Sonae Capital SONC.LS
October 23, 2008 - 4:02pm EST by
2008 2009
Price: 0.79 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 198 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Sonae Capital (SONC.LS) was spun off from Sonae SGPS (SON.LS) in January, 2008. With the Portugese market down over 40% YTD and the stock down over 60% since the spinoff, Sonae Capital trades at a very compelling valuation of less than 1/5th of its conservative intrinsic value.
For background, it would be worth reading the VIC writeup (and thread) on Sonae SGPS dated 6/14/07:
The Sonae SGPS VIC writeup was posted about 7 months before the spinoff. We have a lot more information on it today.
Greenblatt Spinoffs Primer:
Here are a few salient points Greenblatt made in his book, “You Can Be a Stock Market Genius Too:”
1.    Spinoffs outperform the broad market by an average of 10% annualized during the first three years after the spinoff. Most of these gains come in Year 2 and Year 3. Spinoffs usually undergo a decline in price right after the spin and during the first year. This is due to many factors including lack of analyst coverage and institutional restrictions on owning small caps. Spinoffs are more nimble, focused and entrepreneurial. However, it takes time for the new company to get a set of entrepreneurial initiatives underway. Could take a year or more to show visible results to get reflected in the stock price.
2.    Follow the key players. Greenblatt highlighted the Marriott spinoff in his book. In that example, Bollenbach, the architect of the spinoff stayed with the “bad Marriott” and also the spinoff that had 10-20% of the value. Greenblatt invested in the “bad Marriott” and made 4x.
History does not repeat itself, but it does rhyme. There is a spinoff that took place in January 2008 that has some resemblance to the Marriott spinoff.
Sonae and its Founder
Sonae SGPS (SON.LS) was founded by Belmiro Mendes de Azevedo in 1959. He is the son of a carpenter. Over the last five decades the Sonae group has emerged as the largest employer in Portugal involved in a very diversified set of businesses. Over the years there have been numerous businesses that have been spun off from Sonae, including Sonae Industria, Sonae Sierra, Sonaecom and now Sonae Capital (SONC.LS).
Belmiro is a Chemical Engineer by training. He has been through Harvard’s OPM program (MBA for business owners) and Sonae is very professionally managed with solid management bench strength – although I think Belmiro is one of a kind. He is held in high regard and loved by the Portugese people. Used to be the richest man in the country and now is #2. He is a statesman, solid leader and a proven entrepreneur. Above all, he is a solid capital allocator and knows how to make hay. It does not hurt that’s he’s deeply wired and connected with the government and Portugese elite.
Sonae Capital was spun out in January 2008. With the spinoff, Belmiro moved himself from the €2 Billion+ market cap flagship, Sonae SGPS, to the much smaller Sonae Capital (which currently has a market cap of under €200 Million. This resembles what Bollenbach did.
Why the Spinoff?
Sonae SGPS is a complicated company to understand with a myriad of assets and businesses. The spinoff makes it easier to understand and value the two pieces separately. Sonae Capital, even with just a €200 Million market cap is still a very complicated set of businesses and stakes to understand and properly value.
With Belmiro, the master capital allocator, moving over, it allows the spun out business to fully exercise its entrepreneural spirit and create value. Belmiro has stated that they intend to sell and exit a number of important businesses and simplify the range of assets. They have been doing the same for the last 18-24 months with a number of asset sales right after the spinoff was contemplated. Many more transactions will be completed in the coming years.
The Numbers
250 Million Shares Outstanding @ €0.79/share = €197.5 Million (Azevedo Family owns 55%)
Net Debt: €235 Million; Enterprise Value = €433 Million
The Assets and Cash Flows
1.    Troia Resort. Sonae bought Troia in a distressed bankruptcy sale in 1997 with the involvement of the Portugese government. Got it for next to nothing with an obligation to invest and develop the property. It is a unique one-of-a-kind asset with the following salient features:
·         18 Kms of white sand beach front.
·         45 Minutes from Lisbon (2.5 Million population)
·         Cleanest open water bathing conditions in Portugal
·         1100 Acres for development.
·         Best Golf course in Portugal. Top 100 in world.
·         16th century Roman Ruins
·         Nature Preserve and Wildlife
·         Award winning marina and apartments
·         3 Four Star Hotels (fully refurbished by Sonae)
·         289 New Apartments. 50% presold
·         96 Plots for Villas being sold.
·         Land for Five Star Hotel just sold by Sonae Capital for €15 Million
·         Over €170 Million invested so far into Troia by Sonae Capital.
·         Perpetual cash flow after real-estate sales from hotels, marina, restaurants, retail, spa, golf, casino etc.
·         1/3 of buyers are foreign and 2/3 are Portugese. Has strong appeal to non-Portugese.
·         New Lisbon International Airport being build over next 5-10 years is much closer to Troia than present airport. Enhances appeal and raises value over time.
Troia is hard to value, but most analysts allude to a value between €500 Million to €1 Billion. Sonae in generating around €265 Million just from the sales of the 289 apartments, 96 plots and the hotel plot. So, the rest is being valued at less than €250 Million. This includes 3 4 star hotels, hundreds of acres of land for future development, golf course, retail, marina etc.
2.    Porto Palacio Hotel. Sonae spent €35 Million renovating this 250 room 5 star hotel in the last 3 years. It is a member of “The Leading Hotels of the World” and rated the best hotel in the city of Porto (2nd largest city in Portugal with a 2 Million population). Porto properties are more valuable after a high-speed train cut the commute time to Lisbon to 2.5 hours. Porto has non-stop flights to US, UK and Brazil. Porto is a rustic town and is Portugal’s Tuscany. Hard to value the hotel, but perhaps €100 Million might not be too far off.
3.    Aqualuz Suite Hotel. A 163 suite 4-star hotel Could be worth around €50 Million.
4.    98 Other properties throughout Portugal. Valued by Cushman and Wakefiels in Sept. 2007 at €212 Million. One note on Portugal. Unlike neighboring Spain, Portugese real-estate never appreciated or went into bubble zone like Spain. Thus it did not collapse like Spain, US, UK etc.
5.    10 Fitness Clubs. €5.3 Million EBITDA. I will just value all cash flow at 5x EBITDA. Worth €26 Million.
6.    Selfrio Group (JV with Johnson Controls; 70% SON.LS, 30% Johnson Controls). €7 Million EBITDA; Stake worth more than €25 Million.
7.    Funcenters (video game arcades). Worth €6 Million.
8.    Atlantic Ferries – valued at cost of 2 ferries: €40 Million
9.    Box Lines (Shipping): >€10 Million
10. Pysorol (Plywood business). This was sold for €30 Million. Of this €10 Million was received and then there was a default created and business came back to SONC.LS. Unknown value, but could be worth €0-20 Million.
11. TP Windfarms (50% owned by SONC.LS). €18 Million. Note that, in addition, Sonae Capital has a 10% stake in a large project to invest around €1.5 Billion Euros in windfarms. This was a concession awarded to Sonae’s consortium by the Portugese government recently. This will be executed over the next 3-5 years. I expect most of it will be non-recourse project debt financing. Sonae has decent upside here even if returns are modest. Upside with very limited downside.
12.  Finlog (Fleet Management JV – owned 50%). Worth €55 Million
13. Guerin (Car Rental JV – owned 50%). Worth €6 Million.
14.  Norscut (150+ km Toll road). Sonae owns 25% and just agreed to up buy an additional 11% for €11 Million. This is a toll-road commissioned by the government. Motorists pay no tolls. The government pays the toll based on usage. Was non-recourse project debt financed by JV participants. Sonae put in just €1.5 Million in equity investment for its 25%. As you can see the €1.5 Million investment is now valued at €25 Million. I’ll value it with the 25% for now as we need to wait to see impact on net debt etc. in the next earnings report. The windfarms may work out similarly – although it’ll take many years to build the value.
15. Sonae Industria Stock. SONC.LS owns 6.8% of Sonae Industria. The Portugese market is down over 45% in 2008 and the Sonae companies are down even more. Sonae Industria’s stake was worth €100 Million at the peak and is now worth €21 Million.
16.  SONC.LS owns a 58% stake in a closed-end real estate fund. This was valued at €64 Million as of 9/30/08.
The sum of the parts comes to €1.158 Billion to €1.757 Billion. Net of debt, the intrinsic value of the Sonae Capital ranges from €923 Million to €1.522 Billion. With 250 Million shares out this is €3.69 to €6.09 per share. With a current price of €0.79, this is like getting a dollar for 13 to 22 cents.
Additionally, Belmiro has clearly laid out that he intends to exit certain businesses, narrow the focus and invest in areas like Troia, alternate energy, airport concessions etc. So there are two drivers of returns for investors here:
1.    Convergence between the market price and intrinsic value over time.
2.    Increase in Intrinsic Value over time.
Why is there such a large value gap?
Many reasons, but primarily:
1.    Portugese market has been hit pretty hard in 2008. It is down more than US markets at around 45%.
2.    1st year of a spinoff – All the reasons highlighted by Greenblatt on why they selloff.
3.    They missed the Summer ’08 season. Troia opened in September.
4.    Most of the hotels and renovations and construction etc. ended in last 2-12 months. Has not reflected yet in FCF.
5.    Folks lump the Portugese and Spanish real-estate markets in the base basket. Both are very different. Spain went through a tremendous boom (and now bust). Portugal never went through the boom and there was no subsequent bust.
Over time, these issues will abate and value will get reflected in the price.
Disclaimer: We own shares in SONC.LS at the time of this writeup. We may buy or sell SONC.LS shares in the future with no obligation to update on VIC or elsewhere. This is not a solicitation to buy or sell securities. Please do your own, independent and thorough due diligence. We have lost money in the past on investments we've made and expect to continue making investment mistakes in the future that lead to a loss of capital.


Many catalysts are likely to occur over the next few quarters/years. Sonae Capital may have more asset sales, will collect cash on Troia sales, Portugese market will eventually turn, Cash flows at recently renovated/opened properties will kick in.
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