Description

Disclaimer: This report is the work of an investment adviser affiliated with the author. The report is the result of the adviser executing its investment strategy. The adviser holds a position in the security, however there is no assurance that the adviser will continue to hold the investment, or make additional investments, and will not update the information to reflect future changes in the adviser’s assessment of the investment.

Italmobiliare (ITM IM) is a ~$1.1B market cap holding company in Italy. Unlike most holding companies, ITM is helmed by high quality capital allocators and has a portfolio of unusually high-quality assets. The key assets include Italy’s strongest and fastest-growing coffee brand (Caffè Borbone), one of the world’s strongest brands for skis, ski boots, and hiking shoes (Tecnica), and arguably the most ancient Western cosmetics brand (Santa Maria Novella) with an irreplaceable brand lineage tracing its heritage to Franciscan friars outside of Florence in the 1200s! 

ITM remains obscure despite the quality of its businesses and management team as the company several years ago transitioned from a cement company to a listed investment firm with a new management team. This transition has been ongoing over the last few years and has contributed to there being no natural constituency for the shares (not a fit for cement investors or investors in European investment companies). However, this transition is near complete. 

Our summary thesis is:

• We estimate ITM is trading for a ~61% discount to its sum of the parts value. We believe this is materially too high for a management team at the holding company that we view as exceptional capital allocators.

• ITM’s management team has a unique capital allocation engine and has demonstrated a repeated ability to buy cheaply and to create value post-acquisition. Since the new management team took over in 2017, we estimate a >5x MoM and ~50% portfolio level IRR for the company’s core investments. ITM does not charge fees, its management team has significant skin in the game through stock ownership & long-term incentive plans, and has been buying shares in the open market.

• In Europe, holding companies with strong capital allocation, strong corporate governance, and reasonable overhead/cost burdens trade at limited NAV discounts or even premiums. Tamburi is a good precedent in Italy for how we believe the market will view ITM over the coming years, Tamburi trades at a 1% discount to NAV.  

• We believe ITM’s NAV is ~40-50% higher than the company’s marked value of their assets based on where peers are trading. If over 5 years ITM’s HoldCo discount closes to 10% and ITM’s stated NAV converges with our estimate of NAV, the 5 year return is 3.4x. As ITM plans to monetize its assets over a 5 year horizon, ITM’s reported NAV and our fair market NAV should converge over this period. As detailed below, we believe the holdco discount closing and the convergence of NAV could happen over a meaningfully faster timeframe than 5 years. 

• With net cash at the holding company, a 61% NAV discount to fair value, and a defensive, high quality and diversified portfolio, we believe the downside is well protected.

• There are clear reasons why the opportunity exists and why over time the discount will close which we detail below. We start with some background on ITM and its main assets before getting into the meat of the thesis (why it is mispriced, why the mispricing will clear). 

The below table shows our latest estimate of NAV relative to the ~ $1.1B market cap and may be useful to reference through the write-up:

Background

ITM’s investment strategy is to acquire irreplaceable Italian brands that are undermanaged and to grow them aggressively, improve cost efficiencies, and bring in leading management teams. They have a track record of helping family-run organizations get to the next level by applying business best practices to historically mismanaged companies, and they are able to acquire these irreplaceable assets as Italian families/entrepreneurs frequently wish to sell their life’s work to another Italian family with permanent capital vs. a private equity firm or a global multinational corporation. 

The Pesenti family is a fifth-generation Italian entrepreneurial family who historically controlled Italcementi, the local Italian cement champion. They are well regarded for corporate governance and ethics, and Carlo Pesenti is the family’s representative and CEO of Italmobiliare. Under Carlo’s leadership, the family sold Italcementi to Heidelberg Cement in 2015 and used some of the proceeds to pay a special dividend and buyback the company’s outdated structure of savings shares at accretive prices. He utilized the rest of the proceeds to transform ITM into an actively managed listed private equity style vehicle with a strong team to lead their investments.

We believe that Italian mid-market entrepreneurs view ITM as an ideal home for their businesses as ITM is positioned as a permanent capital vehicle for Italian entrepreneurs by Italian entrepreneurs. ITM mostly participates in bilateral negotiations, taking advantage of its deep relationships in Italy and Italian entrepreneurs’ aversion to selling their proverbial baby to private equity. Italian family owned businesses can have very strong products due to the passion/technical expertise of the founder/entrepreneur but can have substantial low hanging fruit on the business side. ITM’s investment team focuses on transactions where it pays a reasonable multiple on existing EBITDA and where there are substantial value creation levers such as cost-cutting, new management, new product launches, new geographies, etc. that were previously unexplored under family ownership. 

Alarico Melissari, the head of investor relations at ITM and one of the two most senior investment professionals at ITM, was the co-head of TMT at Mediobanca (regarded as Italy’s Goldman Sachs) before joining ITM and comes across as a thoughtful investor in our interactions. Leonardo Senni, head of Portfolio Company management at Italmobiliare was previously CEO at Ariston Thermo (Milan listed billion+ EUR revenue company), and a Senior Partner at McKinsey. 

Of the five investments that are over 3 years old at this point, Borbone, Technica, Iseo, Autogas, and Capitelli, we believe that the first three are home runs worth well above 3x what ITM paid for these assets just a few years ago, and the remaining deals will offer an attractive IRR well above 15%. Their newer deals over the last few years such as Santa Maria Novella, Casa de Salute, Callmewine, and Bene Assicurazioni show early signs of strong performance but are too immature to pass judgment on at this point. 

Santa Maria Novella in particular is a large deal for Italmobiliaire and is a good example of the ITM ‘Playbook’ in our view. First, we believed they paid a substantially lower multiple than what competing luxury conglomerates were willing to pay for the asset as a result of their relationship with the 80-year-old seller who happened to be retiring and wanted a long-term Italian family home for his asset. Not only do we think there is room for multiple expansion from what they paid for the business, we think there are substantial growth opportunities for the brand given its history/legacy and product range that has so far remained untapped under previous ownership. From our checks, we heard the former owner of Santa Maria Novella had limited e-commerce capabilities and did not believe in sampling, both critical to success in the cosmetics industry, and took several months of vacation a year. With new professional management, ITM is seeking to drive revenues to ‘catch-up’ to the brand strength, which we think could be several times the revenue the company had at time of acquisition. 

Despite a major historical drag from holding large listed positions and cash (which will no longer be significant drags going forward), ITM has managed to compound reported NAV per share over the past few years at 10% levels. ITM also has a demonstrated track record of disposals of underperforming or legacy assets as well as share class simplification/buybacks and perhaps most importantly, special dividends from the proceeds of exits above carrying value. The Pesenti family has a strong motivation for these special dividends as only Carlo Pesenti is involved with ITM and other family members would like strong dividends from their ITM holdings from our research/speaking with people who know them. 

Since company NAV understates the true value of the underlying businesses, we believe growth in fair value NAV has been far higher than the reported NAV shown above. To give an example on the most important asset, Caffe Borbone, ITM has carried the asset at a low teens EV/EBITDA multiple on LTM EBITDA when top-line has been growing 20%+ rates historically (completely organically) and EBITDA even faster; this is a comparable multiple to European consumer staples comps with 0-2% type growth. Tecnica, another key asset, is carried at a MSD/HSD EV/EBITDA multiple on LTM EBITDA despite having one of the world’s strongest brands in its niches. Publicly-traded peers trade at low to mid teens EV/EBITDA. The list goes on if one looks at additional ITM assets and how ITM values their assets vs. the marks of comps, and it is therefore perhaps not surprising that every exit ITM has made to date has been at a substantial premium to carrying value. ITM management explains their conservative marks by saying they want to raise their marks over time but avoid ever having to reduce them. 

Management at ITM are not empire builders and they have frequently sold assets in the past at attractive prices when it made sense to do so and actively look to recycle their capital. Like a private equity firm, ITM underwrites investments for 5 year periods; they then either re-underwrite or seek to exit. 

Reason for mispricing

From speaking with local and European investors, we understand that many investors still think of Italmobiliare as a cement holding company, so it has no natural investor constituency as the cement shareholders have sold out and it is yet to be discovered by EU HoldCo investors due to its short track record, much of it under significant legacy asset and cash drag, which is just starting to end/be much less significant. The large cash and legacy asset drag was due to ITM’s birth via Italcementi – when Italcementi was sold to Heidelberg for cash, the new ITM began as a pile of cash and legacy Italcementi assets. It has taken some years to deploy the cash and to monetize the legacy assets. 

ITM’s track record is not as obvious to outside observers given conservative marks so one has to do extensive research to mark the portfolio at fair value and, given limited sell-side coverage, liquidity, and obscurity, we believe few people are doing this. However, after 5 years of solid investing, this team is not unproven anymore and has been performing exceptionally.

One taking a cursory look at the company might see a 46% discount to company reported NAV and a 10% historical NAV per share CAGR; while a 46% discount is still wide, it’s not egregious in the context of European holding companies. What this misses is that a) the discount to NAV is actually much higher when the assets are marked to market and more importantly b) the historical track record of 10% NAV per share CAGR is understated due to historical cash and legacy asset drag + the company’s reported NAV being understated. As noted above, we estimate 50%+ IRRs to date on mature core investments under the new team. 

How will these two factors change over time? As noted above, ITM does not hold assets permanently but looks to exit over a several year horizon. We expect an exit from one of its major assets (Tecnica) in 2023 and most of its major assets over the next 3-5 years. 

This will lead NAV to be marked up over time to fair value, and even more importantly, it will show a strong historical NAV per share CAGR due to these mark-ups and the lack of a large cash balance/legacy asset drag. The latter is critical for the holding company discount to close. 

A key additional factor is ITM has historically distributed any gains in its exits over carrying value to investors via special dividends. We think the Tecnica exit alone could lead to a special dividend of 1/3 the market cap, and Tecnica is a smaller potential exit than Borbone and Santa Maria Novella. 

Valuation

ITM’s current HoldCo discount is anomalously high versus its history over both the past five years as well as the long-term when they used to be a passive holding company for their Italcementi interest going by the company’s own NAV estimate (c. 46%) which we think understates fair value today.

Source: Equita 

If we look at other European holding companies (n = 27), we see that they trade at a median discount to NAV of c. 18% (as of 6/1/2022), with a range of 5-10% premiums to more like 40% discount to NAV, so ITM’s ~ 46% discount to the company stated NAV and c. 61% discount to our estimate of NAV is quite anomalous.

Within Holding Companies, we observe that holding companies that actively manage their assets and hold private investments rather than simply holding public investments and not rotating them trade at much lower discounts than passive ones that just sit on public holdings.

The single largest driver of HoldCo discounts seems to be 1) track record of NAV per share compounding and 2) capital returns, such that HoldCos that return capital to shareholders in the form of dividends and buybacks like ITM does and those that compound at high rates of return over the economic cycle (like ITM does) typically trade at significantly lower discounts than those that don’t. Such companies trade at 0-10% discount to NAV and often even trade at a premium, which we think is the right range for ITM, though assume a 10% HC discount for conservatism.

Other factors that impact HoldCo discounts are liquidity, geography, and market cap, however, we believe Tamburi has similar characteristics on these fronts and trades at only a 1% discount to NAV (5% premium to 10% discount in its history) so serves as a good comparison for where ITM should trade once the market understands what is happening here.

Catalysts & Returns 

We believe ITM's share price tracks their reported NAV closely, which we expect to increase significantly over the next few years as the underlying assets grow. Reported NAV should grow ~30% cumulatively over the next two years based on our projections of the underlying businesses if there is no IPO of Tecnica and we can see ~40% cumulative two-year NAV growth if they IPO Tecnica at fair market value (we believe this could happen in 2023).

Hence an IPO of Tecnica will lead to ~40% upside over 2 years without any re-rating and ~70% upside if ITM re-rates to more like a 35% discount to their stated NAV as has been the case of the last few years as the large extra-ordinary dividend from Tecnica IPO proceeds forces the market to take notice. On that note, based on our estimate of Tecnica’s value in 2023, if ITM continues its recent practice of distributing to shareholders any gains above the carrying value of its investments, shareholders could earn ~400M in special dividends which is more than a third of ITM’s market cap. 

We believe ITM’s reported NAV will converge with our “fair value” NAV over the medium term as ITM marks up assets upon realizations. At a 10% discount to NAV, which is conservative considering comparable valuations discussed above, ITM offers an attractive 3.4x return over 5 years. 

Additional realizations should be another catalyst for the stock. ITM started deploying in 2017 and underwrites for ~5 years so we should see more exits in general as companies like Autogas, Iseo, Borbone, etc. reach maturity.

Borbone is actively pursuing growth in international markets as of 2022 as the company understands the potential opportunity there, but we don’t underwrite it or include it in our numbers when estimating NAV or EBITDA growth. If Borbone is successful internationally, then it could get a much higher multiple such as that given to fast-growing CPG comps like Fevertree and lead to a large upgrade of our NAV estimate. There is a reason to believe Caffe Borbone can be successful internationally as nearly every major Italian coffee brand has been successful globally with the exception of Borbone which has not yet made an attempt.

Main Assets

Italmobiliare owns what we believe are high-quality assets with open-ended upside. While Italmobiliare has many assets which we will not discuss here we highlight a few key points about their largest investments below. 

Caffè Borbone 

Italmobiliare invested in Caffè Borbone in 2018 when the company was a challenger brand in the growing coffee pod sector and only had 27.3mn EUR in LTM EBITDA. Today, the company is the #1 seller of pods and capsules in Italy by volume, selling more pods than even Nespresso in Italy and earned ~83mn EUR in EBITDA in 2021, more than tripling profitability despite paying cash dividends to owners over this period. Caffè Borbone offers customers a high-quality coffee compatible with your standard Nespresso, Lavazza A-Modo-Mio, or other machines for a fraction of the price of buying the original brand, and through concerted advertising spending over the past few years has emerged as Italy’s top coffee media advertiser creating a household brand that has taken share from the incumbents like Lavazza and Illy over time. Despite its leadership in the space, we believe Caffè Borbone will continue to take share in the pods/capsule market as our research indicates they are under-represented in modern trade/grocery chains, having started in niche/boutique stores and online which continue to remain their stronghold, as well as geographical penetration into the Northern region where their penetration is lower than the South where Caffè Borbone is considered dominant. Borbone is a high-margin business with high ROIC and FCF conversion that has a dominant consumer brand. Given its strong consumer value proposition and pricing power, we are excited to own this company for several years as consumers switch from other modes of coffee consumption to pods/single-serve and Borbone continues to take market share within the Italian single serve market. Over the longer term, we believe that Borbone can grow significantly outside Italy, as most dominant coffee brands in Italy derive a significant percentage of their sales from exports which remains an untapped opportunity for Borbone and a medium-term priority for the company.

Santa Maria Novella

Italmobiliare invested in Santa Maria Novella (“SMN") in 2020, a luxury fragrance and beauty brand started by Franciscan friars that has served royals such as Catherine de Medici in its 500 years plus history as a brand. Our research indicates that SMN is a very high-value consumer brand with a strong product portfolio and brand heritage that is prized by critics and thought leaders in the space which has historically been undermanaged by an 80-year-old engineer who ran it as a family business, taking frequent vacations and ignoring trends such as e-commerce or taking non-economic business decisions that seem bizarre to those in the industry. Our conversations with key experts in the space suggest that brand heritage is a key factor for success in the beauty industry where Santa Maria Novella due to its rich history carries a lot of untapped potential.

Italmobiliare acquired the business for a sharp discount (c.15x PF EBITDA) versus listed comparables or what we heard luxury conglomerates were willing to pay for the business. Our research suggests that these conglomerates had approached the entrepreneur several times but he declined, wanting the company to be in Italian family hands. ITM has since replaced the CEO with an experienced and talented entrepreneur who has scaled similar brands in the past and has begun to reorganize their product portfolio and launched into new geographies such as China and Japan where such brand reputation is highly prized.

After a brief hit from COVID which saw revenues fall over 50% as the company saw lower tourist footfalls at its flagship store in Florence and lower retail/luxury sales in general, sales have rebounded and we are already starting to see the impact of the ITM playbook, with recent quarterly revenues over >50% above pre-COVID levels pro forma for a recovery in the flagship store and back on a growth trajectory.

Tecnica

Italmobiliare also owns a minority stake (40%) in Tecnica, a leading outdoor sports equipment and clothing manufacturer, best known for the brands Lowa, Blizzard, Nordica, and Tecnica skis, and also selling the iconic Rollerblade skates and MoonBoot shoes. Italmobiliare invested in Tecnica in 2017 out of bankruptcy alongside the incumbent Zanetta family, when it generated an LTM EBITDA of 31.4mn EUR. As a result of cost cuts, channel replenishment, tuck in M&A, and market share gains EBITDA is now ~79mn EUR in 2021 while net debt (ex-IFRS) has reduced from 125mn EUR to 73mn EUR. Based on newspaper articles an IPO of this business is likely over the next year helping shed light on the underlying value creation. We believe this could be a significant catalyst for the stock (see catalyst section).

Other Assets

Italmobiliare’s other large investments include Iseo, a leading lock manufacturer, Autogas, a gas distribution utility, Italgen, a renewable energy producer, and a few other smaller investments in food, diagnostics, direct insurance, and e-commerce. These businesses have relatively a-cyclical revenue drivers, are exposed to growth trends and generally produce a lot of FCF (except for some hypergrowth early-stage investments like Casa Della Salute and Bene Assicurazioni). We expect EBITDA growth CAGR of mid-teens for the remaining portfolio as a whole over the next 3 years. 

Catalyst

Tecnica IPO potentially in early 2023  

Special dividends upon exits that could be a large % of current market cap