Italmobiliare Deep Dive - 50% Discount for Multiple High-Quality Companies?
Discussing NAV and Discounts
Business Model & Businesses
Officina Profumo-Farmaceutica di Santa Maria Novella
Casa della Salute
Overview of Other Assets Classes
Investment Return Expectations
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Today, we will look at an Italian company valued at 50% of its Net Asset Value while holding multiple high-quality businesses that grow rapidly both financially (revenues, margins, cash flows) as well as quality-wise (moat, structural).
What does Italmobiliare do?
Italmobiliare (ITM) is an Italian Investment Holding company that invests in mid-sized Italian companies. But Italmobiliare is not only buying companies and letting them run. They also actively participate in the business by appointing new management teams and/or working on the company’s long-term strategy. In most of their businesses, they aim to expand internationally sooner or later.
Italmobiliare does not invest in companies that are in turnaround situations. They want to own high-quality companies with strong brands, unique selling points, and the potential for internationalization.
However, Italmobiliare isn’t your typical buy-and-hold company. They are interested and open to selling businesses when they can make a good profit and have set free the value that they have seen.
There are five assets Italmobiliare invests in:
Private Equity Funds
Financial Assets, Trading, and Cash
Properties and Related Assets
Valuation: 50% Discount to NAV
What got me interested in this company is its undervaluation compared to NAV. According to Italmobiliare, it is 50% to NAV, and as you’ll see, I think that’s realistic.
Quality: High-Quality Companies
Italmobiliare’s portfolio, with very few exceptions, consists of market-leading companies with very strong brands, strong financials, and rapid growth.
Two of them are exceptionally strong and have the potential to become internationally known superbrands.
Generally, with the exception of two to three companies out of twelve, I’d own any of these companies if they were listed on the market at these prices.
Business Model: The Best of All Worlds
Italmobiliare reminds me of a mix between Berkshire and LVMH. I know this comparison lacks in size, and the strategies also differ here and there, but there are similarities that I very much like to see.
It seems as if the management has a very good eye for quality companies at the right price and has a strong enough network and knowledge of their expertise to invest in them when they find them. They know their circle of competence and stick to it.
I’m usually not a big fan of holding companies. They tend to be intransparent in their NAV calculations, cost structures, and own companies that don’t paint a coherent picture for me.
However, Italmobiliare seems to be the opposite. The information you can get on its website are very transparent. Great presentations, overviews, and transparency in numbers and costs. And the businesses they own are very high-quality and exactly what I would look for in such a company.
The comparison to LVMH or Berkshire lacks due to its smaller size, smaller portfolio, less-known brands, etc., yet, when I came across ITM, I was reminded of both of them in some aspects.
Italmobiliare goes way back. As a holding company, it has existed since 1946. Before that, the company was known as Italcementi, founded in 1864, and, well, a cement company. Initially, Italmobiliare was founded to allocate capital outside of the building materials sector.
The year 1979 marked the next milestone for the company and initiated the next phase. Italcementi was integrated into Italmobiliare, and the company was listed on the Milan stock exchange.
What followed were almost five decades of portfolio diversification. Although the cement business remained the main operation of the company.
The company that we’re discussing today came to light in 2016. When Italcementi was sold for a mix of assets and cash. Some of the assets/company shares that Italmobiliare received are still part of the portfolio. The cash from that sale went into acquisitions and laid the foundation of the holding company that Italmobiliare is today.
Because of its “unique” history and the many changes within the business, the stock movements of the past are not representative of today’s company. The first time I looked at the stock, I thought of a very cyclical business. Which some of the companies still are. But way less than the cement business in the past.
The company that we’re talking about today started in 2015-2016, so that is the timeframe we should focus on.
Discussing Net Asset Value and Discounts
The reason I got interested in Italmobiliare is the 50% discount to NAV that they claim to have. First, it’s not uncommon for holding companies to claim to trade at a discount to their NAV—one of the many reasons I have a healthy general skepticism regarding holding companies.
Secondly, even if such discount exists, there are often reasons for that. Holding companies can have disadvantages that, in my opinion, should be priced into the stock. The most common disadvantages are value destruction, holding costs, lack of transparency, complex structures, and acting against shareholder interests.
If I see any signs of that, I stay away from a company since I can’t know what discount is fair to account for these negatives. I generally trust the market that it has it right, then.
In the case of Italmobiliare, I don’t see any of these signs. They’re transparent in their numbers and clear in communicating with shareholders; their track record shows that they’re a value-adding holding company rather than a value-destroying one, and the structure is quite simple without other holdings or companies that are connected to them in some weird way or being loaded with debt.
Holding costs are about 1.3% of NAV (€26m), which is in a respectable range.
In the chart above, you can see the evolution of NAV per share and the NAV discount. The current discount is 49% without counting the distributed dividends of 5.70€ per share.
Starting from 2017, the compounded annual growth rate of NAV was 7.5%. However, I expect this number to be higher in the future since Italmobiliare only started buying many of the companies they now own in recent years.
As mentioned in the company's history, Italmobiliare doesn’t exist very long in the form it is now. Because of that, the cash ratio in 2017 was also quite high, with 36%. It declined with the acquisitions that Italmobiliare made over time and is now at 8%.
Many acquired companies have shown significantly more growth since ITM stepped in. Besides that, some companies are still young and in the growth phase and thus have most of their value coming in the next few years anyway.
The success of these companies will only be seen in the next years in this NAV evolution chart.
So, if we assume there is nothing that would justify a huge holding company discount, let’s try to calculate the NAV and see if Italmobiliare’s stated NAV of ~2 billion is realistic.
Now, let’s check if the alleged discount of 50% that ITM claims to have is even realistic. I’ve come up with some assumptions on ITM’s 2023 numbers that I think are realistic. However, these are estimates, so keep that in mind.
I’ve tried my best to adjust for seasonality, one-time events, the aftermath of the pandemic for all the businesses that were affected by it, and, of course, inflation and a possible recession or at least a slowdown in the European/global economy.
These are the numbers that I came up with: