-23%

• FCF Margin = 14%

2026 Valuation based on the guide:

• Market cap (today) = 591 M USD

• Revenues > 600 M USD

• Ebitda (adj.) = 150 M USD

• Net Debt = 412,5 M USD (Estimated Debt/Ebitda = 2,75)

• Free cash flow = 80 M USD (Estimated 14,5% Margin FCF)

• Dividend 2%.

• EV/FCF 2026 = 12,54

• EV/EBITDA 2026 = 6,70

• Ebitda Margin = 25%

If a pricing study of the company is carried out, it can be seen that it would be reasonable to value Park Law at multiples of:

• EV/EBITDA = 15x

• EV/FCF = 20-22x [the minimum EV/FCF value of a benchmark company in the sector such as Service Corporation International “NYSE:SCI” was 20x in 2020 (reviewing information from 2013). SCI is a mature business, but Park Lawn is a small but growing Park Lawn business].

Therefore, I could estimate the value per share in the end 2026 at around 40-50 CAD/share. I know that the range is wide, but the uncertainty of the execution of the objectives and the clarity in the analysis factors are also wide. [Today's value is 22,95 CAD/share. At the time of making the article].

12.Last news.

A few days ago, Park Lawn Corporation confirmed that it has submitted a preliminary cash proposal to the Board of Directors of Carriage Services, Inc. (NYSE: CSV). Current management has worked at Carriage Services for many years and knows the value of Carriage Services. We'll see what happens in the future, but this would be doubling the size of the company.

"I have never specialised in economic forecasting or market forecasting either. My own business has largely been based on the principle that if you can make your results independent of any views as to the future you are that much better off." Benjamin Graham

This article is not a stock buy recommendation. (Company information has been obtained from annual reports and investor presentations).

Eurofins Scientific was founded in 1987 with 3 employees and 1 laboratory to market a patented analytical method used to verify the origin and purity of several types of food and beverages and identify sophisticated fraud not detectable by other methods.

Today, Eurofins Scientific SE, together with its subsidiaries, provides various analytical testing and laboratory services worldwide. The company offers a portfolio of approximately 130,000 analytical methods to evaluate the safety, identity, composition, authenticity, origin, traceability, and purity of various products.

Eurofins provide services in several sectors as:

• Agroscience Services

• Agro Testing

• Assurance

• BioPharma Services

• Clinical Diagnostics

• Consumer Product Testing

• Cosmetics & Personal Care

• Environment Testing

• Food and Feed Testing

• Forensic Services

• Genomic Services

• In Vitro Diagnostics Solutions

• Maritime Services Materials and Engineering R

• EACH Services

• Sensory and Consumer Research

• Sustainability Services

Eurofins Group is a leading provider of testing and analytical services with: an international network of ca. 900 laboratories in 61 countries over 61,000 staff, a portfolio of over 200,000 analytical methods and more than 450 million tests performed each year.

2.    Business model

Eurofins' model and key is based on its core focus on rapid turnaround times (TAT): efficient delivery of results to clients through its strong network of 940 laboratories and offer of more than 200,000 test modalities. It is segmented by:

• four main businesses: pharma and agrosciences, food testing, environment testing and clinical diagnostics.

• several types of test modalities (chemical, clinical, genomic, and biological).

• varied methods, from old technologies to the latest innovative developments.

• great geographical breadth (50+ countries and global down to local);

• and depending on the market, varying regulations and environmental priorities.

The Company benefits from society’s growing need for testing due to demands for better health, cleaner environments, and safer pharmaceuticals, food and other products. These factors comprise an attractive market environment giving Eurofins multiple growth opportunities.

The decentralized structure of companies run by Eurofins promotes closer relationships and more individualized services for its clients, while fostering business agility and scientific innovation. Rather than a centralized lab group, they are, by design, a network of empowered entrepreneurs, each running their business with a high degree of autonomy.

It is important to understand that it is a business with which operational efficiency is gained by increasing scale.

3.    Main competitors

The company, as has been seen, operates in many sectors and with different activities within it, so finding an identical comparable is difficult. Perhaps the most similar companies would be Intertek, Bureau Veritas, Labcorp and SGS. All of those companies had CAGRs between (6,5%-10,5%) in the period 2009-2022.

In more specific sectors Eurofins would have a wide variety of competing companies (Thermo Fisher Scientific, Danaher, Charles River, BioMérieux, Addlife,…).

4.    Management Team.

The CEO and founder of Eurofins is Gilles Martin.

Originally, Martin's parents had patented a process for measuring sugar levels in wines, and entrusted their Gilles and his brother Yves-Loïc with the development and marketing of the process. The company's was launched in 1987. Gilles bought the patent from the Scientific Research National Center (CNRS), discovered new applications for the patent, and expanded the company's clientele to the entire food industry. The company quickly reached 50 employees and exported 70% of its production. Eurofins then proceeded to massively buy out other laboratories, including by financing laboratories in start-up mode.

Gilles Martin owns about 33% of Eurofins' capital through the family's holding company Analytical Bioventures. His fortune is estimated to be $5.2 billion.

So the company has "skin in the game," which is desirable for long-term investors.

5.    Performance in markets since its IPO (1997-2022).

Eurofins joined the CAC 40 index and has been for over two decades one of the fastest growing listed European companies. Since its IPO, Eurofins’ revenues have increased by 32% each year (in compound average) to reach €6.7 billion in 2022.

Furthermore, in the 25 years since its IPO to October 24th 2022, Eurofins has delivered a remarkable total shareholder return (reflecting both share price appreciation and reinvestment of dividends) of around 36,600%, equivalent to a compounded annual growth rate (CAGR) of nearly 27%.

1997-2007 - Eurofins had delivered a total shareholder return of 3200%

1997-2012 - Eurofins had delivered a total shareholder return of 5108%.

1997-2017 - Eurofins had delivered a total shareholder return of 30,000%.

(Imagen obtained from “Eurofins: 25 years of shareholder value creation. Analyst hire”. The image shows the adjusted price per share for the 2000 and 2020 share splits of 10 for 1 and the French Franc to Euro conversion).

6.    Testing and laboratory analysis industry.

The spectrum of businesses and market niches is very broad, so it is impossible to establish a growth rate. There are parts of the business that are very mature with growth rates of 4% or less, but there are niche markets with growth rates above 25%.

As a reference I could cite, the global clinical laboratory tests market size was estimated at USD 103.67 billion in 2022 and is expected to expand at a compound annual growth rate (CAGR) of 9.4% from 2023 to 2030.

The clinical laboratory tests market is witnessing growth due to factors such as the rising geriatric population, the growing prevalence of target diseases, and the introduction of innovative solutions to meet the growing demand of the market for clinical tests.

7.      Brief quote of competitive advantages

It is important to highlight that Eurofins is a business with several competitive advantages such as:

• scale economics

• good company culture

• low-cost products

• customer-critical products

• network effect

8.    Main figures of the business and its evolution.

Revenues (Eur in million):

Net earnings and net profit margin (Eur in million):

EBITDA (Eur in million):

Free cash flow and margin FCF (Eur in million):

9.    Comments on recent results and what concerns Mr Market.

Mr. Market exaggerated the valuation of Eurofins due to the temporary increase in sales due to COVID. But recently it has already been adjusting the valuation due to:

• First, because the market realized that sales due to the covid test would be temporary.

• Second, because the market considered that the different real estate acquisitions, that Eurofins was contemplating making would not be efficient with the use of capital.

• And others like the fact that Eurofins has also been affected to a lesser extent by cost increases, the war in Ukraine,…

Eurofins has seen a 55% drop in its valuation from its highest price (Imagen from TIKR.com).

9.1 In relation to the concern about the temporary post-covid drop in sales.

In the previous section "main figures of the business" you can see the effect of the temporary sales of the covid.  As EBITDA, free cash flow, margins,... increased in 2020 and in 2021 compared to 2019. You can also see the decline in the main business figures if you compare 2022 with 2021.

• 2022 Revenues were stable on a reported basis vs FY 2021 despite the year-on-year decrease in revenues from COVID-19 testing and reagents of more than €800m.

• Revenues in the Core Business (excluding COVID-19 testing and reagent revenues) increased by +5.8% organically in FY 2022.

• Due to lower COVID-19 testing volumes, revenues from COVID-19 testing and reagents declined year-on-year by more than €800m (to just under €600m in FY 2022 from over €1,400m in FY 2021).

Other aspects that have affected the business:

• Inflationary headwinds for personnel expenses, energy, logistics and consumables and lagging corresponding price increases by Eurofins companies

• Others as Labour-related effects such as strikes, volume challenges faced by some of their clients following the start of the war in Ukraine.

Despite this, if we discount the effects of the covid, the business continued to grow, and nothing got worse.

9.2 In relation to the concern about the real estate acquisitions.

Recently acquisitions:

• In 2022, Eurofins added more than 78,000 m² of laboratory, office and storage space through the delivery of building projects, building acquisitions, new leases and consolidation of sites, plus 76,000 m² of buildings which were already part of companies added through acquisitions in the M&A scope, comprising a total of over 150,000 m². The net floor area of Eurofins-owned premises has increased by 27% (104,000 m²) vs 2021 to reach 490,000 m², 70% of the building area added by Eurofins in 2022 is owned by Eurofins (vs 58% for the period 2018-2021).

• Since 2018, the net floor area of buildings owned by Eurofins has more than doubled from 240,000 m² to 490,000 m². Furthermore, 28,000 m² of Eurofins current sites were renovated in 2022 to bring them to the highest standard. Out of the total net floor area increase, 21% can be attributed to the Asia Pacific region, expanding the growth platform for a region that today represents only 9.5% of Eurofins revenues.

Upcoming acquisitions for 2023 and 2024:

• From 2023, Eurofins plans to invest around €200m p.a. to build and purchase (both new and currently rented) laboratories. Investments in 2023 and 2024 are expected to contribute a total net floor area of ca. 140,000 m² (40% to be delivered in 2023 and 60% in 2024). Eurofins is committed to continue to invest significantly in its infrastructure to build the largest, most modern and most efficient laboratory network in its industry.

The market is concerned about the current capital allocation in real estate, but Eurofins already began acquiring real estate years ago with more attractive interest rates than today.

The acquisitions are being made at certainly compelling financial valuations, and the management team sees ownership of the site as key to reducing risk and reliance on homeowners and unlocking economies of scale.

9.3 Strength of your balance.

Eurofins’ balance sheet remains very strong:

• The financial leverage (net debt to adjusted pro-forma EBITDA) was 1.9x at the end of December 2022. Including the issuance of €600m of hybrid bonds in January 2023 and the planned repayment of the outstanding €183m of hybrid bonds callable on 29 April 2023, Eurofins’ pro forma financial leverage is 1.6x, at the lower end of our targeted range of 1.5-2.5x.

• Outside of the planned repayment of the hybrid bonds callable on 29 April 2023, Eurofins has no major financing requirements until the outstanding €448m senior Eurobonds become due on 25 July 2024.

9.4 Share buyback plan.

Share buyback plan:

• The 1st tranche of a share buy-back programme that repurchased 121,493 shares was completed on 3 December 2022. It is currently intended that all purchased shares may be used as previously communicated, including to cover the Company’s Long-Term Incentive plans as approved by the Board of Directors at its meeting on 19 December 2022.

• A 2nd tranche was launched 22 December 2022 and will run until 3 May 2023 (extended from 3 March 2023). It will cover a maximum volume of up to one million shares or 0.52% of the Company’s current share capital.

9.5 Dividend.

In 2023, the annual dividend will be of €1.00 per share, corresponding to 33% of FY 2022 reported Basic EPS.

9.6 Latest acquisitions.

Acquisitions in 2022:

• 59 acquisitions were closed (2021: 38), contributing €150m to consolidated revenues (€269m had the effective dates of these acquisitions been 1 January 2022). The cost of these acquisitions was €430m, equivalent to only 1.6x of their FY 2022 revenues. Indeed, Eurofins focussed on reasonably valued smaller bolt-on acquisitions.

• Start-ups have been launched in all key areas of activities and regions of the Group, including 50 new start-up laboratories and 18 new blood collection points (BCPs). The mature start-ups created between 2010 and 2021 generated return on capital employed of more than 45% on revenues of €239m.

10. Plans, future, and expectations.

Eurofins has updated its targets for fiscal year 2023 to fiscal year 2027 (In 2022 the free cash flow before investment in owned sites of €677m):

Main objectives:

• In FY 2023 and to FY 2027, Eurofins targets organic growth of 6.5% p.a. and potential revenues from acquisitions of €250m p.a. Continued growth investments in the ownership of strategic sites, start-ups and bespoke proprietary IT solutions are expected to drive increased profitability and cash generation over the mid-term horizon.

• These objectives assume exchange rates are stable vs 2022 average and zero contribution from COVID-19 testing and reagents.

• With the aim of launching 30 new start-up laboratories (50 in FY 2022) and several new BCPs (18 in FY 2022) in FY 2023, Eurofins expects Separately Disclosed Items (SDI) at the EBITDA level to be about €100m in FY 2023 and decline thereafter toward less than 0.5% of revenues.

• Capital allocation priorities in FY 2023 and the mid-term will continue to include site ownership of high-throughput campuses to complete Eurofins global hub and spoke network, start-ups in high growth areas, development and deployment of sector-leading proprietary IT solutions and acquisitions. Investments in these areas are key to our long-term value creation strategy. From FY 2023, investment in owned sites is assumed to be around €200m p.a., while net operating capex is expected to be ca. €400m p.a. (total net capex of €600m p.a.).

• Eurofins targets to maintain a financial leverage of 1.5-2.5x throughout the period and less than 1.5x by FY 2027.

• The speed of improvement toward the 2027 adjusted EBITDA margin objective will depend on the timing of the bottoming out of food and consumer product end markets and how fast pricing can be aligned to cost inflation as well as the speed of execution of innovation, productivity, digitalization and automation initiatives.

Business valuation.

2023 Valuation based on the guide:

• Market cap (today) = 10710 M eur

• Revenues = 6650 M eur

• Ebitda (Adj) = 1375 M eur

• Net Debt = 2833 M eur

• Free cash flow = 725 M eur (FCFF before investments in owned sites)

• Enterprise value/ FCFF = 18,68

• Unlevered free cash flow yield = 5,35%

• EV/EBITDA = 9,85

• NET DEBT/EBITDA = 2,06

• %margin ebitda = 20%

2027 Valuation based on the guide:

• Market cap (today) = 10710 M eur

• Revenues = 10000 M eur

• Ebitda (Adj) = 2400 M eur

• Net Debt = 3360 M eur (Estimated 1,5 Debt to Ebitda)

• Free cash flow = 1500 M eur (FCFF before investments in owned sites)

• Enterprise value/ FCFF = 9,38

• Unlevered free cash flow yield = 10,66%

• EV/EBITDA = 5,86

• %margin ebitda = 24%

If a pricing study of the company is carried out, it can be seen that it would be reasonable to value Eurofins at multiples of:

• EV/EBITDA = 14x or 16x

• EV/FCFF = 20x or 22x

Therefore, I could estimate the value per share in 2027 at around 120-135 eur/share. If I carry out a discounted cash flow valuation, we would obtain a similar valuation.

Today's value is 56-57 eur/share.

Therefore, we have growth, competitive advantages, quality and value in a single company. Perhaps the market can further lower its valuation and make it more attractive, but today it is already a very good option.

“Quality is under appreciated. It cannot be modelled in Excel, it’s not on the balance sheet, nor does it make for an exciting investment pitch. Quality is not easy to pin down, because it often represents new ways of doing things that stretch or break old mental models.” Josh Tarasoff

This article is not a stock buy recommendation. (Company information has been obtained from annual reports, and TIKR.com).

Cementir Holding S.p.A, incorporated in 1947 in Rome (Italy), with the aim of utilizing blast furnace slag and industrial waste from steel plants for manufacture of cement. Today Cementir is a multinational Group that operating in the cement and aggregates manufacturing sector. Particularly in production of grey, white cement and clinker. Also, ready-mixed concrete, aggregates, and other concrete products.

Market share and Owners.

Cementir Holding is a global white cement leader with around 25% share of global trade (leader in China, United States, Australia).

Holding cementir is owned by the Caltagirone family with a 70% stake. Therefore, we can say that they have “skin in the game”. Francesco Caltagirone Jr is the Chairman and Chief Executive Officer.

Cementir industrial footprint.

Cementir Holding has customers in over 80 countries (Main countries: Denmark, Norway, Sweden, Belgium, France, United States, China, Turkiye & Egypt).

Cementir industrial footprint is broken down into:

• 11 cement plants

• 60 terminals

• 102 RMC plants

• 34 quarries

• 1 precast products plant

• 2 waste management facilities.

Production Capacity is broken down:

• 9.8mt grey cement

• 3.3 mt white cement

Sales are broken down:

• 8.0mt grey cement

• 2.8 mt white cement

• 4.8mm³ RMC

• 10.5 mt aggregates.

Revenues from sales and services by geographical segment:

Revenues from sales and services by business segment:

Ebitda by geographical segment:

Ebitda by business segment:

Industry status.

-Growth rate of the market 2023-2028: CAGR: 5%.

-Major key players in global white cement market and Cementir's leadership:

-The cement production market is suffering from the increase in energy costs and other inputs. Some niche companies as Cementir with great operational efficiency can transfer costs. In the last two years the volume sales in “metric tons” has decreased slightly, but prices have been on rise. Despite the cost of the inputs, the company has increased its profits.

-Growing demand and contained supply represent a good basis for achieving better prices and returns on capital.

-No capacity increases are expected in the sector, perhaps reductions. Neither are large investments in emerging markets as in the past.

-Industry with future visibility. Cement is the most widely used man-made material in history. It continues to possess irreplaceable structural qualities (durability, availability and price) when it comes to constructing a building or infrastructure.

-The position in the race to reduce CO2 emissions is key. This is the main risk that companies in the sector have. (Maybe this is an opportunity for value investors). Therefore, is very important find the company with best efficiency and a cash flow generation very high that allows investments to be made. In the last two years the Cementir Holding has achieved important ESG recognitions, including the validation of its 2030 decarbonization objectives by the Science Based Target initiative (SBTi) and an A- rating by CDP.

Competitive advantages.

-Perhaps it is a sector with an undifferentiated product.

- But its entry barriers are undeniable since permits are not granted for the development of new quarries due to their high environmental impact.

-And the white cement is obtained thanks to very pure and scarce raw materials, and the peculiarity is the lack of contamination from sand and clay. (White cement is used instead of gray cement for its heat-reflecting properties and aesthetic appearance).

Main transactions undertaken.

Since 1996 Cementir Holding have increased EBITDA by about twenty times without any capital increase. All of its growth was supported by operating cash flow.

Since 2001, Cementir has a history of important acquisitions:

Between 2016 and 2018 Cementir have significantly strengthened its business portfolio by:

• acquiring CCB in Belgium;

• selling all our manufacturing activities in Italy

• acquiring control of Lehigh White Cement Company in the United States, the richest and most promising white cement market in the world.

Industrial Plan 2023-2025.

Cementir has given a strong acceleration to its sustainability commitment by further reducing its CO2 emissions targets in the updated decarbonization Roadmap, which will embrace new technologies such as Carbon Capture and Storage (CCS).

The new Industrial Plan includes around 86 million Euro of sustainability investments in the period 2023-2025, distributed across the value chain and centered on four main categories:

• increase usage of alternative fuels and raw materials

• low carbon cement and innovative green solutions

• process efficiencies and recycling

• digitization of key processes

The industrial plan in numbers:

1. Revenue up to around EUR 2 billion (vs 1,72 billion – 2022), with a compounded annual growth rate (CAGR) of 5-6%.

2. EBITDA of approximately EUR 400 million (vs 337 million – 2022), with a compounded annual growth rate (CAGR) of around 6%. The Plan assumptions include a double-digit increase in the cost of fuels and electricity and an average yearly CO2 shortage of approximately 300,000 tons, which represents a 40% improvement from the previous Industrial Plan.

3. Average annual maintenance and expansion capex of approximately EUR 81 million including health and safety and digitalisation.

4. Additional cumulative sustainability investments of EUR 86 million to achieve the ambitious decarbonization targets set out in the 2030 Roadmap.

5. Net cash position of over EUR 500 million by 2025 year end (vs 96 million – 2022), deriving from better results and consistent cash generation.

6. The Plan assumes the distribution of a growing dividend, corresponding to a payout ratio between 20% and 25%.

Current valuation of the Italian market.

The valuation of the Italian market today is low compared to the market and according to its historical valuation.

Risks or causes that limit its valuation.

1. Sector with a large increase in cost in its input elements (energy,…).

2. Sector where investments are required to reduce emissions and environmental impact.

3. Historically cyclical sector because it is linked to real estate sector.

4. Low visibility in the markets for a small cap company and listed in Italian.

For the first point, after reviewing the effect of inflation on the company in recent years, I can say that Cementir has the power of the transfer costs.

The second point, after reviewing the actual position in the emissions race against its competitors, I can say that Cementir has a good position and a credible investment plan in the medium term.

For the third point, it is clear that if a strong recession arrives, the company could temporarily lower its valuation, and also its incomes. But the state in which it is positioned in the face of a possible recession is optimal. By the end of this year Cementir will have 200 millions of euros of net cash. This net cash, plus the cash net generated by business the next year, would allow it to acquire other companies facing the possible recession in another position and at good prices (Cementir could also apply for debt). Possible acquisitions could be increase its position as a global leader.

For the fourth point, there is little to add, it is a point that must be assumed and value together with the opportunity cost, in case that the Mr Market does not provide an adequate value.

Valuation.

Perhaps the market may believe that it is not the best investment at this moment. But I think that Cementir is a defensive cyclical trading at deep discounts and very low multiples on earnings. Cyclical because its performance is linked to the construction cycle, highly dependent on economic growth, and defensive due to the stability of its margins and its cash generation capacity. Cementir shows many years generating cash flow free positive and in this moment the company is free of debt.

The evolution of ebitda is shown below to appreciate the decline in the last great real estate recession, and the time it took to recover the same levels. Currently the company arrives at this moment with a different net cash position, under a different context of possible recession, and with a different position with respect to its competitors. In any case, we could stress the valuation to consider different scenarios.

Highlights of the financial performance obtained in its last annual report 2022 are indicated below:

Highlights of the free cash flow performance obtained from TIKR.com:

2023 Valuation based on the company guide:

• Market cap (today) = 1155 M eur

• Revenues > 1800 M eur

• Ebitda = 335-345 M eur

• Net cash = 200 M eur

• Free cash flow (LTM) = 180 M eur (157 M eur 3 years average)

• Enterprise value/ Free Cash Flow = EV/FCF = 5,5

• EV/EBITDA = 2,81

• %Net margin = 9%

• Capex 113 M eur (Capex increase cycle; Average annual capex of approximately EUR 81 million directed towards developing production capacity, maintaining plant efficiency, health and safety and digitization).

• ROCE 10-12%.

2025 Valuation based on the company guide:

In the next years the company will be focus on increasing efficiency of manufacturing and logistics processes, making the entire production structure leaner, more dynamic and efficient, with process digitization initiatives, intelligent preventive and predictive maintenance, advanced production control systems, intelligent logistics, warehouse management and integrated digital sales planning.

• Revenues > 2000 M eur (CAGR 6%)

• Ebitda = 400 M eur (CAGR 6%)

• Net cash = 500 M eur (deriving from better results and consistent cash generation)

• Dividend 20-25% payout ratio.

• EV/FCF 2025 = 3,65

• EV/EBITDA 2025 = 1,65

Conclusion

I find Cementir Holding to a valuation very attractive in absolute terms and in relative terms compared to the market and compared to the main players.

Multiples of valuation in the market could be (14-15x ebitda) as Vulcan Materials or Martin Marietta the two largest aggregate companies. There are also other cheap companies currently as Heidelbercement (ETR: HEI) that are trading to <6x EV/EBITDA (Heidelbergcement has been very cheap for several months, but now the market is already recognizing part of its value). But Cementir is in a niche industry of the white cement, which is a material very pure and scarce.

In any case, a multiple of valuation of 8-10x ebitda seems appropriate for a leading global small Italian company (7-9x ebitda for the grey cement and aggregates and 8-10x ebitda for the white cement).

Therefore, we would have a potential based on the adjustment of the indicated EV/EBITDA multiple, a growth rate of the sector/company of the 5% and a 3% dividend.

We could analyze different scenarios of behavior if a possible recession occurs. But the safety margin for the invest is very wide and the valuation low, and the Mr Market will tell us about the profitability in the future.

This article is not a stock buy recommendation.

(Pictures has been obtained from web site Cementir Holding- Anual reports and presentations).