Description
New, value-oriented management and a 40+% discount to fair value make Technical Olympic (OLYMP GA) a compelling buy. The Company is a small-cap Greek holding company that is trading at over a significant discount to fair value with a family that plans to liquidate the Company over the next two years. The Company has a number of disparate assets, but its 74% interest in Technical Olympic USA (NYSE: TOA) and 48.2% interest in Mochlos (small-cap traded Greek Construction Company) alone exceed the Company’s current valuation. The remaining assets, including a huge resort in Greece, are being valued at nothing. In addition, there are several likely catalysts that will cause the Company to re-rate and current management has an incentive to create shareholder value. Over the medium term, there is no strategic sense for OLYMP to exist and management has told us that they will slowly liquidate it.
Current Valuation (in EUR):
Technical Olympic Price per Share: 4.13
Shares Outstanding: 132.5
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Market Cap: 547.2
Net Debt (a): 3.0
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Enterprise Value: 550.2
(a) Net Debt is holding company only and does not include the debt of publicly traded subsidiaries
Value of Publicly Traded Stakes:
Current price of TOA: 26.13
Shares Owned: 32.91
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Value of TOA Stake (USD): 860.0
Pre-Tax Value of TOA Stake in EUR: 660.1
Value of Mochlos Stake (b): 26.9
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Total Pre-Tax Value of Public Stakes: 687.0
% Discount pre-Tax: 19.9%
Taxes owed on TOA Disposal (c): -129.4
Taxes owed on Mochlos Disposal (d): 13.0
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Total Pre-Tax Value of Public Stakes: 570.6
% Discount pre-Tax: 3.7%
(b) OLYMP owns 48.2% of Mochlos. It currently trades at 0.38 per Share
(c) The Company will have a tax rate of 35% on its capital gain. The cost basis is about $11.50 per share
(d) The Company has made a loss on its investment in Mochlos and will receive a tax credit that can offset other Greek Income
Technical Olympic USA is a mid-sized homebuilder with operations in Florida, the Mid-Atlantic, Texas, and the Rocky Mountains. It was formed through the merger of Newmark Homes and Engel Homes in June, 2002. The Company targets mid-range and move-up home buyers and its average home sells for a bit over $250,000. The Company’s performance has been excellent with homes delivered nearly doubling over the past four years. From a valuation perspective, the Company trades at a discount to its peers. TOA is currently at about a 10% discount to its peers on both a P/E basis (6.9x vs 7.6x) and a P/B basis (1.8x vs 2.0x), despite having the highest projected YOY EPS growth in the homebuilding universe and being a natural target. We believe that this discount is unjustified and that there is therefore little downside in owning OLYMP unhedged. We also believe that there is a significant chance the OLYMP will sell TOA to a competitor in 2005. Management has indicated that they want to reduce their holdings in the Company, TOA is attractively valued, and other homebuilders are flush with cash and short of sites (TOA has the opposite problem). It would also be much more efficient for management to sell to a strategic buyer than to try to place so much stock on the market.
Mochlos is a small-cap construction company that has sold-off significantly over the past year. We believe that this sell-off is unwarranted and that the Company is inexpensive at 5x EPS and 3x EBITDA. In addition, the Company owns a 10% stake in Porto Carras, which could be worth its entire market cap (more below). Mochlos has been affected by the negative sentiment towards all Greek construction stocks as analysts anticipate a post-Olympic slowdown in government work. Nevertheless, the valuation remains compelling, in our opinion.
Private Companies:
In addition to its stakes in TOA and Mochlos, OLYMP owns several private assets. The most important asset is Porto Carras, a sprawling seaside resort in Greece. I have visited Porto Carras and can testify to its beauty. Porto Carras represents over 90% of the total value of the other assets in the Company. It has a casino, four hotels, a marina, numerous restaurants, and space for about 1,100 private homes to be built. Porto Carras was acquired out of bankruptcy for about EUR 90mm and OLYMP has subsequently spent about EUR 110mm improving the property. The property has been appraised for tax purposes at EUR 650mm and the Company will need to start paying property taxes on this value next year. While Porto Carras currently produces negligible EBITDA, it has attracted significant interest from strategic acquirers because its occupancy only averages about 40%. Many global hotel brands believe that this could be turned into a year-round resort and occupancy levels could nearly double. This gives the property significantly more value in the hands of a resort owner with distribution, such as Hilton, Accor, or Club Med. We understand that several parties have made unsolicited bids for the property several years ago, but that the change in the Greek government and subsequent problems with the homebuilding caused the Company to delay the process (details below). The last time I visited with OLYMP management, they expressed hope that the property would be sold soon.
In addition to the hotel value of Porto Carras, the potential to build homes on Porto Carras carries significant value. According to the Company, about 1,100 homes of 200 square meters (about 2,000 sq ft) can be built on the resort based on prudent zoning. OLYMP previously planned to begin building these homes in 2003, but when the Greek government changed, those plans were destroyed. Under the new Greek government, the previous designation of Porto Carras as an area suitable for building was changed to preservation forest land without compensating the Company. This occurred despite the Company’s charter in which the government specifically gave the Company the right to build houses. The current government used this issue as part of its platform to get elected and we believe that much of the opposition will wither once the government takes full power in April or May of this year. In our view, it is clear that OLYMP was given the right to build these homes, but it is unclear when the Greek political system will set things right. The right to build on these sites has the potential to be worth about EUR 150mm (present value at 10%) over the six years that it would take to build the homes, but it is not central to the Company’s valuation.
The remaining assets are a hodgepodge of assets that we have tended to value at book value both to be conservative and because they make up an irrelevantly small portion of the total valuation. The Company would maintain that this severely undervalues the assets. The most important assets are several small marinas where the Company owns concessions to operate the marinas and the surrounding shopping and leisure areas. These tend to be long-term contracts that can be easily DCF’d and were won as a result of building the Marinas after winning the concession. The book value is EUR 14.5mm. We are inclined to agree with management that this undervalues the Marinas due to the upward revaluation of European concession owners over the past three years (tollroads, etc.) and the decline in long-term interest rates since the marinas were built. The Company also owns several Real Estate developments in Romania that have been mostly pre-sold and should net the Company about EUR 9mm in proceeds. Lastly, the Company owns a small wind farm that is worth EUR 4mm.
Management:
George Stegnos is the new CEO of OLYMP. He has replaced his father who was known to be unfriendly to minority shareholders. Based on our understanding, he has been given a mandate to liquidate the Company because the family no longer desires the headache of running a public company. The family also wishes to liquidate OLYMP because it has been embarrassed by the Porto Carras incidents. The family’s most important assets are outside OLYMP and our understanding is that this is George’s proving ground in order to show that he can run the other assets.
Antonio Mon is the CEO of TOA. He formerly founded Pacific Greystone, which was sold to Ryland. He has a stellar reputation in the homebuilding industry and has consistently created value for his shareholders. We believe that he enjoys building companies and selling them rather than building empires.
Sum of Parts Valuation:
Downside Valuation (per share in EUR):
TOA at 10% Discount: 3.68
Mochlos at 10% Discount: 0.18
Porto Carras at Cost: 1.36
No Homebuilding Permission: 0.00
Marinas at Book Value: 0.11
Romanian Real Estate: 0.07
Energy Assets: 0.03
Net Debt: (0.02)
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Total Value per Share: 5.43
% Discount: 23.9%
Middle Valuation (per share in EUR):
TOA at Post-Tax Value: 4.01
Mochlos at Market: 0.20
Porto Carras at 75% Tax Value: 2.63
Homebuilding Permission in 5 Years: 0.51
Marinas at Book Value: 0.11
Romanian Real Estate: 0.07
Energy Assets: 0.03
Net Debt: (0.02)
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Total Value per Share: 7.55
% Discount: 45.3%
Upside Valuation (per share in EUR):
TOA at 10% Premium in Takeout: 4.33
Mochlos at 10% Discount: 0.20
Porto Carras at Tax Value: 3.35
Homebuilding Permission in 2005: 1.02
Marinas at Book Value: 0.11
Romanian Real Estate: 0.07
Energy Assets: 0.03
Net Debt: (0.02)
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Total Value per Share: 9.10
% Discount: 54.6%
Other Upside:
We believe that there are several areas of upside to these estimates. First, it may be possible for OLYMP to avoid taxation on its TOA stake by creating a US ADR and allowing shareholders to swap into the ADR at their convenience. The Company could then declare a stock dividend that is tax free to shareholders. This would be worth another EUR 0.98 per share or almost 25% upside from today’s price.
Additional upside could be found in a deal for TOA. We believe that the excellent land bank and large number of potential bidders could result in a much higher valuation than an in-line multiple would imply (an in-line multiple is shown in the “Upside Valuation.” Each 10% additional revaluation is worth about EUR 0.32 per share or about 8% of today’s price.
Catalysts:
We believe that there are several catalysts that are likely to occur over the next 12-18 months in order to cause a re-rating of the stock. These catalysts could include:
(1) Recognition that the Company is very undervalued
(2) Potential sale of TOA, Porto Carras, or both
(3) Resolution of the homebuilding dispute at Porto Carras
(4) Revaluation of Mochlos as people recognize it as very inexpensive
Catalyst
(1) Recognition that the Company is very undervalued
(2) Potential sale of TOA, Porto Carras, or both
(3) Resolution of the homebuilding dispute at Porto Carras
(4) Revaluation of Mochlos as people recognize it as very inexpensive