2023-05-06 11:35:00 ET
Summary
- Tessenderlo is a diversified holding with its roots in the industrial segment. It subsequently acquired a gas-fired power plant and Picanol, a manufacturer of weaving machines.
- The company will generate hundreds of millions in EBITDA which could be used to pursue additional M&A.
- The company will pay an initial dividend of 75 cents per share, and pledges to pay 7-15% of its EBITDA as a dividend, going forward.
- Majority shareholder Luc Tack is a free cash flow focused (deep) value investor and has historically reinvested the incoming free cash flow in bolt-on growth ideas.
Introduction
Tessenderlo Group ( TSDOF ) has converted itself to a true holding company after the acquisition of Picanol. Not only does this add a new division to the Tessenderlo Group, it also strengthens the grip of Luc Tack on the combined entity. Tessenderlo’s 2022 results were very strong but as usual, the group is very cautious on the future, although it does expect the Picanol division to report a higher EBITDA than last year. And just for clarity sake: after deducting the shares owned by Verbrugge NV (which used to be a division of Picanol before Picanol was acquired by Tessenderlo).
Tessenderlo has its main listing on Euronext Brussels where the stock is trading with TESB as its ticker symbol. The average daily volume in Belgium exceeds 30,000 shares, which makes the Brussels listing the most liquid listing. I will refer to the Brussels listing where applicable, and I will use the Euro as base currency throughout this article.
2022 was a decent year, 2023 will be the first year the Picanol activities are consolidated
Picanol will only be consolidated from 2023 on, so the results I will discuss below are the results of Tessenderlo on a standalone basis. I would also recommend to read the February update from fellow author The Scepticist.
The total revenue increased to 2.6B EUR resulting in a gross profit of 668M EUR. Of course, Tessenderlo wasn’t immune to cost increases as well but despite seeing double digit percentage increases in the operating expenses, the adjusted EBIT increased by over a third to 300M EUR and the reported EBIT was 288M EUR. The net income was 227M EUR or 5.26 EUR per share which is a very nice increase from the 4.36 EUR it reported as 2021 EPS. Yet the market still didn’t care. Nor throughout the year nor at the end of the year.
In a way I understand the market does not want to be backward looking and odds are 2023 will be weaker than 2022. But in that case the market should have cared a bit more during 2023 because the stock was trading at low multiples throughout the year.
In any case, I always considered Tessenderlo to be a cash cow and that status has not changed. The official cash flow statements were pretty clear.
The total operating cash flow was 200M EUR on a reported basis but this includes about 12M EUR in cash taxes that were paid but weren’t owed over FY 2022. Additionally, the total investment in the working capital position was approximately 176M EUR (which we should add back to the equation) but we should subsequently also deduct the 13M EUR in net interest expenses and the 21M EUR in lease payments. This means the underlying operating cash flow on an adjusted basis came in at 354M EUR (compared to 279M EUR in 2021, this again emphasizes how strong Tessenderlo’s financial year was).
The total capex was approximately 113M EUR, resulting in an underlying free cash flow result of 241M EUR. Divided over the just over 43M shares outstanding, the underlying free cash flow result per share exceeded 5.50 EUR per share.
Of course I have no illusions: 2023 will be worse than 2022 as Tessenderlo scored on all levels. Agro was – perhaps a bit surprisingly - weaker than I had expected as a 23% revenue increase resulted in an EBITDA increase of less than 8% (after reporting a 50% EBITDA increase in the first half of the year). On the other hand, the bio-valorization division reported a 20% revenue increase but a 37% EBITDA increase so that division clearly also was one of the main drivers behind the strong performance.
Tessenderlo is pretty conservative for 2023 as the company is guiding for a lower EBITDA than the pro forma 467M EUR it generated in 2022 based on the pro forma addition of the Picanol division. While Tessenderlo expects the Picanol EBITDA to increase from the 32.2M EUR in 2022, that increase won’t be sufficient to offset the anticipated lower EBITDA from the ‘legacy’ Tessenderlo business.
Without any commitment from Tessenderlo it is very difficult to guesstimate how high the anticipated EBITDA decrease will be. Are we talking about a 5% decrease or a 15% decrease? Let’s assume the latter as a worst case scenario and let’s assume a decrease of the EBITDA to 400M EUR. We know the depreciation and amortization will be around 175M EUR and the net finance cost will be next to zero. I anticipate a 400M EUR EBITDA to result in a pre-tax income of 210M EUR and a net income of 170M EUR. This would result in an EPS of 2.7 EUR per share.
Two things I’d like to emphasize here: First of all that’s based on a 15% EBITDA decrease. We know Tessenderlo usually reports very conservative numbers as initial guidance and increases guidance throughout the year, but I wanted to paint a conservative picture. An EBITDA result of 450M EUR (a 4% decrease versus 2022) would for instance result in a 0.60 EUR EPS increase. And secondly, the free cash flow result will come in higher than the reported net income. So in a less conservative scenario (450M EUR EBITDA and a normalized sustaining capex), I anticipate the underlying free cash flow result to come in closer to 4 EUR per share.
This will not show up in the cash flow statement as Tessenderlo is also investing in growth. The construction of a new fertilizer plant in Ohio is ongoing and will likely not be completed before the end of next year. An additional fertilizer plant is now under construction in The Netherlands and that plant should also be operational in 2024. Meanwhile, in China, PB Leiner is teaming up with a local partner to produce fish collagen peptides and all these expansion plans will result in an above-average capex level in the next few years.
That’s fine. The operating cash flow can handle it and I expect Tessenderlo to now have a net cash position on its balance sheet. The company recently sold its stake in Swiss company Rieter at a gain, so unless there is a massive investment in the working capital position, I anticipate Tessenderlo’s balance sheet to contain a net cash position when it publishes its half-year results.
While the per-share performance optically gets reduced now the acquisition of Picanol has been completed, the deal will give Tessenderlo more firepower on the financial front. All expansion plans can now be autonomously financed, and then some. A portion of the cash flow will now also be used to pay a dividend. Tessenderlo is committing to paying a dividend equivalent to 7-15% of the EBITDA result of the company. For FY 2022, Tessenderlo has declared a 0.75 EUR dividend. While I never minded Tessenderlo not paying a dividend, I’m fine with the 48M EUR it plans to distribute based on the 2022 results if Luc Tack cannot find a better way to spend the cash. And sometimes handing it back to the shareholders is a better idea than investing it for the sake of investing without that investment meeting the minimum return criteria.
Investment thesis
The stock is currently still trading at just around 5.5 times EBITDA. If you would apply a multiple of 7 times EBITDA and use a 425M EUR EBITDA result, you’d end up with a fair share price of around 46-47 EUR. The merger with Picanol has ‘diluted’ the free cash flow performance of Tessenderlo but it does create a stronger company with a net cash position while it also removes uncertainty as the market has been speculating about a Tessenderlo-Picanol combination for quite a while now. Keeping the bigger picture in mind, Tessenderlo still is a buy. Perhaps less pronounced than in the standalone scenario but the increased firepower could enable Tessenderlo to pursue more M&A. Meanwhile, the company is buying back its own shares , a move I definitely can appreciate.
For further details see:
Tessenderlo: Entering Deep Value Territory