Rella Holdings, profitable company trading below net cash

Rella Holding (RELLA.Denmark)

The following is a guest post by a long time reader who wishes to stay anonymous due to various restrictions.

Market Capitalization: 580mln DKK   

Price: 24 DKK per share

Price to net assets value: 0.36x  

Target Price: 48 DKK per share  Upside: 100%

EV/EBIT: Negative -> High cash position.

Investment Case:

Rella Holding S/A is an investment vehicle that owns 57.5% of the shares of Aller Holding S/A, a Scandinavian publisher with an approximate 60% market share of Scandinavian (Finland, Denmark, Norway, Sweden) weekly magazines. Although profitable (EBIT margins have averaged 6% over the past ten years), the prime attraction of this investment is the high discount to net asset value on the balance sheet. Taking into account the large securities & cash position, the real estate as well as small working capital position implies that Rella trades at only 35% of net asset value.  In other words, a liquidation scenario would yield to substantial (>60%) returns. We believe the main risk of the investment case is continued poor capital allocation by the Aller family, who has the majority of voting rights. Given the exceptionally large discount to liquidation value, we believe that there is a low risk of permanent loss of capital. Although no immediate catalysts are in place (with the exception of continued share buy-backs by Rella Holding A/S), we find comfort in buying 1 DKK of assets for 36 cents. We maintain the mantra that if the assets are in place, goods things will happen.

From an asset perspective, the main attraction is the large cash & securities pile sitting on the balance sheet of the holding. From speaking to the CEO of Rella Holding S/A, we believe the assets are primarily invested in corporate and sovereign debt with sufficient liquidity enabling it to be liquidated within a number of days. Next to a small position in A/R and inventory, Aller Holding S/A also has substantial real estate assets.   This includes the new Allerhuset office building (18.000m2) located in Copenhagen, where a number of the magazines are produced:

The shares are very cheap from a net net perspective, but if the business is burning cash, the value can and will disappear. Fortunately, partially due to its high market shares, the magazine business has remained profitable 9 out of the past 10 years.

The magazine business came under pressure in 2009, due to the financial crisis but cost restructuring has helped return the company to average profitability. The magazine business will likely continue to face pressure from increased internet usage and the advent of tablet pc’s, but we believe that given the high market shares in the Scandinavia it is well positioned to survive declines in circulation numbers.

While well positioned, the decline in its main business also poses the main risk to our investment thesis. This is because the family owns the majority of a-shares which gives it full control over future capital allocation decisions.

We believe that in an attempt to secure the future viability of the business the family could make poor use of the hard assets on the balance sheet and replace them with sub-par long shot investments. Indeed, history has shown that the family has already spent a considerable amount of CAPEX over the past years

Overall, while some of the investments can be explained, especially during 2007-2009, with the investment in the aforementioned Allerhuset, other ventures have yet to prove themselves.  Capital allocation based on family driven investments remains the largest risk to the shareholder of Rella. While this is the main risk, we believe the discount to NAV already assumes substantial value destruction and does not take into account any other more positive alternatives.

Poor capital allocation is always a risk when one is an OPMI (outside passive minority investor), but given the sheer size of the discount to NAV we have tried to ascertain why the market is giving us such a seemingly attractive deal.

Reasons for Cheapness:

1. Obscure Holding Structure 
2. Low market liquidity/Capitalization
3. Relatively poor disclosure
4. Family owned
5. No voting rights
6. No immediate catalysts
7. Balance sheet investment (vs. Institutional Earnings Myopia)Declining Business 
8. Poor share price performance becoming self-reinforcing
9. Listed in Europe  

Overall we believe these are all valid reasons for why Rella is so cheap, but given the large and liquid asset base, the risks to prospective shareholders is minimal. At the current share price, Rella is being offered at a price that offers only a miniscule risk of permanent loss of capital with very substantial upside if any asset conversion event occurs in the future (be it M&A, liquidation, higher payout ratios, going private or a more aggressive use of assets).

Disclosure: Author long, Nate no position