Tessenderlo Stock: Entering Deep Value Territory (OTCMKTS:TSDOF)

Introduction

Tessenderlo Group (OTCPK:TSDOF) has transformed itself to a real holding firm after the acquisition of Picanol. Not solely does this add a brand new division to the Tessenderlo Group, it additionally strengthens the grip of Luc Tack on the mixed entity. Tessenderlo’s 2022 outcomes have been very sturdy however as regular, the group could be very cautious on the long run, though it does anticipate the Picanol division to report the next EBITDA than final 12 months. And only for readability sake: after deducting the shares owned by Verbrugge NV (which was a division of Picanol earlier than Picanol was acquired by Tessenderlo).

Tessenderlo has its primary itemizing on Euronext Brussels the place the inventory is buying and selling with TESB as its ticker image. The common each day quantity in Belgium exceeds 30,000 shares, which makes the Brussels itemizing the most liquid itemizing. I’ll seek advice from the Brussels itemizing the place relevant, and I’ll use the Euro as base forex all through this text.

2022 was an honest 12 months, 2023 would be the first 12 months the Picanol actions are consolidated

Picanol will solely be consolidated from 2023 on, so the outcomes I’ll talk about beneath are the outcomes of Tessenderlo on a standalone foundation. I might additionally suggest to learn the February replace from fellow writer The Scepticist.

The total revenue increased to 2.6B EUR leading to a gross revenue of 668M EUR. After all, Tessenderlo wasn’t resistant to value will increase as properly however regardless of seeing double digit share will increase within the working bills, the adjusted EBIT elevated by over a 3rd to 300M EUR and the reported EBIT was 288M EUR. The online revenue was 227M EUR or 5.26 EUR per share which is a really good improve from the 4.36 EUR it reported as 2021 EPS. But the market nonetheless didn’t care. Nor all year long nor on the finish of the 12 months.

In a manner I perceive the market doesn’t wish to be backward trying and odds are 2023 might be weaker than 2022. However in that case the market ought to have cared a bit extra throughout 2023 as a result of the inventory was buying and selling at low multiples all year long.

In any case, I all the time thought of Tessenderlo to be a money cow and that standing has not modified. The official money stream statements have been fairly clear.

The full working money stream was 200M EUR on a reported foundation however this contains about 12M EUR in money taxes that have been paid however weren’t owed over FY 2022. Moreover, the entire funding within the working capital place was roughly 176M EUR (which we must always add again to the equation) however we must always subsequently additionally deduct the 13M EUR in internet curiosity bills and the 21M EUR in lease funds. This implies the underlying working money stream on an adjusted foundation got here in at 354M EUR (in comparison with 279M EUR in 2021, this once more emphasizes how sturdy Tessenderlo’s monetary 12 months was).

The full capex was roughly 113M EUR, leading to an underlying free money stream results of 241M EUR. Divided over the simply over 43M shares excellent, the underlying free money stream outcome per share exceeded 5.50 EUR per share.

After all I’ve no illusions: 2023 might be worse than 2022 as Tessenderlo scored on all ranges. Agro was – maybe a bit surprisingly – weaker than I had anticipated as a 23% income improve resulted in an EBITDA improve of lower than 8% (after reporting a 50% EBITDA improve within the first half of the 12 months). However, the bio-valorization division reported a 20% income improve however a 37% EBITDA improve in order that division clearly additionally was one of many primary drivers behind the sturdy efficiency.

Tessenderlo is fairly conservative for 2023 as the corporate is guiding for a decrease EBITDA than the professional forma 467M EUR it generated in 2022 primarily based on the professional forma addition of the Picanol division. Whereas Tessenderlo expects the Picanol EBITDA to extend from the 32.2M EUR in 2022, that improve gained’t be enough to offset the anticipated decrease EBITDA from the ‘legacy’ Tessenderlo enterprise.

With none dedication from Tessenderlo it is rather troublesome to guesstimate how excessive the anticipated EBITDA lower might be. Are we speaking a couple of 5% lower or a 15% lower? Let’s assume the latter as a worst case state of affairs and let’s assume a lower of the EBITDA to 400M EUR. We all know the depreciation and amortization might be round 175M EUR and the online finance value might be subsequent to zero. I anticipate a 400M EUR EBITDA to end in a pre-tax revenue of 210M EUR and a internet revenue of 170M EUR. This is able to end in an EPS of two.7 EUR per share.

Two issues I’d like to emphasise right here: To begin with that’s primarily based on a 15% EBITDA lower. We all know Tessenderlo often studies very conservative numbers as preliminary steerage and will increase steerage all year long, however I wished to color a conservative image. An EBITDA results of 450M EUR (a 4% lower versus 2022) would for example end in a 0.60 EUR EPS improve. And secondly, the free money stream outcome will are available in larger than the reported internet revenue. So in a much less conservative state of affairs (450M EUR EBITDA and a normalized sustaining capex), I anticipate the underlying free money stream outcome to come back in nearer to 4 EUR per share.

This is not going to present up within the money stream assertion as Tessenderlo can be investing in progress. The development of a brand new fertilizer plant in Ohio is ongoing and can seemingly not be accomplished earlier than the tip of subsequent 12 months. A further fertilizer plant is now beneath building in The Netherlands and that plant also needs to be operational in 2024. In the meantime, in China, PB Leiner is teaming up with a neighborhood associate to provide fish collagen peptides and all these growth plans will end in an above-average capex degree within the subsequent few years.

That’s nice. The working money stream can deal with it and I anticipate Tessenderlo to now have a internet money place on its steadiness sheet. The corporate not too long ago sold its stake in Swiss company Rieter at a achieve, so except there’s a large funding within the working capital place, I anticipate Tessenderlo’s steadiness sheet to comprise a internet money place when it publishes its half-year outcomes.

Whereas the per-share efficiency optically will get decreased now the acquisition of Picanol has been accomplished, the deal will give Tessenderlo extra firepower on the monetary entrance. All growth plans can now be autonomously financed, after which some. A portion of the money stream will now even be used to pay a dividend. Tessenderlo is committing to paying a dividend equal to 7-15% of the EBITDA results of the corporate. For FY 2022, Tessenderlo has declared a 0.75 EUR dividend. Whereas I by no means minded Tessenderlo not paying a dividend, I’m nice with the 48M EUR it plans to distribute primarily based on the 2022 outcomes if Luc Tack can’t discover a higher strategy to spend the money. And generally handing it again to the shareholders is a greater concept than investing it for the sake of investing with out that funding assembly the minimal return standards.

Funding thesis

The inventory is at the moment nonetheless buying and selling at simply round 5.5 instances EBITDA. In the event you would apply a a number of of seven instances EBITDA and use a 425M EUR EBITDA outcome, you’d find yourself with a fair proportion worth of round 46-47 EUR. The merger with Picanol has ‘diluted’ the free money stream efficiency of Tessenderlo however it does create a stronger firm with a internet money place whereas it additionally removes uncertainty because the market has been speculating a couple of Tessenderlo-Picanol mixture for fairly some time now. Retaining the larger image in thoughts, Tessenderlo nonetheless is a purchase. Maybe much less pronounced than within the standalone state of affairs however the elevated firepower might allow Tessenderlo to pursue extra M&A. In the meantime, the corporate is buying back its own shares, a transfer I positively can admire.

Editor’s Observe: This text discusses a number of securities that don’t commerce on a significant U.S. alternate. Please concentrate on the dangers related to these shares.