I was unfortunately expecting to be disappointed by the level of disclosure on certain items: No mention of the dissolution of their Indian JV with Tata – but revenues weren’t significant, and profits were obviously non-existent, and I far prefer they concentrate on a consolidation strategy in Europe, so who cares…
TOT’s been much better about disclosing their Capespan holding, and transactions – but I already have that info., what I want to know is why?! It’s absurd they keep increasing their holding in a possibly eventful/volatile unlisted stock, and don’t actually disclose their actual strategy/rationale for this investment to TOT shareholders. They certainly don’t need a Capespan shareholding to have a healthy/productive business relationship..! I’ve some thoughts about their possible strategy here. Finally, after a year of zero share repurchases, we get nothing more than a hint of further share repurchases ‘…should the appropriate opportunity arise.’ Er, um, wouldn’t that have been when the share price was sub-EUR 0.40..?!
Anyway, as I re-read the report, I’ve actually warmed up to the operational performance. Consensus EPS was beaten slightly with an adjusted diluted EUR 0.0724 EPS – well managed, gentlemen! Revenues, however, were down 2.8% at EUR 2.53 bio, with Adjusted EBITA down 6% at EUR 45.0 mio. This was a little disappointing until I dug in – the revenue and EBITA decline can be more than ascribed to the Eurozone segment, due to the EHEC scare. Scandinavia/UK/etc. were all stable, or showed significant gains.
I’d have preferred management to better flag up this EHEC impact last year, but I guess they still expected to hit consensus EPS so no disclosure was warranted. However, it does suggest their 2012 adjusted EPS guidance of EUR 0.07 to 0.08 could prove to be pretty conservative (and far too wide!) if they can recover these impacted revenues/profits (plus positive contribution from their 50% purchase of Frankort & Koning). I was also encouraged by an improved (estimated) Operating Margin (after Minorities) of 1.51%. The only other (negative) metric I’d highlight is an increase in Cash Net Interest/Adjusted EBITA to 11.6% – but I’m not concerned as there’s EUR 90.1 mio of idle Cash available to mitigate this, if necessary.
Overall, this leaves TOT on a P/E of only 6.2, and implies very v minor amendments to my Fair Value Price Target, which now stands at EUR 0.912 per share, for an Upside Potential of 103% vs. the current EUR 0.45 share price. I have a 5.9% portfolio holding, my third largest stake.
See here for valuation, and here for some brief commentary. I’ll keep this relatively brief: My recent Fair Valuation of FBD at 2.0 Price/Book was based on an underlying RoE of 19.5%. Since I was working off LTM figures (which included a poorer H2 2010), I suspected the P/E would drop, and RoE rise, based on FY results.
This has proved to be the case, and results actually turned out even better than expected due to a substantial improvement in their Combined Operating Ratio. Operating EPS (from cont. ops.) came out at EUR 1.64. I really don’t understand the analyst/media obsession with Operating EPS, though – with the majority of FBD’s investment portfolio in Bunds and deposits/cash, there’s going to be a rather inevitable negative Investment Return variance for the foreseeable future. Therefore, I prefer to focus on the lower cont. ops. diluted EPS of EUR 1.2983 – this is also a good idea because I’m using a Price/Book valuation methodology for FBD. However, I think it’s valid to exclude impairment/restructuring charges next year, so I model the lower 2012 operating EPS guidance of EUR 1.45-1.55 (based on slightly lower insured values, and some decay in the COR) will actually produce a pretty much unchanged diluted 2012 EPS.
Where does this all leave us in terms of valuation? Historic P/E now stands at a measly 6.4. Book value remains the starting point – NAV‘s at EUR 6.305 per share, and this puts FBD on a current 1.32 Price/Book. Actual historical RoE came in at 23.7%, while prospective RoE looks like it will be around 20.6%. There were no other surprises in the results, and we got definitive confirmation that FBD now has zero debt, as expected after the spin-off of its property interests. Taking all this together, it’s reasonable to me to upgrade my Fair Value slightly to a 2.25 Price/Book. This would be equivalent to a 10.9 P/E which seems eminently reasonable to me also.
My Fair Value Price Target is therefore EUR 14.19 per share, for an Upside Potential of 70% vs. the current EUR 8.35 share price. I currently have a 3.3% portfolio holding.