Last week a fellow Dutch value investing blogger wrote-up TABS Holland. The company supplies wood and building products to the Dutch market, and is traded on the obscure NPEX platform. The platform will actually cease all trading next month because its software doesn’t comply with the latest regulations. They have implemented a weird auction system without a central order book that makes it possible that different lots of shares are simultaneously sold and bought for different prices. An obscure illiquid stock on a weird exchange sounds like the rights ingredients for a cheap valuation, and on the surface that seems to be the case for TABS Holland as well. It’s trading at a 6.6x P/E-ratio while the other valuation metrics are as follows:
Last price: €28.76
Shares outstanding: 6,768,303
Market cap: €194.7 million
Net debt: €63.4 million
Enterprise Value: €258.0 million
P/E (ttm): 6.6x
P/B (mrq): 1.56x
EV/EBITDA (ttm): 5.23x
EV/EBIT (ttm): 6.12x
Based on market cap and enterprise value Timber and Building Supplies Holland (TABS Holland) is actually not that tiny and obscure. Most of the stocks I own are smaller, but in this case the float is ridiculously small. According to VIB.net the free float is roughly 3% which translates to less than €6 million. Most of the shares are held by HAL Holding while management and some other “big” shareholder own the rest.
Before trying to figure out how much this business is worth it’s a good idea to start with a look at the historical financials, even though that might not be that useful in this case. In 2015 PontMeyer NV acquired Deli Building Supplies and the combined company continued as TABS Holland. The acquisition basically doubled the size of the company. The transaction was completed the 1st of September, so in the financials for the year 2015 the last four months include the results of Deli Building Supplies while 2016 was the first full year of the combined company.
When looking at the historical results it is clear that TABS Holland isn’t a great business. Revenues didn’t grow at all in the 2011-2014 period while profitability was around breakeven. Only in 2015 and 2016 things started to turn around in a big way. While the acquisition of a big competitor can’t have hurt, I think the main reason is simply the fact that the Dutch housing market has rebounded after the crisis and is now running white hot again. The low for the Dutch housing market was in 2012 and 2013, while now things are pretty crazy again. I live in Groningen, which isn’t as hot as Amsterdam, but I have never seen so many houses being renovated or just being torn down and rebuild in my neighbourhood as in this year. So it’s not a surprise that the more recent results are pretty good, and presumably the full year results for 2017 will be even better. The timing of the acquisition was certainly excellent!
It was a big acquisition, and to finance it TABS Holland issued a bunch of new shares while the amount of debt outstanding also exploded. They have been paying down the debt rapidly, and last year they even found some money to pay out a decent dividend.
How much is TABS Holland worth? it’s a good question. It’s a cyclical business that probably is near the top of the cycle. The housing market in the Netherlands isn’t showing signs of slowing down yet, but when you play a game of musical chairs the music always continues playing until it doesn’t. Based on current earnings the business is clearly cheap, but a lesson about cyclical businesses that stuck with me is that they are best bought when they appear expensive, not when they appear cheap. But maybe a 6.6x P/E ratio is cheap enough to overcome this risk.
A reasonable base-case scenario is perhaps to assume a couple of years like this year, followed by more average results (adjusted for the doubling in size of the company). This gives some credit to the current good results, while also building a bit of mean reversion into the valuation.
In the valuation I have doubled the operating profit numbers from 2011 till 2014 to account for the fact that the business is now roughly twice as big. Since 2015 already included 4 months of the combined company I multiplied those results by a factor 1.5. This gives us an average operating profit of €21.2 million. Deduct €1.4 million in interest costs (assuming they keep operating with the current debt load), deduct 25% in taxes and normalised net income is €14.9 million. Slap a 10x multiple on that and we have a €149 million terminal value. Additionally I will assume that the next 3 years will be great, and the company will earn €30 million in each of these years. Discount this with a 10% rate and we get a valuation of €182 million.
The current market cap is actually a bit higher than that, so to me the market price seems pretty reasonable. A P/E-ratio of 6.6x sounds pretty cheap, but at the same time I don’t want to be paying a 10x ratio if it’s indeed near a cyclical top.
When I read about TABS Holland I thought that it was a pretty interesting situation, and I already had opened a NPEX account and transferred some money. After doing a little bit of research I’m less convinced. The company doesn’t appear particularly expensive, especially compared to other publicly traded equities, but at the same time it isn’t obvious cheap either. I think a conservative valuation needs to take into account a bit of mean reversion at this point in time, and because of that it should be looking cheap from the outside. You could come up with some reasons why looking at the past results is too pessimistic or why a 10% discount rate is too high though. The combined company probably has realised some synergies while the market has become less competitive.
I have to admit that I would have loved to buy something on such an obscure platform as NPEX, but I think I’m going to pass on this opportunity… TABS Holland is probably a bit undervalued, but not enough for me.
Author has no position in TABS Holland
Where will TABS trade after the NPEX closes?
Unknown, presumably NPEX will upgrade their systems to allow trading again in the future. But might not be able to trade it for some time.
Nice post. I’m more optimistic about how an average bad year is going to look. I think the entire period after 2008 was extremely bad for the construction sector, with record numbers of bankruptcies, etc. When things turn down again, which inevitably will happen, I don’t think it will get quite as bad as this. That said, I agree that this business does not deserve a large earnings multiple on current earnings.
I’m also not sure how well managed the company was in the past. I believe the current CEO and CFO only came in after the financial crisis broke out, so these might be their first couple of good years they have seen at the company.
This makes it pretty hard to come up with a good estimate of how things might look when business slows down. There’s little data to go on and what we do know about the recent past was pretty horrible, but I think exceptionally bad as well.
I like that capex is relatively low and that the company can produce a lot of cash in the good years. That makes it better than the businesses of their customers.
I think that for outside investors to really do well with this investment, HAL will need to sell or IPO the company. I don’t think there are going to be too many occasions where: 1. the construction business is good and 2. the M&A / stock markets are favorable. I think the environment for an IPO is quite good right now, looking at a recent IPO like Koninklijke VolkerWessels and the multiple they were able to get for a pure construction business: https://www.iex.nl/Column/263357/VolkerWessels-Hoe-brutaal-is-de-prijs.aspx. This seems to be a time where both 1 and 2 are true and I think HAL will be looking to capitalize on that in the next few years.
When I look at the numbers from 2003 to 2017 it seems poor performance is the standard. It’s not like this was an otherwise healthy business that just got a few bad years when the Dutch housing market crashed after the financial crisis. In this period only 2006, 2007 and 2008 had decent numbers and now 2015, 2016 and 2017 again. The fact that I took sort of arbitrary the average earnings from 2011 till 2017 (just because I had these numbers in my sheet) might be sort of optimistic to begin with. That’s three bad years, one so so year and three really great years.
Maybe the business is now better run, in a better position because of scale advantages or some other reason. But I tend to give a decent amount of weight to historical results, and what I see I don’t like. I don’t want to buy buying a mediocre business that is just having a couple of good years.
I do like that their capex is low indeed. At least this is not a business that burns a lot of cash when things aren’t going so well.
And I also think that it’s not unreasonable to expect that HAL might be trying to monetize TABS Holland at some point in the near future to take advantage of current market conditions and the good numbers of the company. If that happens current shareholders will probably get a excellent result, but at the same time I don’t want to bet on that. I want to own something because I think it’s intrinsically undervalued, not because there might be a greater fool willing to pay more.
I continue to hold this but bought in much lower. Average price of 11 per share. I think its in line with your standards that are generally quite demanding. As long as you have enough better opportunities it seems fine to pass. I’ve started buying at $6 but have an average cost base of $11. I’m holding because the story (others have laid out) HALL does indeed have a history of executing on a buy-and-build into IPO strategy. That doesn’t seem unlikely at all here. One more year or so and they’ll have a pretty sweet three year history to IPO.
Vastgoed Fundament Fonds probably doesn’t meet your standards either but it may be a closer call.
Just took a fast look at that one, but doesn’t look that attractive at first sight. I guess it’s trading at a ±50% discount to NAV, but at the same time rental income can barely cover the interest costs of the debt (and after management fees and exploitation costs net income is negative).
Indeed, but the VFF is refinanced for only 4% on 20 october. On that moment they will make a very good profit.