Måns Larsson Short ICA Gruppen: Sohn London Conference

We're posting up notes from the Sohn London investment conference.  Next up is Måns Larsson of Makuria who presented a short of ICA Gruppen (STO: ICA).


Måns Larsson's Sohn London Conference Presentation

Short: ICA Gruppen (STO: ICA)

ICA is a Swedish based supermarket/ grocery business. It’s the largest Swedish supermarket. ICA isrun on a franchisee model.

ICA is significantly overvalued at 25x accounting earnings. It has made good returns for shareholders over the last decade, but Larsson thinks that is about to change. Given the headwinds, 14x earnings would be a fairer valuation.

Challenging fundamentals: sales volumes are declining, the store footprint is contracting, the competition in Sweden is heating up especially with Lidl quietly gaining share.The Swedish grocery market is moving online quite quickly (expect 15% of total by 2022). Online is growing at about 30% per year. ICA doesn’t make money from online sales. ICA’s offline grocery sales are declining at about 1% per annum. Lidl is growing at about 10% CAGR over the last 5 years.  ICA has stores in the Baltic region, but Aldi and Lidl will be opening stores there next year.

Larsson’s research that looks at the accounts of individual franchisees suggests that profitability is heavily skewed towards the large out of town stores (maxis). In the large cities like Stockholm and Gothenburg where online adoption is higher profitability is lower or non-existent. Because many of the franchisees are not making money, ICA as the franchisor may have to lower fees.

Quality of earnings and cash conversion is poorer than it looks: EBIT looks okay, but they have taken a lot one offs. ICA’s cash conversion is poor. Cash flow to equity holders is less than 20% - it doesn’t cover the dividend. Since 2016 about 30% of cash generation has come from non-operating items like networking capital. Reverse factoring is a big component. Management’s capital allocation has not always been good. They have invested too much in online.

ICA is a low-quality supermarket that is going ex-growth yet it is one of the most highly valued food retailers in the developed market.


Be sure to check out the rest of the presentations from Sohn London conference 2019.

Mans Larsson Long Grand City Properties, Nos: Sohn London Conference

We're posting notes from the Sohn London investment conference 2016.  Next up is Mans Larsson of Makuria Investment Management who pitched two long ideas: Grand City Properties (GER:GYC) and Nos (ELI:NOS).


Mans Larsson's Sohn London Conference Presentation

Mans Larsson - founded Makuria Investment Management in 2013. Makuria has $775 million AUM and invests long / short across the capital structure with a bias towards credit and special situations.

Long Grand City Properties (GER: GYC) 

Grand City Properties is a German specialist real estate company focused on densely populated areas. It focuses on multi dwelling units – basic accommodation. It is a mid-cap company that is trading near 52-week lows. German residential property has good fundamentals. There is acceleration in rental growth (about 4% annual growth). Unlike many countries, real estate value in Germany has not grown in recent years. There is no history of home ownership in Germany but that is changing.

Grand City Properties could raise their rents as they are 20% below the market. The founder and chairman owns 33% of the stock and are well aligned with shareholders. The stock trades at a 20% discount to replacement cost. Cashflow is growing organically in the mid-teens. Cashflow can grow from Euro 144 million today to Euro 200 million in three years.

Grand City has issued perpetual bonds at rates as low as 2.5%. That will be a huge help to them if rates rise.


Long Nos (ELI: NOS) 

Nos is a Portuguese mid cap company that is a leading provider of cable TV, fibre broadband and 4G networks. It is a high-quality business with predictable and growing FCF. Nos trades at below 13x operating cashflow. It is is the leading cable TV provider in Portugal growing their market share from 25% in 2012 to 30% today. It has invested heavily in the last few years and now has the best in class fibre optic broadband and 4G network. It also has good set top box technology.

The capital expenditure phase is now over allowing Nos to move from an investment to a harvesting phase. Recently Nos and Vodaphone have agreed to share football rights which should reduce the price war between the two players.

The Portuguese stock market is one of the cheapest markets in Europe. Nos’s valuation is compelling at about 6x EBITDA. Pricing is low and could be raised. The cable business is relatively recession proof. The Portuguese economy is improving. Leverage is about 2x which is not high for the industry.

Be sure to check out the rest of the Sohn London conference presentations here.