CIR is a downside protected call option on the European Long-term Care (“LTC”) sector (as CIR has a 371mm euro net cash balance compared to 513mm euro market cap) . Despite 2020 being a horrific year for the LTC industry, I expect most of the Coronavirus-related headwinds to reverse in 2021+ due to the aging European population and critical nature of LTC. I value CIR’s stake in KOS (its LTC business) at ~400mm euros based on a 5% 2022 FCF yield discounted to today. Additionally, CIR is trading at a ~45% discount to NAV (highest in 6 years) despite management taking a notably more shareholder friendly approaching over the last year. I see ~40% upside to CIR based on 20% discount to the sum of 1) its stake in KOS, 2) the value of CIR’s other smaller business investments (18% of NAV) and 3) its net cash position (net of holding company costs).
CIR is a holding company that currently owns a 1) ~60% stake in KOS, a long-term care facility operator, and 2) a ~57% stake in Sogefi, an auto OEM. As you can see below, CIR's LTC asset and net cash make up ~80% of NAV.
Historically, KOS has been an Italian LTC operator (~97% of revenues) with 8,510 beds currently.
Italian market is highly fragmented and regulated. KOS has been able to grow bed count by 400-500 beds per year with stable EBITDAR margins.
KOS owns ~25% of its real estate
On October 30, 2019, KOS entered the German LTC market via an acquisition Charleston Holding from EQT for 92mm euros. Charleston has 47 residential facilities/4,050 beds in Germany
In 2018, Charleston generated 152mm euros of revenue (estimated 30.4mm euros EBITDAR, estimated purchase multiple of ~13x 2018 EBITDAR)
…as you can see below KOS revenue/bed and EBITDAR margins have been expanding over time
KOS owns a hodgepodge of other (lower quality) assets. For example, Sogefi supplies filtration systems, air management and engine cooling systems and suspension components to the automotive sector. It’s a low margin (<5% EBIT) business that is highly cyclical.
CIR also owned a large stake in a publishing company (Gedi). However, CIR sold most of its stake in Gedi to Exor for ~90mm euros (6.5x fwd EBITDA). A 60% premium to the pre-merger share price.
Net Cash – CIR is trading at a very modest premium to its net cash position today (lowest level in 6 years)
Italian LTC Market has been Highly Attractive
Italian market has incredibly high barriers to entry for private operators. As Korian (a large European LTC operator) notes below, regulatory authorization for new beds is very hard to come by in Italy. KOS is the largest publically traded operator in Italy and grows bed count ~4.5% per year.
KOS is also focused on Northern Italy where demand for LTC per 65+ resident is highest.
Strong Italian LTC fundamentals are also reflected in KOS's financials, which reflect consistently rising revenue/bed, EBITDAR margin and ROE.
…with next 10 years set to be better for Italy LTC than prior 10
Italy’s population is aging faster than almost anywhere else in Europe with bed penetration well below that of peer countries. Therefore, as Korian notes below, waitlists for beds in Northern Italy are long and the Italian government is actively saying it is increasing its share of spend on LTC.