Description

This write-up is short because it truly is a simple idea, not because we are lazy. Although perhaps because we are lazy we are drawn to simple ideas.

The idea is Emirates Driving Company (DRIVE UH). DRIVE is a driver’s education school in Abu Dhabi with monopoly status. The Abu Dhabi government owns 37% of the company, and it is the only company approved to offer drivers licenses in the emirate. DRIVE has had a monopoly since it was created by the government 18 years ago, and we think it’s highly likely to remain that way given the government’s ownership stake. In addition to simple incentives, we spoke with a former government official in Abu Dhabi and a former executive of DRIVE, and both thought a change in this regard was remote to nil. 

As such, one doesn’t have to worry about that little thing that gets in the way of most businesses: competitors. And due to the incentive system of the government, DRIVE has been allowed to raise price regularly over its history, leading to strong profit growth (10% CAGR over last 10 years in EBITDA, 17% over last 5 years). This is on top of a ~ 9% dividend yield. So overall one should have a total return of 20%+ even before any multiple re-rating, and clearly  ~ 6x LTM P/E for a monopoly business with nearly one third of the market cap in net cash is too cheap.

The opportunity exists because the stock is illiquid (although blocks are available) and only locals are allowed to buy shares in DRIVE. However, via p-notes, foreign investors are allowed to gain access and we can walk through the details including contact info for the right brokers in the Q&A section if there is interest.

There is some reason to believe a multiple re-rating is possible. Al Dhabi, an Abu Dhabi based firm, has been encouraging mgmt to remove the foreign ownership limitations and allow foreigners to invest directly in the company’s shares. This has led to re-ratings in Abu Dhabi in the past as obviously it shifts the demand curve for the equity to the right given many foreign investors will not want to take the trouble of accessing the market via p-notes. Al Dhabi also has successfully pushed for the ~ 50% payout ratio the company has maintained in the last two years and which we think will continue to be the case going forward.

The current facilities are large and have plenty of excess capacity, so significant cap x to maintain the current earnings stream isn’t needed.

In terms of major risks, management is average in our opinion as operators but again due to the monopoly status, it is more a case of opportunity cost lost than a real risk. The average management ability mainly shows up on the cost side, on the revenue side the number of students is largely population driven and the price is set by the governnment. According to the former executive we spoke with, DRIVE has significant fat in its cost structure as a variety of people are put on the payroll just to fill jobs and the company operates somewhat like a government department vs. a private operation. However, this is already baked into the earnings stream today, and there shouldn't be a step change further in inefficiency, just the existing inefficiency continuing. Capital allocation also isn’t great as the company last year invested a significant amount of funds in a building vs. distributing that cash. Similar to the poor cost structure, we are not counting the excess cash the company has currently or the 50% of net income that isn’t distributed as having any value. Our return math is simply dividend yield + earnings growth + chance of multiple re-rating. So any improvement in either capital allocation or operations is only upside.

Catalyst

Al Dhabi pushing for foreign ownership restriction removal or increased payout ratio or special dividends.

Getting paid to wait given high dividend yield.