Description

Long – D’Ieteren Group (DIE.BR) – Hidden value in Belron IPO

Thesis Overview

D’Ieteren has long been viewed as a sleepy European family-controlled holding company, however we believe the market has finally begun to realize the enormous value Belron (majority controlled) creates and expect significant value is about to be unlocked in a Belron IPO (D’Ieteren owns 50.3%). Belron is the #1 auto glass and repair business in the world (~40% market share in US and ~30% in Europe) with >20% operating margins; Safelite, which they acquired in 2007, being the top brand (think of the jingle: “Safelite repair, Safelite replace”). Carlos Brito, the chief architect of the AB-Inbev saga, was announced as the new CEO in Nov 2022. Why would a former business titan join as the divisional CEO role of a family-controlled company? We believe Brito has been brought in to drive an international value unlock in the auto glass industry.

In 2021, a consortium of investors (GIC, Hellman & Friedman, Blackrock; CD&R had previously invested in 2018) invested in Belron at a valuation of €17.5Bn at a LTM multiple of ~22x EV/EBIT (15.5x EV/EBITDA). On 2023 numbers, Belron is worth €250/sh to D’Ieteren vs. today’s share price of €206 (upside of 22% as of 4/4/24).

We believe D’Ieteren is worth in excess of €350/sh (corresponding to ~20% IRR on a 3 year view), with the potential for a 2 year double from Belron’s continued growth.

D’Ieteren was previously written up on VIC in 2014 by max78. The share price has since increased 6x and a ~20% IRR since his post.

Business Introduction

D’Ieteren Group has its beginnings in the early 1800’s as a shipbuilder and automotive manufacturer. It was first listed on the Brussels Stock Exchange in 1929 and in 1948 became the exclusive distributor of Volkswagen to Belgium. Through this relationship, D’Ieteren became the dominant car dealer in Beligum and still retains the #1 position (today has ~23% market share and has added brands such as Audi, Porsche, etc). In 1999, D’Ieteren acquired a controlling stake in Belron (today it owns 50.3%) and brought on Gary Lubner as CEO (Lubner is 3^rd generation of the founding family of Belron). Lubner led Belron for 22 years (32 in the company; succeeded by Brito) and oversaw remarkable results, driving significant organic and inorganic growth over his tenure. Sales grew from €822M in 2000 to €4.6B in 2021. In 2007, Belron acquired Safelite, which is the #1 brand in the U.S. and sits in clear pole position in glass repair (NA is ~60% of Belron’s sales). Outside of Belron, the group has its car dealership business (eponymously named D’Ieteren / 45% of sales), a real estate investment business, two equipment / parts distribution businesses (PHE 22% of sales / TVH 6% of sales) and Moleskin, the iconic notebook brand (1% of sales). While each business is a unique asset, our thesis focuses on Belron.

Source: D’Ieteren investor presentation

While they might not have known it at the time, Belron was a transformative acquisition for D’Ieteren. It is now ~30% of group revenues and ~50% of group PBT (2022: Belron was 50% of revenues and 70% of operating profit). For the last 5 years, all Belron’s KPI’s have moved in the right direction and the stock price has followed. Looking back further, since 2014, sales have compounded at 9%, with EBIT compounding >30% since 2019 (~20% Adj. EBIT margin FY2023; ~25% EBITDA margin). EBIT margins are targeted at 23% in 2025 with 85% FCF conversion from EBITDA.

Carlos Brito, the current CEO, needs little introduction. He has been the subject of many case studies and articles over the years as he was one of the chief architects of the 3G Capital takeover of global beer through AB-Inbev (market cap grew from $26B to $141B over his tenure as CEO). We believe he is the perfect man at the helm and will provide the necessary experience to unleash an M&A machine, while driving material cost efficiency initiatives to drive FCF generation.

Why we like the business?

While the replacement cycle for auto-glass has historically been correlated with ‘miles driven’, technological advancements in glass and auto-glass capabilities have created significant tailwinds for auto-glass providers. Driver assistance features (think sensors, visuals, cameras, etc) have dramatically changed the capabilities of auto-glass and contingently the repair and replace capabilities necessary to service this technology. If you’re like me and you drive an old car, you can likely still go to a junk yard for a replacement window or windshield and have your local mechanic install it. However, the ‘nearly new’ car parc makes this impossible. Any replacement or repair requires significant calibration, which also derives significantly higher Sales/Job (ASPs). This flows to EBIT at ~70% incremental margins and has been a large driver of EBIT/job growing from €40 in 2020 to €97 in 2023. The technological advancements also benefit any scale provider. The pace of change, educational requirements and necessary investments in equipment is leaving smaller service providers behind. This ultimately benefits OEM franchised car dealerships and scale-providers such as Safelite. Going forward, this is a business where scale will beget scale and the large players will extract the significant majority of the profit pool. Customer Satisfaction tends to follow scale in a service business like this – Belron highlights this with a combined NPS of 83.

For quick data points, try googling “Smart windshield technology” to see the range of technological innovation (e.g. wiperless windshields, gorilla glass, augmented reality, HUD etc). Some illustrative pictures below.

Source: 2022 Belron Investor Day

Source: 2022 Belron Investor Day

Key Thesis Points

1. Belron’s value alone significantly exceeds the Group equity value today

Up until the last few months, Belron’s 2021 investment valuation equalled the entire equity value of D’Ieteren (€163/sh value vs.  €179/sh on 1/2/24; 52 week low of €134/sh).

We believe the market already recognizes that Belron will control the destiny of the group’s share price going forward. Over the last 5 years, the stock is up significantly, coinciding with the >3x increase in Belron EBIT and PBT.

Despite being at all-time highs, the value of Belron is masked by the holding company structure of D’Ieteren and the other low-to-mid growth businesses in the portfolio. Holding the 2021 valuation constant, on today’s EBIT Belron is likely worth in excess of €250/sh (22% upside to today’s price).

There is obvious upside to this given the growth trajectory the business is on, but it is a helpful proxy for a private market valuation.

It seems obvious that you get the remaining businesses for free and we believe the remaining assets have a NAV of €100/sh.

2. Carlos Brito will pull the levers to unlock value creation through M&A and cost efficiency

Brito’s (and 3G’s by association) reputation for cost-control is notorious. But in the aftermath of the 3G ZBB bloodbath (KHC, ABI, etc), many forget that Brito is an unmatched deal-guy, with success unthinkable for most.

Belron, likewise, have shown themselves to be thoughtful acquirers. They have averaged ~10 acquisitions per year of smaller ‘mom & pop’ establishments. We expect this to only accelerate under Brito.

Since Brito took the reigns, EBIT margins have gone from 17% to 20% (FY25 target of 23%) with EBITDA margins at 25%. Being a highly cash generative business, we believe Belron can support a dividend, significant M&A and has further upside from margin expansion.

While this element of the thesis is more “bet on the man,” we are hard pressed to think Brito is settling into a cushy CEO role to finish out his prime years. Rather, we believe Brito will embark on another industry-leading transformation through M&A. We expect Belron to be the prime beneficiary with him at the helm.

3. Belron IPO

It seems obvious to us that this valuation unlock will be through a Belron IPO. Not only does this provide a logical exit opportunity for the consortium of Belron investors, it also provides D’Ieteren with the ability to realize a significantly higher valuation on their investment and access to capital to keep growing.

With 60% of sales in North America, it makes sense that Belron would attempt a US IPO. This is also a place Brito has familiarity given his historical time with ABI. Nonetheless, Belron is growing with great margins and is in attractive end markets. We believe it would be comped against Boyd Group (BYD) and see it trading >20x P/E as a standalone.

Valuation

There is no doubt Belron deserves a premium multiple. As demonstrated above, we believe Belron is likely worth >€250/sh. On very simple valuation estimates, we believe the remaining group is worth ~€100/sh. Moleskin is the only asset that deserves a significant premium due the scarcity of the asset and its unique heritage. The distribution businesses might go for higher multiples, but with significant European exposure we believe 10x is fair. Management have stated that the RE portfolio, while generating minimal earnings for the group is worth ~€300M.

While our thesis does not depend on the success of these other businesses, we do believe these shouldn’t be valued at 0 and are overall healthy and profitable. Belron drives the valuation and we expect the share price will be tied to Belron EBIT performance over the next 5 years.

Risks

In our view, the key risk here is that an IPO never materializes. If it doesn't, this business will likely be stuck as a tracking stock to Belron with a significant discount relative to what it would be as a standalone.

Appendix 1: D’Ieteren Group Holdings Portfolio Breakdown

Appendix 2: Belron Adj. EBIT

Appendix 3: Belron Business Breakdown

Catalyst

Carlos Brito and M&A acceleration

Belron IPO