CTTOF - Maran Partners - Correios De Portugal: Trading At ~10% Free Cash Flow Yield
2023-07-31 21:10:00 ET
Summary
- CTT, the Portuguese conglomerate, has been monetizing its non-core assets and repurchasing stock with excess cash.
- The sale of a 10% stake in CTT's bank at a valuation of €285mm has helped alleviate concerns about the bank's value.
- CTT's progress in real estate monetization, share buybacks, and operating improvements could serve as catalysts for the stock in the second half of the year.
The following segment was excerpted from this fund letter.
Correios De Portugal, S.A. ( OTCPK:CTTPY )
I wrote the following about CTT six months ago:
CTT is our Portuguese conglomerate that owns the monopoly postal business in the country, a pan-Iberian parcels business, a growing, profitable bank, and a large portfolio of excess real estate. CTT started to monetize its non-core assets and repurchase stock with excess cash last year. During the fourth quarter, CTT announced that it sold a 10% stake in its bank at a valuation of €285mm, or 1.1x book. Many investors had feared that the bank might only be worth one half of book value or less, so this transaction went a long way towards removing those fears. CTT continues on its path towards real estate monetization via both a yield vehicle and a development vehicle (which together have book value of €135mm and market value well north of that, in my opinion).
As I have discussed in recent letters, I think CTT’s bank and excess real estate value more than cover its recent market capitalization (€450mm at year-end), while its core postal/parcels business more than covers it as well. As value is growing in each division, I believe this still sets up as a potential “three-year double.”
Yes, CTT is far off the beaten path, and I occasionally get questions about whether investors will ever start “to care” and give the business a more appropriate valuation. In other words, they ask, “isn’t this a value trap?” While many sum-of-the-parts stories in smaller markets may be, I gain comfort in the aligned management team who have clearly demonstrated that they are doing the right things to unlock and grow value. Absent the plans to monetize the bank, monetize the real estate, buy back shares, cut costs, renegotiate the company’s government postal contract to allow for inflation passthroughs and volume decline offsets, and commit to a long-term plan predicated on double digit EBIT growth, this could be a value trap. But given all of those catalysts in place, I’m not worried about this stock being ignored for too long.
Yet while it continues to be ignored, the company will likely continue to utilize capital allocation as a tool to increase value per share. After repurchasing 5% of the shares outstanding last year, the company will likely continue to repurchase shares this year, as its balance sheet is clean.
CTT has made additional progress on many fronts this year. In May, it announced solid 1Q results well ahead of expectations and raised its full-year guidance. 1Q EBITDA was €40 million, and full-year guidance, which appears conservative, implies EBITDA of €140 million. Again, this EBITDA compares to a roughly €500 million market cap, and enterprise value, adjusting for the bank and real estate, of close to zero. Also in May, CTT formalized its real estate monetization plan, entering into a series of agreements to sell assets. It started by announcing a €40 million-plus asset sale at valuations in line with my estimates for the portfolio (€200 million).
In June, CTT announced the resumption of its share buyback program. CTT has been buying back approximately 10% of the daily trading volume in its stock, every day, since then. The company has also seen recent insider buying.
And just this week, it announced another solid earnings report in which it announced that first half EBITDA came in at €80 million and first half free cash flow was approximately €50 million. Yes, this company is trading at around a 10% free cash flow yield on just first half results! And that is despite having almost all of its market cap covered by its real estate and bank holdings.
CTT is making progress executing on its operating and capital allocation plans, yet the market seems to be snoozing. Ongoing buybacks, the closing of the first real estate transaction, and continued operating improvements are all potential catalysts for the stock in the second half of the year.
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Maran Partners - Correios De Portugal: Trading At ~10% Free Cash Flow Yield