Semapa (SEM.LS) – Going Private – Upside TBD

Current Price: €11.68

Offer Price: €11.66 (expected to be increased)

Upside: TBD

Expiration Date: TBD

Prospectus

This idea was shared by Pedro.

Semapa – a holding company listed in Lisbon and tradeable on IB – is in the process of being taken private by its largest shareholder at a very low valuation. The remaining shareholders are unwilling to sell at the offered price, suggesting there is a high chance of an improved bid.

Family-owned investment vehicle Sodim owns 81% of Semapa (and 83% of voting rights) and is now attempting to take the company private at €11.66/share in cash – at this price the buyer would be receiving the unlisted Semapa assets at a negative valuation. Two largest shareholders and reputed value investing firms Bestinver and Cobas AM (own 5% combined) have rejected the offer, publicly stating that the price is unacceptable, while another 2% are owned by Norges Bank, which has a cost basis above the offer price and will also likely not sell.

A privatization tender offer expired on the 4th of June and, as expected, Sodim increased its stake only from 73% to 81% (partly through open market purchases while the tender was ongoing) and failed to reach the minimum 90% voting control threshold necessary to carry out the delisting. The buyer has now announced an open market purchase running from the 8th to the 15th of June aiming to acquire the remaining shares at the same €11.66/share price.

Given that most shareholders are clearly dissatisfied with the price it’s unlikely that the buyer will manage to collect enough shares during this week. Therefore, the bet here is that after the current bid in the market expires on the 15th of June, Sodim will continue to pursue its opportunistic privatization attempt and will eventually be forced to increase the price for a second time to persuade Semapa shareholders into selling. There is substantial headroom for positive price adjustment from a valuation perspective.

At the offer price of €11.66/share Semapa appears very cheap from SoTP perspective – excluding its main listed holding (69% ownership of Navigator) the two remaining high cashflow generating businesses carry a negative €222m valuation.  It’s no surprise that the buyer looks strongly motivated to privatize Semapa now and has already increased the price once (see more in the timeline below). One of the interesting things of note is how in the recent press release Sodim tried to persuade SEM shareholders to sell shares by suggesting them to buy Semapa’s major holding The Navigator Company instead (PR):

Sodim reminds that, with this Offer, it intends to concentrate the Group’s presence in the market through its main participated company, The Navigator Company, S.A. (“Navigator”) and to provide to Semapa’s shareholders a liquidity event and an exit premium that is relevant in light of the market price (ref. Prospectus) also allowing the shareholders who wish to do so to reinvest in Navigator. Sodim reminds that between 2016 and 2020, Semapa’s market performance presented a correlation of 0.97 with that of Navigator, which in turn presented in the same period dividend yield and liquidity levels (measured by the daily trades average volume) respectively 2.3 and 4.5 times higher than those of the Semapa share.

The argument doesn’t make much sense but clearly highlights how desperately Sodim tries to cover up the low-ball offer price.

If the bet doesn’t work out – i.e. there is no higher offer – the downside seems protected. Assuming the buyer somehow manages to reach 90% threshold (unlikely) and squeezes the remaining shareholders at the offer price, losses is negligible. If the threshold is not reached and the buyer withdraws its current offer for the remaining shareholders, then in the longer term the stock provides exposure to an undervalued, family-owned industrial group in which the majority shareholder appears motivated to unlock value and has been buying in large quantities at current prices.

Short timeline

• 18th February 2021 – Sodim expressed intentions to launch a tender offer for the remaining shares at €11.40/share in cash. At the time, the buyer held 72.7% of SEM shares.
• 12th April – the offer was revised to €12.17/share (6.7% increase), including €0.512/share dividends (record date has already passed).
• 26th April – offer prospectus was released. The offer was launched on the 27th of April with an expiration date on the 25th of May.
• 25th May – expiration extended to the 4th of June.
• 1st June – the buyer waived the 90% condition and agreed to accept all tendered shares. At the time, 7.7% of shares tendered in the offer and 1.1% additional shares were purchased in the open market. The buyer controlled 80.7% of shares.
• 7th of June – tender resulted in Sodim owning 81.3% of SEM shares. Open market purchase at €11.66/share from the 8th to 15th of June was also announced.

Current order book shows Sodim’s open market bid for the remaining 12m shares.

Semapa background

Semapa is an industrial group founded in 1991 by the Portuguese industrial family Queiroz Pereira, later listed in the Euronext Lisbon in 1995. The group has evolved to become a portfolio of industrial assets that includes:

• The Navigator Company (69% stake, 60% of consolidated EBITDA adjusted to remove portion not owned by Semapa): integrated paper & pulp producer leader in bleached eucalyptus kraft pulp in Europe; listed in the Euronext Lisbon, the company focuses on office paper (68% 2020 revenue) and pulp sales (11%) but has been diversifying into tissues (10%) and also sells co-generated energy (10%);
• Secil (100% stake, 37% of consolidated EBITDA): cement producer with 9,750 K ton cement production capacity and operations across Portugal (72% of Secil 2020 EBITDA), Brazil (17%), Tunisia (10%), and Lebanon and Angola (2%); the company grew revenues and EBITDA 8% and 13% p.a. 17-20 on a constant FX basis, respectively, but suffered from large devaluations in the Lebanese pound and Brazil Real, resulting in actual revenue and EBITDA growth of -3% and +9% p.a.
• ETSA (100% stake, 3% of consolidated EBITDA): waste management and food / animal protein recycling company with residual contribution to the Semapa portfolio.

Till 2017 Semapa used to trade at a slight premium to its NVG stake, however the discount appeared in 2018 coinciding with the passing away of chairman Pedro Queiroz Pereira and general weakness in Portuguese paper & pulp stocks (see graph below).

Valuation

Excluding the 69% NVG stake, the market and Sodim are currently valuing Semapa stub (Secil and ETSA) at a negative €222m. Keeping in mind that these businesses consistently generate plenty of cash and that at a hold-co level Semapa only burns €10-€13m annually, such holding discount seems to be unwarranted.

Secil and ETSA generated on average €90-100m of EBITDA and on average €50-60m of cash flow over the last 8 years. In 2020 the performance was even better – €134m EBITDA and €112m FCF, but given the company’s cyclical and commoditized nature I believe looking at long-term average earnings power is safer. At a conservative 6x EBITDA multiple and less the subsidiary-level debt the equity of these two businesses is likely to be worth at least €300m+. So even after deducting capitalized hold-co level cash burn (let’s say -€100m), there is still considerable equity value left – instead, Sodim wants to get these assets at a negative €220m, leaving plenty of space for an improved offer to convince the remaining 19% of Semapa shareholders.

Secil has more leverage than the typical cement peer, however, this does not seem enough to justify the discount as distress risk appears limited (3x ND / EBITDA, 4x at the Semapa consolidated holding level, with well-distributed maturity profile and +€1B in available liquidity between cash and undrawn commitments). Western Euroepean cement peers are trading at around 6x EBITDA. Peer multiples are directional as taken directly from Bloomberg, but the point remains that relative undervaluation is significant.

While the stub is clearly undervalued, I believe the market is valuing Navigator at a relatively fair price – the company is trading at 7.5x its 8-year average EBITDA (2020 EBITDA suffered from the impact of Covid on office paper). This is not far from its historical valuation and looks fair for a business that earns ~10% return on capital, grows at most with GDP, and suffers from the overhang of the long term decline in demand for its key product, office paper. As such, one may potentially consider shorting partially or fully the exposure to Navigator as part of this trade.

The stub businesses have also performed better than Navigator during Covid lockdowns. During 2020 NVG was impacted quite strongly due to fall in paper consumption and temporary factory shutdowns – in 2020 revenues went down 18% and EBITDA 23% YoY. Secil and ETSA, performed much better. In 2020 Secil’s revenue decreased 12% YoY, mostly due to negative FX impact, whereas EBITDA went up by 15%. ETSA was largely unaffected (essential services) and showed 30% YoY EBITDA growth YoY 2020. Same trends continued in Q1’21 – paper demand remained in line with Q4’21 and partly due to certain maintenance shutdowns NVG again reported 16% YoY revenue drop and 20% EBITDA decrease, whereas Secil showed 3% revenue and 17% EBITDA growth YoY, while ETSA – 15% revenue growth and 29% EBITDA growth YoY.

Risks

Shorter term, I view risk as limited – one could always sell to Sodim at the current offer price, resulting in minimal to no loss. If the bid fails and Sodim does not make a new, higher offer, holding Semapa for the long term carries more risk, despite the undervaluation and well-aligned majority shareholder, namely:

• Exposure to the Portuguese construction sector (70% of Secil EBITDA);
• Potential for further deterioration of the economies of Lebanon, Tunisia, and Brazil and/or further currency devaluations (30% of Secil EBITDA);
• The decline of office paper (70% of Navigator’s sales) may occur faster than expected, preventing firm from diversifying its operations in time;
• Governance – management seems to disregard the interest of minority shareholders in favor of the family – e.g. biased support of the Sodim bid.