Description

Long Ald SA

All values are given in Euros.

Ald SA (busy rebranding itself into Ayvens) has been written up about 7 months ago by Roojoo. I think the thesis is still quite intact, only today the shareprice is about 40% lower, which should mean more upside in the long run. I think this company should be worth between 2-3 times the current shareprice, and you get a pretty decent well covered dividend while you wait for a re-rate.

Car leasing

The car leasing business has actually been a pretty stable business over time. Because the asset is leased, there are no issues of seniority in case of default of the borrower. And because cars are very liquid, transferable and relatively short life, there is usually a very liquid and dynamic market. Recovery rates thus happen to be quite good the longer the leasing contract is enforced, due to companies usually under-depreciating the cars in the beginning of the contracts, and over-depreciating the longer the contract is in force.

And given that cars are not as politically sensitive as for example houses to repossess, there is very little regulatory risk which is somewhat inherent in financial companies. For example, most Greek banks went belly up in the years 2011-2014 due to banks not being able to sell houses of loans in default, but ALD SA Greece was profitable even in those years. And I think 2011-2014 in Greece was maybe one of the more painful crisis in recent economic history with jobless rates of 24% and a 28% drop in GDP.

Since Ald SA leases mostly to corporates and SME’s, there is an added buffer. Most of these leases are needed to keep business coming in or are an added low taxed way to compensate employees. Only about 10% of leases are to individuals, and looking at the numbers, these also look like a very stable and conservatively financed (only around 0,5% were past due in the year 2020). 

Current headwinds

The company has a few issues right now, which I think are mostly temporarily. Due to rising interest rates, their cost of debt has gone up. Almost all their contracts however had no inflation escalator, which has pressured their margins. Add to this the fact that car backlogs make current lessors extend their contracts, and you have an environment which on the income side shows a deteriorating margin. As a person anecdote, a family member ordered a car which still hasn’t been delivered 9 months later. So current contracts often get extended at old prices, while current costs go up.

The same logic again is applicable with SG&A costs and some service costs.

Then another costs are restructuring costs following the takeover. Apparently, LeasePlan had a pretty extensive investment in IT the moment the company got taken over, which has proven to be more expensive to resolve than initially anticipated. More restructuring costs are expected in the coming year, with most of the office closures anticipated in H1, but then 2025 should see most costs having been made and the rewards in synergies.

And then the Russian invasion, which dented the bottom line with a further 90 million one time cost due to the sale at a loss of that division.

Longer term Earning power

For a long time between the years 2014 and 2019, both ALD and LeasePlan had a combined net profit in the range of 0.9 Billion and 1.1 Billion a year. Then last 2 years, due to increases in the price of used cars, this went up dramatically.

But one doesn’t have to be too aggressive to envision an earnings power of this company around 1-1.2 billion Euros a year. That translates in a PE around 4-5. This is very cheap for 2 companies with quite a long history of consistent profitability. They did have to sell some divisions due to anti-monopoly regulation, but those divisions were not very material ones in the grand scheme of things.

And this is not taking into consideration any possible synergies from the acquisition. At the time of the takeover, management guided for synergies of around 350 million a year. This would be achieved through reduced office and IT costs, but also purchasing power for their services (more bargaining power vs car manufacturers and tire companies) and cars.

There are again a few other benefits.

Diverse funding base

I quite like the fact that the company is funded in a very diverse way.

Most leasing companies are funded with a combination of bank debt or bonds (the large car companies for example) or deposit funding (most bank subsidiaries in the car leasing business). Ald now has a mix of the 3. Ald due to it’s history as a subsidiary of SocGen (and still majority owned by SocGen) has a long term financing agreement with SocGen for about 33% of it’s funding. With the acquisition of LeasePlan they have their own banking subsidiary which is responsible for deposit gathering and financed around 20% of their debt funding. Then they regularly issue medium term bonds to the market and get financing from other banks and financial institutions. Apparently, the company claimed that due to an improved credit rating they are able to get cheaper financing. This is somewhat true compared to some of the smaller players, but large car manufacturers that also happen to lease cars (Toyota or Volkswagen group) have a similar or lower cost of debt I have noticed (especially Toyota, being able to borrow in Japan at low rates).

This is somewhat a competitive advantage, but not as large as originally anticipated.

Geographic Diversification

The combined companies are very well diversified geographically, but with a distinct western European footprint. Countries like the UK, France, Netherlands, Belgium, Scandinavia and Italy make up the majority of their revenue, but they have established and growing sizeable subsidiaries in Poland, Brazil, Romania, Mexico, India, Turkey, etc. So even though the low growth European market is still their main market, there is room for expansion in Eastern Europe, South America and even beyond.

Valuation.

Ald SA is for sale in the market right now for around 65% of tangible book value. And at a market cap of 5 Billion, you are paying the same price for the combined business as the purchase price of Leaseplan in 2022 (4.9 Billion).
Given that both companies had ROE’s (including intangibles) of around 15%, this is a pretty attractive valuation.

This also begs the question, did they overpay for Leaseplan?

Personally, I don’t think this is the case. They paid 4.9 Billion for a business which made around 500 million in net profit the last 5 years (a PE of 10), and about 1,2 times book value for a business making 15% ROE the last 5 years before the deal.

So given the valuation and the earnings quality of the company, that just looks too cheap to ignore.

Risks

Well, 3 come to mind which are most often mentioned.

- Higher portion of EV’s and lower resale value

- meaningful decline in used car prices

- economic crisis

The company did disclose that full EV’s have been a drag on performance due to lower resale values than the classic ICE or Hybrid cars. It has to be mentioned that EV resale values were still within the company model. And while it appears that this part is probably growing in the future, there are some sings of improvement here. Improved company models taking this into consideration but also lower new EV car prices should somewhat compensate here going forward. And one could argue that lower EV resale prices should mean a slight increase in prices of second hand ICE and Hybrid cars, which still make up close to 90% of their car inventory (and can be observed, though very hard to determine what is the cause).

The decline in used car prices is probably the biggest risk here, since many of the cars sold by manufacturers 1-2 years ago were also slightly inflated. Then again, as long as default rates do not increase dramatically, I don’t really see an issue here. The company is decently capitalized (not like it used to be before the LeasePlan acquisition, when it had equity as a percentage of balance sheet total around 20%) but it is still one of the better capitalized companies in the industry at 12.5%.

And an economic crisis. I was surprised by the financial stability of these companies in times of crisis. Even in years like 2007-2009 and 2011-2013 in Europe these companies maintained a very respectable level of profitability. They companies stayed consistently profitable with ROE’s above 10%. This is probably due to their clients being mostly large international companies, but impressive nonetheless.

Catalyst

Time, and improved results starting in H2 of 2024