Description

I think the Swiss ski resort operator Bergbahnenn-Engleberg-Trubsee-Titlis (TIBN) is quite cheap. Non replicable asset + >25% sustainable operating margin + >20% ROE + net cash on the balance sheet + shareholder friendly management + capacity to grow = 8.6x trailing earnings. Most ski resort operators are crappy businesses amid high fixed costs and seasonality. I will explain the rational to conclude that: i) BETT is a great business and ii) is selling for a bargain price.

TIBN opened its doors in 1913 as a single funicular railway, subsequently acquiring other cableways in the region and eventually expanding into the hotel, lodge and restaurant businesses. With more than a century operating it is certainly not easy to find a more durable business than TIBN in particular and the cable car in general.

Most ski resorts are very seasonal by their own nature. They generally open from November-December to March, whereas the premises need maintenance for the whole year. In addition, either cost overruns mainly in the form of snow canyons or demand shocks derived from harsh weather conditions are not infrequent. TIBN is one of the few exceptions – probably with Jungfraubahn, another Swiss public company – of profitable mountain operator.

Many ski resorts also receive support from the authorities resulting in an undesirable side effect. In order to support regional economies local authorities pour money indiscriminately into these businesses to keep them alive no matter how uneconomic they are. Unsurprisingly this too relevant to fail triggers in some cases the possibility of careless management teams running the resorts.

TIBN’s case is very different, as it operates the entire year just generating half of its sales during ski’s season. Crowds of South American and especially Asian tourists visit TIBN in spring and summer as the area benefits from unique wonders: Galcier Cave and Titlis Cliff Walk, Europe’s highest suspension bridge. Both offer a wide spectrum of activities for visitors.

TIBN has an enormous cost advantage over other ski operators amid its location, allowing full-year operation. Relatively close to Zurich it is good value for money for locals during the ski season. Regarding the EM tourists during summer season most of this flow does not consist of “only Switzerland” or “only Zurich” visitors but of visitors all around Europe, generally in-route Italy-France-Germany. Imagine a 2 or 3-week road trip across Central Europe and how relevant is Zurich as a cross-roads in between the three countries. This fact is actually central to the thesis as not only it mitigates the risk of volatile traveling preferences but also makes TIBN to consistently benefit from notable pricing power. Think about how diluted a 60-70 Swiss franc ticket gets within a two or three thousand euros travel-package. Regarding pricing power also think about TIBN’s hotels and restaurants, comprising circ.40% of revenues.

In addition to raise prices, TIBN can certainly attract more visitors. In terms of volume growth and additional capex requirements, TIBN is still far from operating at full capacity. For those of you who have never skied, ski resorts likely have a saturation point in practice as endless queues of skiers usually make people unwilling to return. TIBN has not reached that point by any means. Since 2011 management has increased its commercial efforts to attract more visitors though new sales people and marketing campaigns. SG&A has grown as a result since 2011 – the year Norbert Patt became CEO - from 4 to 6mCHF an effort that should pay off in the future.

Led by the CEO Norbert Patt and the CFO Esther Schneider, the management is very shareholder oriented. Norbert Patt became CEO in late 2010, a very difficult time for TIBN. The company suffered an unfortunate setback when over 10m CHF in investments made by a company executive turned out to be wholly fraudulent. 10m is not a small number for a company with 50m in sales and 13m in EBIT by that time. Norbert and Esther have worked hard to implement internal controls and implemented a great culture. After extended talks with them I am pretty sure that they love what they do and they really are outsiders. These guys think different. How cool and unsual is to find a management team presentation wearing ski attire rather than business attire... http://www.titlis.ch/en/header/company/team

I think TIBN is unfollowed and as a result selling for an anttractive price for three main reasons: i) the sell-side does not really cover a company operating in such a niche, ii) TIBN is mostly a stock thought for ski experts & lovers and people who have personal attachments far beyond the pure economic one and iii) market cap is just north of 200mCHF and daily liquidity is around 45KCHF, which translates into technical or strategic constrainsts for institutional investors to deploy money in TIBN.

From 1997 to 2014, sales have grown at 6% annually, EBIT at 11% and net income and EPS at 16%. The stock has unsurprisingly risen by more than 7x during the period amid these outstanding figures. Currently the company has virtually no debt – 2m net cash position. TIBN is still selling for 8.6x trailing EPS! Operating margins head north of 30% and there is still room via prices and volumes to exploit operating leverage even further. Estimating 6-7% annual free cash growth in steady state and 3% dividend yield, that would yield something like 9-10% IRR assuming no multiple expansion. 

As current capex is distorted as a result of investment in commercial real estate development, my estimation is slightly below average and there is good room for growth through prices and number of visitors, I think the valuation is conservative. Moreover, a significant part of the developed real estate has not been sold yet, recognized in the balance sheet at cost yet appraised value is around 25-30m, providing additional upside potential significant for a 200m company. Using a simple two-stage DCF with 9% growth for five years and 5% onwards, it would give 359mCHF+2m net cash+25m real estate for sale ≈ 386mCHF or 576CHF per share, which is almost double the current share price.

Catalyst

Value and cheapness are the catalysts themselves