FFP: investing in France at a 50% discount

Societe Fonciere, Financiere et de Participations or simply FFP is a diversified French holding company that is trading at a discount of roughly 50% to it’s NAV. The biggest shareholder in the company is the Peugeot family with a 79.2% stake. So while FFP has a €1.08B market cap the free float is just €225 million. Given the fact that the FFP is majority owned by the Peugeot family it shouldn’t come as a surprise that the largest position is also in the company Peugeot, accounting for almost 30% percent of gross asset value. The other assets consist mostly of publicly traded French companies, private equity investments and real estate. Given the large amount (>83%) of publicly traded assets inside FFP it’s easy to calculate an updated net asset value, confirming the big discount:

FFP NAV spreadsheet

The spreadsheet you see here is publicly accessible on Google Drive using this link and updates automatically all share prices and the current discount. Not all assets in FFP are publicly traded, and since the CAC 40 index is up ~15% since the end of June the real discount to NAV is most likely hitting 50% at this moment. This is basically the whole investment thesis! I could write thousands of words about the valuation of the individual companies inside FFP, but the truth is that I don’t really care. The companies that FFP owns have market caps in the billions of euro’s, and I do trust the market to some degree.

What’s positive to see is that FFP appears to have a good track record with their investments outside Peugeot. As you might know the family business isn’t doing very well these days, and if you would have invested in Peugeot 5 years ago you would have lost half your money. If you would have invested in FFP on the other hand you would have made more than 20%, a remarkable achievement given the huge historical stake in Peugeot.

FFP performance relative vs Peugeot

An investment without a catalyst

What I do want to discuss is why I like an investment at a big discount in a holding company, even though I don’t expect that this discount will disappear anytime soon. The Peugeot family owns almost 80% of the holding company so there is no way an outside investor can pressure the family to do something to eliminate the discount, and the family is presumably not extremely interested in the market price of FFP since they are holding this for the very long term. FFP is the vehicle that allows them to control Peugeot SA: their legacy.

I don’t think this really matters though. Even if the discount would never get smaller you buy a company that can support a dividend steam that is twice as high as the underlying assets. And that is what ultimately determines intrinsic value: the dividend stream back to shareholders. You don’t need to sell a stock at a higher price to realize value: if you buy cheap and just hold you will simply enjoy an above average yield.

While there is nothing wrong with holding a stock till infinity I actually don’t think that you have to do this. At some point in time the market will probably realize that a 50% discount isn’t warranted. Last year FFP didn’t pay a dividend because of the poor results at Peugeot and the re-initiation of a dividend could possibly act as a catalyst.

I also assume that the Peugeot family doesn’t hate money. The undervalued shares represent an easy opportunity to make money if they start a repurchase program. You also have to figure that there is probably going to be some point in time when the Peugeot family wants liquidity. They would be stupid to sell their FFP shares at a 50% discount when they could for example divest some assets and realize NAV. Since I think they will care about the NAV discount at some undetermined point in the future you can expect that it will eventually be eliminated. It’s going to take a lot of patience, but I don’t mind that if I’m owning an asset that has intrinsically a yield twice as high as the market average.

Conclusion

The investment thesis in FFP is extremely simple. The holding company trades at a 50% discount to NAV, and I don’t think such a large discount is warranted. Luckily I believe that the simpler the investment thesis, the better, and it doesn’t get any simpler than this!

Rating: on a scale from one to five I’m going to give this idea two stars. The thesis in FFP shares many similarities with Burelle: both are French, family controlled holding companies at a ~50% discount with a focus on the automotive industry. An identical rating is logical.

Disclosure

Author is long FFP.PA

25 thoughts on “FFP: investing in France at a 50% discount

  1. Arvosijoittaja

    Great post!

    Have you analyzed what would be a fair discount from NAV for FFP? I.E: considering taxes paid from the dividends received and the company cost structure.

    The dividend yield is only 2,56%. Holding until the end of time does not sound very attractive alternative with that dividend?

    Reply
    1. Alpha Vulture Post author

      I don’t think taxes and corporate overhead at the holding company level are good explanations for the discount. Haven’t done a in-depth analysis, but G&A expenses seem to be ~1 million annualized (that’s fine for a hold co with >2 billion in assets) and France seems to be an excellent country tax wise for a holding company, see for example this article. So a more normal holdco discount of lets say 15/20% seems appropriate to me. I think the big discount is mostly the result of the ownership structure of the company: the family is a controlling shareholder, and the free float is small.

      PS. The current dividend yield is actually zero!

      Reply
    1. Alpha Vulture Post author

      About the dividend yield: it’s not about what they pay today, what they could pay, and what they will pay 3, 5 or 10 years from now. If you buy assets at a 50% discount you obviously also buy something that can support a yield that is twice as high as the underlying assets (minus overhead expenses). The intrinsic value is here, and some day that will be recognized and/or realized: that’s what I’m betting on.

      Reply
  2. Pepijn

    Hi,

    As I have been looking at FFP for quite some time now, I am still very tempted to buy FFP given this discount of around 50% versus NAV.
    BUT:
    1. Since a large part of its NAV is listed, we can simply look at the valuation of the underlying shares. Zodiac is trading at a (forward looking !) P/E of 17, LISI at 13, Orpea 16, SEB at 14 and DKSH at 21. My main concern is that these companies are not cheap. Further since Peugeot has rallied significantly, would that mean that the upside in NAV might be limited.

    2. Since the company always traded at a large discount, therefore I think the upside might be limited. Let’s say the discount narrows to 40% (which is historical has been a low discount), than your return is 10% over the period that the discount rate narrowed. This could be some years.

    3. By the way, currently around 80% of the company is in the hands of the Peugeot family. It is not in their interested to close the discount. It is nice on paper for them, but in the case they won’t be selling any of its shares there is no benefit for them (i.e. probably they would have to pay more taxes on it !). When the discount is huge, it is in their interest to potentially, someday, buy out the minorities (which is cheaper when the discount is higher) – at a small premium (but this could takes years).

    3. All in all, I guess the main driver of return would (still) be an increase in NAV and some upside from a potential lowering of the discount. To me your focus is a lot on the discount and not on the underlying increase of the NAV.

    I am interested in hearing your thoughts on that !

    Thanks !

    Reply
    1. Alpha Vulture Post author

      It’s important to realize that a discount reduction of 10 percent implies a 20 percent return! There is a significant amount of upside possible the discount shrinks to 30% or less, and this is in addition to the return that will be realized on the underlying assets. If you have a strong (negative) opinion on the underlying assets this is obviously not a good investment, although at a 50% discount you do have some margin for error.

      Reply
      1. Pepijn

        Agree that the return will be 20 percent with a rduction of the discount by 10 percent. Do you see a lot of upside then on the underlying stocks ?

        Reply
        1. Alpha Vulture Post author

          Do I need have to have an opinion? I wouldn’t necessarily expect high returns from the underlying stocks, but also don’t expect low returns. You basically get a bunch of good businesses that aren’t cheap, but also not extremely expensive, and you get Peugeot that is cheap, but also risky. And it’s in France were the economy isn’t doing that well: maybe things will turn around, maybe not… who knows.

          Reply
  3. JK

    Interesting analysis.

    One other skeptical point I will make from my experience investing in undervalued companies that have large management shareholders: What I have occasionally seen is that these large holders have no interest in closing the valuation gap or returning capital through dividends. This is because although their interests are ostensibly “aligned” with the minority holders they have the benefit of running the company and can treat it like their own piggy bank by putting their personal day to day expenses through the company (cars, rent, travel, property etc). I note your comment above that G&A only appears to be EUR1m p.a. but I am not sure how much visibility there is on this (especially as I do not speak French so cannot read the filings in detail).

    Reply
    1. Alpha Vulture Post author

      Sorry, missed a zero in my comments about the expenses. They are 10 million, or 0.5% of NAV. I think this is potentially overstated because there might be something consolidated in that number, but just like you I do not speak French. but Google Translate is pretty good. And one thing to note is that this is a holding company, not an operating company, so usually expenses are reasonable limited.

      Reply
  4. SlowkingValue

    This reminds me a lot of Urbana Corp (trading at ~50% discount) – except that managements at Urbana had control but little to none economical interest in the company, which is of course a plus for FFP

    Now, back to Urbana, there has been a rally… but that came from (mostly) NAV appreciation (yes Urbana did repurchase its shares and NAV did appreciate that way, but most of the NAV appreciation is from gains in the portfolio)

    Like you said with 10% reduction in discount = 20% return, but this works both ways, 10% widening = 20% loss. I guess what I’m trying to say is absent hard-catalysts this discount will stay, and absent hard-catalysts your returns will be largely on NAV appreciation…

    How old are the family members? Are they retiring soon?

    Reply
    1. Alpha Vulture Post author

      Discounts fluctuate: I don’t think you necessarily need a hard catalyst for a change. This is IMO just like CEF discounts: sometimes they are big when investors are pessimistic, and sometimes they are small (or negative) when investors are euphoric. I’m simply (trying!) to buy cheap, hoping that I’ll be able to sell it less cheap at some point in the future, and I’m a patient person: I don’t mind waiting a couple of years or even more!

      Reply
    1. Alpha Vulture Post author

      That’s a huge difference though! Because if you have a 3% expense ratio (Urbana) a fair discount might be in the 30-50% range if there is not an active share repurchase program. With a 0.5% expense ratio plus some tax inefficiencies you might say that a more normal hold co discount of 10-20% is reasonable. And you don’t get a manager that is trading in all kinds of leveraged gold ETF’s…

      Reply
  5. chun

    Thanks for the idea. A few questions:
    How do they account for these cross holdings? If it’s equity method, what are the values of these holdings on their balance sheet?

    Why do they hold these assets, and do you think the management has any incentive to monetize the holdings?

    Reply
    1. Alpha Vulture Post author

      I’d say that how they account for their holdings on the balance sheet is totally irrelevant. What matters are current market prices! But to answer your question: most of it is accounted for using the equity method, and you should check the latest financial report for the precise book values.

      And why do they hold these assets? The Peugeot family founded Peugeot, so that’s the family legacy. The other assets are part of the ‘diversification’ portfolio, presumably they realized that betting everything on Peugeot wasn’t the best plan from a risk management perspective.

      Reply
  6. Don

    As Pepijn mentions: “By the way, currently around 80% of the company is in the hands of the Peugeot family. It is not in their interested to close the discount. It is nice on paper for them, but in the case they won’t be selling any of its shares there is no benefit for them.”
    If the discount has been there since ’07, I don’t see why they should all of a sudden they should care about the market price. These guys are business owners and understand that the “market” can be irrational and miss-price assets. Unless there’s a catalyst (transfer of wealth from generation to generation, change in management, etc.) the discount is likely to continue to present itself in the stock price… An object in motion stays in motion.

    Reply
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  8. Roger

    “Even if the discount would never get smaller you buy a company that can support a dividend steam that is twice as high as the underlying assets.”
    Did you check if this assumption is really true?
    As a shareholder at Burelle (same hope, of reducing discount) I realized quite wondered, that the dividend of Burelle is MUCH smaller than the inflowing dividends from Plastic Omnium.
    1. A Holding structure costs money too
    2. Your dividends are double-taxed
    3. The holding may think that they know better investments than pay high dividend.

    PS: Nevertheless Burelle was among my best investments this year, due to the fantastic development of the PO-share. Even if the dividends are discouraging.

    Reply
  9. Thomas Braziel

    Wow I’m a little surprised by some of the comments here. Aren’t we supposed to be “buying 50 cents for a dollar” irregardless .. I guess some of us need to dig deep and figure out if we are truly value investors. As Seth Klarman likes to say.. of course he prefers a catalyst, but a number of his most undervalued holdings have no immediate catalyst for value realization

    Reply
    1. Alpha Vulture Post author

      Exactly because everybody wants an investment with a catalyst these days I think an investment without one can actually turn out to be the better bet. You will need some patience though 🙂

      Reply

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