A SNAPSHO SNAPSHOT T by Gotham Insights Team
GRUPO EMPRESARIAL SAN JOSÉ, S A
Grupo Empresarial San José S.A.
16/10/2018
CONTENT
0. DISCLAIMER
03
1. INTRODUCTION
04
2. METHODOLOGY
04
3. A DESCRIPTION OF GSJ’S BUSINESS INTERESTS
04
3.1 THE CONSTRUCTION BUSINESS
04
3.2 “HIDDEN”ASSETS
06
3.3 OTHER ASSETS AND TAX CREDIT
08
4. PARTICIPATORY LOAN
09
5. ASSUMPTIONS AND SENSITIVITY
10
6. SHAREHOLDER AND STOCK MARKET DATA
14
7. CONCLUSION
15
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0. DISCLAIMER This document is provided solely in connection with the valuation of GSJ based on the information obtained and analysed from public sources (CNMV, (CNMV, Group San José Annual Accounts Reports Repor ts FY14FY17, GSJ Shareholder Meetings insights, among others). This document must not be made available or copied in whole or in part to any other person without its author’s express written permission. For these purposes, its author does undertake to assume any kind of liability with third parties with regards to the information contained in this document.
This document summarizes the material ndings of certain nancial analysis conducted by its author regarding GSJ and, if applicable, its afliate companies, and it may however from time to time contain certain information on other companies related to GSJ which should not be considered as falling within the scope of the document. This document is limited to matters of the informatio information n contained and obtained from public sources in compliance with the laws applicable in the jurisdiction of Spain and does not cover the laws of any other jurisdiction jurisdiction or any documents, proceedings ( judicial or otherwise) or agreements, which which may be subject to, or governed by the laws of other jurisdiction. Our review of any entities or materials not governed by the laws applicable in the abovementioned jurisdiction, has been done with regard of the information contained in public sources. Consequently, no reliance is given as to our review and
ndings relating to any entities and materials not governed by the laws applicable in the jurisdictions of Spain. For the avoidance of doubt, the information reviewed reviewed for the purpose of the issuance of this document
include only that public information specically obtained from public sources for the purpose of preparing this document, and do not include any other documents or informatio information n relating to GSJ Group made available from time to time to other person than its author. Regarding the information informa tion obtained for review, we have limited our review to the scope of valuating GSJ and should not be treated as a recommendatio recommendation n for investing in GSJ nor should be read as extending by implication to any other matters.
We are not in a position to assess whether the affairs of GSJ and its afliate companies have been conducted in accordance with the terms of the documents and public information reviewed, nor are
we in a position to comment on the further commercial or nancial implications of such documents. This document should be read in conjunction for understanding the valuation of GSJ. This document does not address or purport to address any details, items or matters dealt with in those other reports. To the extend this document contains or refers to reports, memoranda, opinions or advice from any other person, that person remains exclusively exclusively responsible for the contents of such reports, repor ts, memoranda, opinions or advice. This document speaks solely as at the date hereof. This document is not a legal opinion and accordingly it is not to be taken as expressing any opinion
as any legal matter, value or condition of GSJ and its afliate companies. This document is also not a recommendation to potential buyers to proceed to purchase purchase or invest in GSJ and its afliate companies. This document is based on its author’s professional experience from a nancial perspective and its content may not be correct or accurate, the decision to proceed with any investment should be a commercial decision from an ultimate buyer to be executed with its relevant advisors.
This document should not be treated as a substitute for specic nancial and/or advice concerning individual matters, situations situations or concerns to execute any kind of investment in GSJ. Page 3
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1. INTRODUCTION Grupo Empresarial San José, SA (GSJ) is a diverse Spanish enterprise, with business lines and holdings that include construction, development, agriculture and energy. GSJ has been listed on the Spanish stock market since 2009, following completion of the takeover of the then listed company, Parquesol Real Estate. As a result of that takeover and the subsequent collapse of the
Spanish property market, GSJ fell into severe nancial difculties. It was restructured in 2014, when creditors assumed Parquesol’s assets and debt. As of 16-10-2018, GSJ’s shares were
trading at €4.66, compared with an initial otation price of €13.51. Perhaps not surprisingly given the group’s group’s low capitalization, and the fact that only a minority of its
shares (30%) are held in the free oat, there is no market research on GSJ and the company seldom issues information about itself. As a result, we believe the group’s activities are poorly understood
and that an improvement in its nancial position and prospects has gone largely unnoticed. This document describes GSJ’s main business interests and assets and values them accordingly. We
conclude its stock is undervalued by between 60 and 85%.
2. METHODOLOGY There are two distinct parts to GSJ’s business: the construction business, which we value according to EV/EBITDA multiples, and a range of other assets (described below), for which
we establish a minimum and maximum potential value. The maximum is a discounted cash ow valuation, assuming the assets are fully developed over a 10-year period.
Sources: public information, CNMV, Grupo San José Annual Reports (2014,2015,2016,2017), GSJ General shareholders meetings insights, Mazard's Construction Sector repor ts.
3. A DESCRIPTION DESCRIPTION OF GSJ’S BUSINESS BUSINESS INTERESTS INTERESTS 3.1 THE CONSTRUCTION BUSINESS Construction. Construction is GSJ’s principal activity, accounting for 85% of revenues in
the construction business overall and 70% of EBITDA. EBITDA . Half of these revenues are generated domestically and half internationally, in Germany, France, Portugal, Romania, Malta, Argentina,
Chile, Peru, Colombia, Mexico, Panama, Paraguay, Uruguay, the United States, India, Timor, Cape Verde and the United Arab Emirates. Some 90% of activities are focused on the most protable segments of the market – residential and non-residential construction in the private sector. In the two years to end-2017, revenues grew at an average annual rate of 12%, boosting prot ratios. In the six months to end-June 2018, the division’s construction backlog grew by more than 30%. Page 4
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Real estate and urban development. Historically an important business line for GSJ,
revenues fell between 2015 and end-2017 as the company focused its attention elsewhere after restructuring. Now, however, GSJ is reviving this business with the development of 1,100 homes at the Nuevavista Condominium in Lima, Peru. GSJ has previously developed
homes in the same district, and is thus familiar with the potential prot margins of around 35%. Given these margins, we believe the further fur ther development of GSJ’s real estate and urban development business will be an important driver of the group’s EBITDA growth (see Table 4). At end-2017, it owned 1.8 million m2 of land, 71% of which qualied as buildable. Of this area, 723,140 m2 are in Spain, 20,000 m2 are in Peru and 1 million m2 are in Argentina. The GSJ board commissions annually an independent valuation of its land inventory and
property investments. At end-2017, these were estimated to be wor th €55 million more than the book value and €83 million more than the fair market value, indicating a latent capital gain g ain of €138 million. (Note, these gures exclude the holdings of DCN, discussed later.) Energy. This accounts for 2% of revenues. It is a stable and protable business, with an
average EBITDA margin over the past two years of 32%. Concessions and services. This business accounts for 7% of the construction business’s
overall revenues. Its own revenues grew by 20% over the past two years. Table 1 shows the accumulated quarterly revenue of each business line in 2016 and 2017,
and the rst half of 2018.
Table 1. Construction business accumulated quarterly revenues, by business line (€ millions)
Mar 16
Jun 16
Sept 16
Dec 16
Mar 17
Jun 17
Sept 17
Dec 17
Jun 18
Construction
108
229
379
537
128
291
432
601
283
Real estate and urban development
8.2
11
13.4
16
2
3.4
5
6.7
1.6
Energy
2.6
5.2
8
10
3
6
8.8
11.1
4.7
10.6
19
28.6
39.4
10.3
23.5
35.3
47.7
24.7
3.3
6
9.4
10.7
3
7.6
12.2
16.2
15.3
Concessions and services Others
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3.2 HIDDEN ASSETS Besides its construction activities, GSJ has a number of what can be regarded as hidden assets, in that there is no market research on them. Several have signicant value- creation potential.
DCN DCN, a property developer, has the option to buy and develop 60% of the land earmarked for Madrid Puerta Norte, the biggest real estate development in Europe today and similar in
ambition to La Défense in Paris in the 1960s, Canary Wharf in London in the 1980s and, more recently, Potsdamer Potsdamer Platz in Berlin. Plans for the 2,680 million m2 site include residential buildings, commercial buildings and a new railway station for fast connections to Madrid
airport and other Spanish cities. The area covered by DCN’s option includes the prime site, next to the Chamartin railway station, designated for a new nancial district. GSJ has a 24.5% stake in DCN and the option to acquire a further 2.5%. The remaining 75.5% of shares are owned by banking group g roup BBVA. BBVA. The project was conceived more than 25 years ago and the plans have been modied repeatedly. The latest latest draft proposal proposal has now been agreed by all interested public and private
parties, including the city council, which must now give g ive formal approval to the scheme. Initial approval took place on September 20. Thereafter, Thereafter, the approval process is likely to take another
four to ve months to complete. DCN then intends to exercise its option to buy and develop the site.
The terms of the current proposal are more favourable to DCN than the previous proposal in 2014, as shown in Table 2. There are two noteworthy changes. First, the costs of building
the supporting infrastructure will now be assumed by public authorities rather than by DCN as the developer. Second, the amount of buildable land has been reduced. The effect of the reduction, which mainly affects the area of land set aside for residential use, is to bring down the value of the buildable land by €600 million, assuming a value per square metre of about
€2,500. At the same time, however, the charges payable by DCN have been reduced by far more – €1.025 billion. In this scenario, the value of the land net of charges is €2.48 billion. GSJ’s share of this value (24.5%) is about €600 million, or €9.35 per share given the current number of shares. Once developed, the asset could have a gross value for GSJ of close to €1.05 billion, or €16.15 per share.
In addition, GSJ has the option to take on the construction of the entire project, giving its core business huge growth potential over the next decade.
(1)
Three public authorities are involved: The City Council, the Community of Madrid, and the Ministry of
Infrastructure Page 6
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Table 2. Comparison of proposals for Puerta Puer ta Madrid Norte Nor te1
2014 proposal
Current proposal (estimate)
Ofces
1,495,316
1,490,000
5,316
0%
Residential
1,495,316
1,085,570
409,746
-27%
286,059
254,430
31,629
-11%
3,276,691
2,830,000
446,691
-14%
0
150,000
Remaining buildable
3,276,691
2,680,000
596,691
-18%
DCN (60%)
1,963,515
1,698,000
409,746
169,800
1,767,163
1,507,200
259,964
-14.7%
Ofces
883,582
800,000
Residential
883,582
600,000
0
107,200
1,767,164
1,507,200
2,000
2,500
3,534,328,000
3,768,000,000
Land payment
1,080,000,000
1,280,000,000
Other charges
1,025,000,000
0
Total charges
2,105,000,000
1,280,000,000
Land value, net of charges
1,429,328,000
2,488,000,000
Difference
%
Land use, m 2 (Total area = xxx)
Other Total buildable Train station
Less disposals Net
DCN land use, m 2
Other
Land value to DCN, € Average €/m2 Gross valuation
Charges:
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La Tablada La Tablada Tablada is a densely populated city in the municipality of La Matanza, which is part of the
Greater Buenos Aires metropolitan area. Here, GSJ owns 1,222,665 m² of land earmarked for what will be the largest private urban development scheme in Argentina in the past 50 years – the Parque Lagos Urban Transformation Transformation Project. Some 20,500 new homes will be built, as well as commercial property. Existing housing stock (not new-build) in the area, which borders the city’s central districts, currently fetches more than $1,600/ $1,600/m m2, compared with wi th $700/m2 a decade ago. These are the
key gures: • • • •
Plot: 1,222,665 m² Constructed residential oor area: 1,635,946 m² Constructed commercial oor area: 221,775 m² Total constructed surface 1,857,721 m 2
GSJ specializes in the development and construction in large Latin American cities of the type
of housing planned for Parque Lagos – that is, small, low-cost units (about 80-85 m² and costing around $400/ $400/m m2) such as the Nuevavista Condominium referred to above. La Tablada has extraordinary value potential for GSJ. Even the re-sale value of the company’s land there is currently worth between €100 million and €150 million. GSJ’s intention is to develop this asset once the economic situation in Argentina improves, thereby minimizing its nancial risk.
Carlos Casado Founded in 1909, Carlos Casado is one of Latin America’s foremost agricultural companies,
listed on the Buenos Aires and New York York stock exchanges since 1958 and 2009 respectively. GSJ has been a majority owner of the company since 2007, with a 50.4% holding. One of its main assets is 220,000 hectares of land in the Chaco region of Paraguay, which
borders Argentina, Bolivia and Brazil. The land is used for cattle rearing (20,000 livestock) and soybean and corn production p roduction (4,000 hectares).
3.3 SMALLER ASSETS AND TAX CREDIT GSJ also has a number of less signicant assets. These include: •
Comercial Udra. Through various companies – Arserex, Outdoor King, Running King,
Athletic King and Trendy King – Comercial Udra distributes internationally prestigious sports and fashion labels such as Arena, Teva, Teva, Hoka, Diadora, Hunter, Fred Perry and Dr. Martens. •
Panamerican Mall. Shopping centres in Argentina.
•
Other minority interests. These include Bodegas Altanza, SA (wine producer),
Unirisco SCR, SA (venture capital), Filmanova, SA (lm production company), Editorial Ecoprensa, SA (publisher of Spain’s El Economista) and Oryzon Genomics, SA (publicly traded biotech company). Finally, GSJ has a tax credit of €470 million, arising mainly from losses incurred following the
2014 restructuring. It will therefore therefore make scal savings of €118 million in total over over the next 15 years. Page 8
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4. PARTICIPATORY LOAN GSJ has an outstanding participatory participator y loan of €100 million from shareholders, raised in 2014 when
the company was left with negative equity following its restructuring. It matures end-October, 2019. The terms of the loan, which whi ch are key to the valuation of GSJ, are as follows:
Fixed interest of 2% for the rst two years, rising to 3% in years three and four and 4% in year ve. • Bullet payment at ve years. •
•
Any part of the loan not repaid repaid at maturity maturity will be converted converted into GSJ shares shares at a price equal to the average share price during the month prior to maturity, with an upper limit on
the value of new shares issued of 35% of the company’s current share capital. •
The price at which any unpaid proportion of the loan will be converted to equity will be the average closing price of the stock in the 20 trading days prior to end-October, 2019.
There is a minimum price of €5.05 per share, however. We assume that the company directors intend to capitalize both the ful l loan and accrued interest
when the loan matures. This will amount to €113.8 million, which would mean the issue of a maximum of 22.7 million new shares were they to be issued at the minimum price of €5.05 per share.
Table 3 shows the number of new shares that would be issued relative to conversion price of the participatory loan. As we will show later, the price at which new shares are issued will not greatly affect the value of the group’s shares. Table 3. Number of new shares issued relative to the conversion price of the par ticipatory loan
Conversion price per share
Number of new shares Total number of shares issued after conversion
5.05
22,537,934
87,564,017
6.00
18,969,428
83,995,511
7.00
16,259,509
81,285,592
8.00
14,227,071
79,253,154
9.00
12,646,285
77,672,368
10.00
11,381,657
76,407,740
11.00
10,346,960
75,373,043
12.00
9,484,714
74,510,797
13.00
8,755,120
73,781,203
14.00
8,129,755
73,155,838
15.00
7,587,771
72,613,854
After the loan is capitalized, GSJ will have positive net debt, putting it in a strong nancial position to invest in its businesses – particularly DCN and the development of Madrid Puerta Norte. Page 9
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5. ASSUMPTIONS ASSUMPTIO NS AND VALU VALUA ATION Our valuations are based on certain assumptions for both the construction business and GSJ’s other assets. The construction business
Our valuation for the construction business includes incl udes or assumes the following:
• Strong cash generation as, since 2016, the construction business has been a strong cash generator. This is likely to continue as the business has no planned investments and considerable land reserves. • Construction margins similar to those in 2017. • Revenue growth of 10% over over the next next three years. Our Our estimate of revenue revenue growth is conservative, according to market evolution, and lower than that recorded in the past two years. It is supported by portfolio growth and by the plans described above to generate revenue growth from the group’ group’ss real estate and urban development business. • The sale of of homes in the Nuevavista Nuevavista Condominium in Lima from July 2018 to 2020 at a prot margin of 35%. This is in line with previous sales. The valuation also takes into account several small property developments currently under way in Spain. • A progressively lower tax rate as previously loss-making subsidiaries return to prot. The valuation does not, however however,, include tax credits. • Estimated EBITDA, as shown in Table 4. (It separates out the gures for the real estate and urban development division in order to demonstrate its importance in driving future prospects.) • A sensitivity analysis of the conversion price of the participatory loan on share share value, relative to a range of EV/EBITDA multiples (Tables 5 and 6).
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Table 4. Prot and loss account for GSJ’s construction business, 2015-2020 € millions
2015
2016
2017
2018 E
2019 E
2020 E
Income
536.0
613.0
683.0
751.3
826.4
909,073 909,073
EBITDA margin
8.2%
7.5%
6.8%
7.2%
7.8%
7.9%
EBIDTA
43.8
45.9
46.4
54.1
64.2
71.8
Real estate and urban development 10.2 EBITDA**
6.5
1.7
3.0
8.0
10.0
EBIT
30.7
25.0
31.0
36.8
45.2
50.9
Gross prot
10.6
19.7
22.3
31.8
41.2
49.9
Net prot
7.2
8.0
12.3
22.3
33.0
40.4
Net debt
167.2
97.1
66.7
42*
-65.0
-136.8
Backlog
1.835
1.889
1.630
1.886*
All business lines
(*)
reported 1st half Red gures represent the specic EBITDA of real estate and urban development business line
(**)
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Table 5. Sensitivity analysis of share value relative to the conversion price of the participatory loan and EBITDA multiples in 2018
Participatory loan, conversion price per share, € 5.0 .05 5
6.0 .00 0
7.00 7.0 0
8.0 8. 00
9.00 9.00
10.0 10 .00 0
11.0 11 .00 0
12. 2.0 00
4
2.47
2.58
2.66
2.73
2.79
2.83
2.87
2.90
5
3.09
3.22
3.33
3.41
3.48
3.54
3.59
3.63
6
3.71
3.86
3.99
4.09
4.18
4.25
4.31
4.36
7
4.32
4.51
4.66
4.78
4.87
4.96
5.02 5.
5.08
8
4.94
5.15 5.
5.32
5.46
5.57
5.66
5.74 5.7
5.81
EBITDA multiple**
Table 6. Sensitivity analysis of share value relative to the conversion price of the participatory loan and EBITDA multiples in 2019
Participatory loan, conversion price per share, € 5.05 5. 05
6.00 6. 00
7.00 7. 00
8.00 8. 00
9.00 9.00
10.0 10 .00 0
11.0 11 .00 0
12.0 12 .00 0
4
3.68
3.83
3.96
4.06
4.14
4.21
4.27
4.32
5
4.41
4.60
4.75
4.87
4.97
5.05
5.12
5.18
6
5.14
5.36
5.54
5.68
5.80
5.89
5.97
6.04
7
5.87
6.12
6.33
6.49
6.62
6.73
6.82
6.90
8
6.61
6.89
7.12
7.30
7.45
7.57
7.68
7.77
EBITDA multiples**
(*)
gures in red show the most probablest scenarios
(**)
the average multiple for the European construction companies was 8.7x in 2017. Source: "Is now the time
for the alternative valuation methods for the construction industry?". industry?". Mazard Sept, 2017
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Other assets We estimate a minimum and maximum value for GSJ’s other signicant assets. The minimum is equivalent to the price we estimate could be achieved currently were the assets to be disposed
of in a re sale. In the case of Carlos Casado, the minimum price is the current market value. The maximum reects the DCF over a 10-year period assuming the assets are fully developed. It takes into account the book value and assumes the shareholders’ loan is capitalized at €5.05 a share. The valuations do not include tax credits, and are net of tax (25% in Spain and 35% in Argentina).
DCN GSJ’s 24.5% holding in DCN is worth: €m
€ per share
Minimum
340
3.91
Maximum
816
9.40
The minimum value conservatively assumes that the land could be sold for €2,000/m2. This is a discount of 20% on its estimated current value. The maximum value assumes average construction costs of €1,300/m2 and an average selling price of the residential and commercial units of €5,000/m2. The price of €5,000/m2 €5,000/m2 is conservative conser vative if we consider recent comparable transactions in similar areas of Madrid.
La Tablada €m
€ per share
Minimum
103
1.18
Maximum
924
10.62
The minimum value represents our estimation of the value of the land in a re sale, that is, $100/ m2. In 2015, GSJ received an offer for its land of $200 million, which it rejected. The maximum value assumes an average selling price for the houses of $1,300/m2 and construction costs of $400/m2. $400/m2. Prices of existing housing stock (not new-build) in this part par t of Buenos Aires are in the region of $1,600/ $1,600/m2, m2, and construction costs are around $360/m2. $360/m2. We have converted dollars into euros at a rate of 1.15 $/€.
CARLOS CASADO As of August 2018, GSJ’s 52% stake in Carlos Casado was worth: €m
€ per share
20
0.23
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6. SHAREHOLDER SHAREHOLDE R AND AN D STOCK MARKET MARKE T DAT DATA Since its listing on the Madrid stock exchange in 2009, GSJ has had 65,026,083 issued shares. The main shareholders are: Jacinto Rey Gonzalez (GSJ president)
48.3%
The Avalos family (company founders)
21.0%
Board members
1.0%
Executive managers
1.0%
Free oat
28.7%
Shares data: Ticker:
GSJ.MC
Share price on Oct, 16
€4.66
Market cap
€303.2 million
Average daily volume (52 weeks)
140,951 shares
Highest and lowest price across 52 weeks
€6.09 - €3.04
200-day moving average
€4.00
Advanced chart:
14.13
13.51
8 9 9 9 1 1 1 1 0 0 0 0 2 2 2 2 . . . . 0 1 6 2 1 0 0 1 . . . . 6 1 1 1 1 0 0 3
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7. CONCLUSION As this document explains, we believe GSJ to be considerably undervalued. Its current share price does not reect the value of the various business lines within construction, let alone of its other assets, including DCN. Table 7 summarizes what we believe to be a more realistic valuation of the shares, based on our
understanding of the company and the assumptions explained in this document. It assumes the shareholders’ loan is capitalized at €5.05 per share, indicating that a maximum of 22.7 million new shares would be issued in 2019. Table 7. Assessment of GSJ’s true value
Minimum
Medium*
Maximum
Construction business
3.71
4.70
5.68
Assets
5.32
8.06
20.35
Tax credit
1.00
1.37
1.37
10.03
14.13
27.40
Total (*)
The medium represents a mid-point between the minimum and maximum for Constuction business, 0% of potential value for the assets and just 50% of DCN potential value
Even the most conservative valuation makes this an extraordinary investment opportunity over the next one to three years. GSJ is a mature company with strong cash generation and no debt,
and it has the nancial muscle to grow its business. In addition, its performance depends upon relatively few external factors such as currency risk. Hence, it is a low-risk investment, with the potential to deliver returns of between 250% and 685% over the next 12 to 36 months. The group currently has a low prole, but we believe this will soon change. chang e. Given the prominence of the Madrid Puerta Norte Nor te project in the Spanish media as it approaches nal approval, the value of DCN and hence of GSJ will surely come under scrutiny by a growing number of analysts and investors. Once they better understand the company and its holdings, market valuations are likely to rise.
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