Description

Compagnie des Alpes (CDA) is two businesses in one. The company holds the concessions for 11 of the top ski areas in the French Alps, and also runs 11 leisure destinations (amusement parks) in Europe. The balance sheet is strong, with net debt to EBITDA of about 1.4x.

The shares look undervalued. Using a multiple of EBITDA close to the lowest comp (6.5x), the ski business (€427m in sales, €155m in EBITDA) alone justifies the current share price (after deducting net debt).

This means shareholders are getting the leisure destinations (€321m in sales, €77m in EBITDA), the international development segment (€14m in sales and growing), and a 37.5% stake in listed company Compagnie du Mont-Blanc (worth €51.4m) for free.

I believe that, using conservative multiples on 2017 financial results, we arrive at an intrinsic value above €50. As evidenced by half-year results published on May 24, sales and earnings continue to grow and the group continues to develop its business.

The company has been growing top line and EBITDA steadily, both organically and through acquisitions, as far back as I have data (early 90s). The company’s goal is to generate a return on capital employed over 8%. It recently hit 8.9% and hopes to continue to increase that over the coming years. There’s a potential catalyst which may help lift the company’s profile and re-rate the shares (discussed below).

Why is this cheap?

This stock has never been written up on VIC, has little analyst coverage, and has a small market cap. It’s probably also a weird amalgam of two unrelated businesses, which as we know is always a challenge for the sell-side to cover.

Ski resorts

The ski businesses run by CDA are not like Vail or Intrawest; they don’t have a long-term government lease to the land, and they do not run food, beverage, lodging, and rental businesses. The only thing they do here is operate the lifts (this is ~95% of the ski segment revenues).

These concessions run for many years and are negotiated with the various towns and cities. They have never lost a concession in the past; this doesn’t mean it won’t happen in the future, but that’s a fact. These are renegotiated before they expire. Cities like to see a strong player with a good balance sheet, a commitment to capex expenditures for upkeep and expansion, and domain expertise. The pricing discussion includes a fee paid to the cities, fees for services like shuttles to and from the airport, and price increases to match inflation. Lift tickets are about half the price of those in the US, and they’re considered a transportation permit, so are negotiated with the city like a bus or metro ticket.

Global warming is an issue; but as long as you stay above 1,800m in elevation (which most of them are), resorts are expected to survive over the long-term, and probably thrive, as lower altitude competition gets eliminated.

Here are the global comps (admittedly, some of these are fantastic businesses, and others are very lousy ones, but I don’t think it’s fair that CDA’s ski business alone, at 6.5x EBITDA, justifies the current share price):

Leisure destinations (amusement parks)

Unlike the ski business, the leisure destinations have no limit on margins, pricing, and expansion potential. The company has expanded and made some mistakes (they recently took an €18m impairment in their Prague and Seoul parks). Tickets for the parks are also affordable, about half the price of those in the US.

CDA’s parks rank pretty well among parks that are/were publicly traded:

In April of last year, Groupe Bruxelles Lambert took a 15% stake in Parques Reunidos at an implied valuation of 9.7x EBITDA. Here’s where the European and other comps trade today:

Sum of the parts

If you agree that the ski business deserves at least a 6.5x multiple, and that the parks business, at least a 10x multiple (which I think is warranted given the comp set above and the GBL investment in Parques last year), then this what we get:

Put another way, to justify the current share price, the ski resort business would have to be priced at 3.5x EBITDA (keeping the rest at 10x). Sensitizing the ski resort multiple:

A few notes:

The ski business has no minority interests, per my conversation with the CFO. The minority interest relates to Futurescope, which is one of the lowest EBITDA parks in the mix. Therefore, my initial estimate of minority interest of €12.9m (which is the after-tax minority interest from the income statement grossed up for the 33% French tax rate) gets discounted by 50% to €6.4m.

The “support” segment is corporate overhead. “International” is the international expansion segment, which might turn profitable soon. The net debt figure of €270m was shared in the half-year report and is as of 3/31/2018. All other numbers are as of 12/31/2017.

This per-share total of €50 is a backward-looking number and since then the company has continued to grow sales and earnings.

Potential catalyst

This part gets hand-wavy and you can totally ignore it, but it turns out that Chinese conglomerate Fosun has been trying to buy a stake in CDA. The company has said that it won’t issue new shares, so presumably this will come from the government’s stake (they own ~40% of the company). The French being French, they’re worried about the Chinese “taking over” and that’s presumably why this has been rumored but hasn’t yet happened. Yet the CEO reaffirmed, late last month, that this remains a strategic goal for the company.

Fosun owns Club Med, whose all-inclusive resorts in the Alps overlap with many of the lifts operated by CDA. Chinese clients at Club Med have doubled from 59k to 120k over the past 6 years, and they recently opened their fifth property in China. For its part, CDA would like to expand in China and help fulfill that country’s goal of developing its ski industry before the 2022 Winter Olympics. CDA considers this investment strategic and part of their ambition to expand outside of France.

Due diligence

CDA has a decent investor relations website, a full English-language annual report, and the CFO speaks English perfectly.

Catalyst

This part gets hand-wavy and you can totally ignore it, but it turns out that Chinese conglomerate Fosun has been trying to buy a stake in CDA. The company has said that it won’t issue new shares, so presumably this will come from the government’s stake (they own ~40% of the company). The French being French, they’re worried about the Chinese “taking over” and that’s presumably why this has been rumored but hasn’t yet happened. Yet the CEO reaffirmed, late last month, that this remains a strategic goal for the company.

Fosun owns Club Med, whose all-inclusive resorts in the Alps overlap with many of the lifts operated by CDA. Chinese clients at Club Med have doubled from 59k to 120k over the past 6 years, and they recently opened their fifth property in China. For its part, CDA would like to expand in China and help fulfill that country’s goal of developing its ski industry before the 2022 Winter Olympics. CDA considers this investment strategic and part of their ambition to expand outside of France.