Description

It has been a year since we introduced Italmobiliare (ITM IM) to VIC so wanted to follow up with a quick update as the company has been firing on all cylinders, with the stock price yet to reflect fundamental reality and with numerous insiders now buying the shares aggressively in the market. At a high level, ITM is a ~ $1B market cap publicly traded investment company/holding company in Italy with an elite capital allocator mgmt team that we estimate has generated a ~26% portfolio IRR since the new strategy/team began ~ 5 years ago through 6/30/23 (excluding the four most recent acquisitions which we mark at cost). Despite this strong emerging track record, the discount to net asset value is over 50%. We see robust downside protection, with minimal chance of long-term capital impairment, coupled with the chance to generate a multiple of money over the next 2 – 3 years. Not only do we expect strong fundamental growth to continue, we also see catalysts for value unlocking over the next few years.

The company’s portfolio companies continue to perform very well, and we expect strong earnings growth in 2023 across all of the key assets in the portfolio – we expect Caffe Borbone and Tecnica to grow earnings almost 15%, and for Santa Maria Novella and Casa della Salute to grow earnings >40%. This should translate to significant NAV growth (we estimate that the company’s estimate of NAV/share will compound at a CAGR approaching 20% / annum over the next 5 years) as the sellside valuations / management NAV tend to track earnings growth over time. ITM’s current portfolio companies offer a meaningful opportunity to continue to deploy capital at high rates of return (e.g. for new Casa della Salute diagnostics locations or for assets like Santa Maria Novella that have underinvested in growth historically or been unprofessionally managed). Notwithstanding ITM’s impressive execution and the fact that the company continues to meaningfully compound value, the stock has generated a marginally negative total return since our initial post as the company’s discount to its reported NAV (which we believe to be very conservatively marked), remains near all-time highs (~50%). This is significantly wider than the company’s historical average (~35%), which itself we think is wholly unjustified given excellent capital allocation, modest HoldCo costs to shareholders, and a favorable Italian HoldCo tax regime.

At the risk of being redundant/repeating from our first writeup, we have strong confidence in the capital allocation abilities of the ITM team which has only grown over the years. The controlling family, the Pesentis, are a fifth generation Italian entrepreneurs that historically controlled the local cement champion, Italcementi, before their exit to Heidelberg Cement, which formed the genesis of ITM (the proceeds were reinvested to create the ITM portfolio today). They are well regarded locally and sought after partners for leading Italian mid-market entrepreneurs seeking a longer term alternative to the buy and flip business model of PE.  To assemble this portfolio, they hired the best of the Italian capital markets --  the team is lead by Alarico Melissari, who was co-head of TMT at Mediobanca (regarded as Italy’s Goldman Sachs) and Leonardo Senni who was CEO at Ariston Thermo (1bn+ EUR turnover Milan listed) and a senior partner at McKinsey and is well incentivized to create and grow value for all shareholders.  To highlight the capital allocation point, using our market based valuations, we believe that ITM has earned an +5x MOIC on its investments in both Caffe Borbone and Tecnica group, and that each of Santa Maria Novella, Casa della Salute, and Iseo appear poised for multi-bagger returns as well. We would note that our internal NAV calculation suggests the discount is ~60%, using public comps / precedent transactions vs the company’s internal valuations.

If this quality and growth has not been reflected in ITM shares so far, why invest now? Presumably, given the under-covered nature of the security, management could continue to grow per-share value while the market pays no heed as the stock is illiquid, not very well known amongst investors, and management has little interest in IR given they are unlikely to be selling shares (to the contrary, they have been buying in recent months). We think the timing is especially fertile today, as ITM is now in exit mode, which will catalyze the unlock of value.

1. Given ITM’s current strategy (revolving around portfolio companies) has been in place since 2017, early vintage investments are now approaching the exit phase of their life cycle

2. ITM’s latest shareholder meeting (last April) modified management’s long-term incentive plan to include a monetary bonus directly related to the capital gains generated by exit deals; the scheme is similar to private equity carry, though with terms far more favorable to the LP / shareholders – management will earn 3 – 5% of any yield above a 10% IRR (vs PE where GP earns 20% of all yield subject to 7% hurdle)

3. Exits carry at least four benefits for the stock – they 1) show that ITM is willing to recycle capital (associated with lower HoldCo discounts), 2) demonstrate the conservatism in ITM’s marks/lead to NAV upgrades, 3) typically result in significant special dividends (ITM has historically distributed realized gains in excess of cost to shareholders) and 4) they turn ITM’s unrealized track record that we have estimated increasingly into a realized track record, which will make a large NAV discount increasingly untenable

4. We expect ITM to seek to IPO Tecnica as soon as the Italian market for new issues is stable (we estimate an IPO in 1H24). We think that Tecnica’s fair value as a public company is substantially higher than ITM’s NAV mark, perhaps by ~40% (10x EBITDA multiple / ~$1bn TEV); this would crystallize an ~5.5x MOIC on the investment

   1. In support of our Tecnica valuation, we would note that Tecnica’s Moon Boot asset, which has tripled revenue over the past few years  through renewed management focus and partnership with both leading designer brands (e.g. Gucci, Moncler) and social media influencers, is now generating over 40mm of revenue and positive EBITDA. We see a path to 100mm of revenue, and think this is a business that could trade at ~30x EBITDA / HSD revenue multiple to a strategic buyer (e.g. Moncler or the larger designer houses)

   2. An IPO of Tecnica would likely result in consolidated NAV growth of ~5% (via mark to market) itself and should result in a substantial special dividend (potentially ~20% of market cap judging by the company’s history/capital allocation framework)

5. In May 2023, ITM exited its stake in Gruppo Florence for 78mm in net proceeds vs a 31mm investment cost (i.e. 2.5 year investment that generated a 2.5x MOIC); this should result in special dividend (47mm in realized proceeds less cost) and demonstrates ITM’s willingness to exit investments

6. Dividends are particularly valuable to the return case of ITM as they come out of the holdco to shareholders at a dollar for dollar return vs. staying in the holdco at a ~ 50% NAV discount

As we wait for exits, unless the discount widens further we should compound with NAV per share growth which we estimate at a 20% CAGR over the next 5 years. E.g. even if none of the above leads to any closing of the discount, the returns are attractive with the potential for supercharged returns should the discount close to more reasonable levels.

In terms of near terms return case, we expect that ITM’s NAV will grow from 49 EUR/share to about ~68 EUR/share over the next two years as they exit Tecnica at peer multiples and other assets continue to grow. We expect ITM to pay a 5 EUR/share special dividend with the net-gains on Tecnica exit, and remain with a NAV per share of c. 63 EUR.  ITM stock today trades at 24.05 EUR/share or a ~50% type discount to NAV today. Assuming post the Tecnica exit and associated special dividend the discount tightens to c. 45% discount to NAV (which is still above historical levels), we will get a total return of 40 EUR/share, or c. 65% upside in 2 years or a c. 28% IRR from the current price. There is further upside if the discount closes to a lower level than 45%.

Finally, we would note that management seems to share our bullish view – insiders have been purchasing shares hand over fist when not in blackout period, with both members of senior management unaffiliated with the family, as well as Carlo Pesenti, the patriarch, buying shares in the open market. Pesenti has bought shares most trading days over the last several months.

One obvious question is if the ITM team are such great capital allocators and have net cash, why aren’t they buying back stock? Their view, which we understand but are not in full agreement with, is that the stock is already illiquid, buying back stock will just compound this issue, and they cite accurate data that illiquidity is associated with higher NAV discounts. While buybacks would be ideal, the ITM team is certainly strongly in favor of capital returns to shareholders where gains upon exits are generally returned to investors via special dividends. The ITM team believes the current NAV level (~ 2B EUR) is the right level for their strategy, so it makes sense to distribute NAV gains upon exits in order to keep NAV from growing too much over time. Unlike a PE firm, which has a strong incentive to grow assets at the risk of returns, ITM’s principal, Carlo Pesenti, owns ~ 50% of the company and shareholders are highly aligned with his goal to generate the best risk-adjusted returns for his own capital. He and his team have so far been doing so at very high rates, and over time it is untenable for this to continue and the NAV discount to remain at egregious levels.

We wanted to provide in this write-up the high level on the set-up, the past write-up has more detail on the individual portfolio companies and we can also cover the underlying assets in more detail in the Q&A 

Catalyst

Portfolio company exits and associated special dividends