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OTOEL.GA - Autohellas


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This Greek company has been mentioned a few times on the board and is appears to be a compounder selling for a cheap price.  Autohellas is the Hertz franchise in Greece and has some offices in Turkey and the Balkans.  Autohellas offers both rental cars at airports and car fleet leasing.  Leasing is a larger part of the business.  What impressed me is the capital allocation of management.  It is one of the few Greek companies to provide compound growth of over 8% over the past 10 years while the Greek market declined by over 9% per year over the same period.  They returned a large amount of excess capital in the mid 2000s.  The family also owns Aegean Airlines and has done pretty good for an airline business.  This is a primarily family owned business (they own 70% of Autohellas).  Given this the float is relatively small.

 

At current prices, the company sells at 2.3x EBITDA.  Other large rental car companies Avis and Hertz sell for 5.5 and 6.2x EBITDA respectively.  A rental/lease company in Germany called Sixt sells for 6.2x EBITDA.  The other comp I found was in S. Korea (Red Cap Tour) who sells for 3.8x EBITDA.

 

At the current price, they are planning about an 7.8% dividend for this year.

 

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There are definitely tailwinds present:

- Greece economy growing again;

- low oil price (boosts car rental usage as percentage of transportation?);

- low euro (tourism increases).

 

I wouldn't bet on a return to the Drachma to be a net positive for Autohellas. Even if tourism increased (which I doubt because the consequences would like not outweight the increased cheapness), it would never be enough to offset the devaluation.

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While I don't think a return to the Drachma would be a positive I would think that the company wouldn't suffer too dramatically. Almost all their assets are cars. Worst case you can sell them all internationally for euro's or dollars and wind down the company?

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You are correct about their car inventory but the shares of Aegean Airlines may be hit.  Most of the cars are for lease to corporate clients on an average 4 year lease period.  Leased revenue is about 64% of 2013 revenues and 55% of 2014 revenues as tourism picked up.  I think if Greece left the Euro this would not be hit as hard as other companies but I have sized this accordingly.

 

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I have been looking at the company today, and what do you think about the following issues:

 

* Gross profit margin and operating margins are now significantly above their average since 2008. They have stayed relatively stable at respectively 22% and 13%, but are for 2014 at 28% and 19%. Is this sustainable?

* Tax rate also seems to be a bit low in '14 since corporate tax rate in Greece is 26%, but perhaps the effect of their foreign operations?

* How did you calculate the 2.3x EBITDA multiple? I assume that you subtracted the value of their Aegean Airlines from the EV? but if you do that don't you think you should also add the deferred tax liability that is related to their gains on this stake?

* Their licence to use the Hertz brand expires in 2023. Do you see this as a risk?

* What kind of EV/EBITDA multiple do you think is appropriate? Don't think this is a business that should be worth more than book given historical returns and the fact that their balance sheet mostly consists of normal cars?

 

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If you look at the margins in context to what was happening in Greece post 2008, Depression like business conditions, I think the last 2 years is probably more representative of the future assuming there is not another Depression like downturn. 

 

The 2.3x is calculated as Debt (157m debt + 10m deferred tax on equity gain) plus equity of 124m (10.3 times 12.062m share) less Non-op Assets (cash (15m) + Equities (60m) + JVs (6m) + Inv Prop (20m)) = 190m / EBITDA of 81m = 2.3x.

 

The use of Hertz I think is a minor risk as both parties are benefiting (Hertz from franchise fees) and Autohellas from a name tourists know.  Recently (2015), Autohellas just obtained the Hertz rental rights for Ukraine so if Ukraine cools down it provides an interesting option.

 

I think a 5 to 6x multiple makes sense.  If these guys can deliver like in the past maybe higher but at this price you are not paying anything for these guys capital allocation ability.  Probably the closest comp in terms of operations is Sixt who both leases and rents cars and it is trading at 6.2x EBITDA.  Other more rental oriented firms (Hertz and Avis/Budget) sell for 5.5 and 6.2x respectively. 

There is an EM rental car firm in Korea that sells for 3.8x EBITDA. 

 

Another potential free bonus is the company is lightly levered versus comps and if conditions improve they can take on some debt and pay a dividend like they did in 2007.

 

Packer

 

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Isn't  the risk here really a grexit and having the liabilities denominated in euro but your assets denominated in Drachma? Then if you get a crazy deval the capital structure becomes unsustainable?  Not to mention how do you finance having to refresh the fleet going forward.

 

Otherwise it sounds quite interesting.

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There is some risk in that but since most of the assets are automobiles they will not depreciate in a grexit and worse come to worse they can sell to others in the EU.  There will be some depreciation in Aegean Airlines stock but they are similarly positioned with aircraft.  Most of the Aegean Airline traffic is tourist traffic from the EU so they will be collecting money in Euros regardless.

 

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I think its a bit bold to think that the secondary market for cars in Greece won't deteriorate if the Grexit happens, and then ok - sell them in the secondary market in Europe is a fine idea - except that there is already more debt than cars on the B/S. As you sell them at like 90% of carrying cost your leverage metrics keep going up. It screams "dilutive family backed rights offering"

 

How do they finance the cars today? The annual report effectively told me nothing.  Without cars there isn't a business right?

 

How do rental car companies in Argentina or Turkey fund themselves? Or do they just use locally produced cars?

 

I think if you can underwrite what happens if Grexit does occur and you are happy with that downside case it is a pretty exciting idea.

 

I'd guess if the Grexit does happen you see Euro denominated prices fall to match the local cost component. I.e. where the people can use the devel to trade price for volumes they will as most tourist businesses are fixed cost.

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If the secondary market in Greece gets worse drive them to Italy or Germany then sell them.  Greece will still be a part of the EU with a Grexit so I don't think it is that bold of an assumption.  This at worse will only have to be done with a portion of the inventory that cannot be rented or leased long term to clients in Greece.  The cars are financed with debt at low leverage rates compared to the comparable firms and some cash.

 

As to Grexit, I think price will go the other way as the EU is much bigger than Greece (i.e. tourist demand is higher than local demand).  The price of rentals will probably go up in Drachma and slightly down in Euro.

 

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Interesting idea, thanks. A bit small but not too shabby for private portfolios.

 

I have not yet seen or found numbers but I would assume selling rental cars in the secondary market will be considerably below their book value. In a downside scenario, no way you are getting 90% of carrying cost.

 

At first sight Autohellas seems to have great operating metrics. Compared to the peers you mentioned, higher EBITDA margins (54% vs 31% at Sixt). Operating income 28% vs 11%. There is a huge difference in operating margin for Autohellas and the other, which average around 13%.. (includes Hertz, Avis). Net profit margin also considerably higher, and return on assets/equity/capital way higher than the pack (except Avis which has a crazy ROE thanks to leverage). Autohellas is significantly underleveraged if you compare it with the other players 0.77x versus 2.5x average.

 

Interesting idea, no analyst coverage, no conference calls, family owned, small, . and funny how different first screening operating metrics are.. Will be interesting to see where the differences are coming from.. Any idea what kind of franchise fee they are paying?

 

BTW: Northgate plc might be another peer, trades at 4.6x EV/EBITDA

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I have not yet seen or found numbers but I would assume selling rental cars in the secondary market will be considerably below their book value. In a downside scenario, no way you are getting 90% of carrying cost.

They buy a considerable amount of new cars every year and sell a huge amount of old cars as well every year (presumably at book value or at a profit. Think they don't break this out in their financials?). In most scenario's they don't even have to sell cars, just stopping buying new ones. They bought on average E83 million of new cars every year while they received E34 from the sale of old cars. Seems to me that you can deleverage extremely fast with those cash flows if you start selling more second-hand cars and/or stop buying new cars. Should be a very flexible business model.

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Rental car companies are a lot like banks in the sense that they can scale back (or up) relatively cheaply if the move isn't forced. Rental car companies are definitely reliant on liquidity-management. I don't think the car values on a balance sheet are a concern at all unless you think liquidity will be an issue (they have a low leverage ratio so I doubt it). As Packer hints at, nearly-new used cars are by no means a regional market ("If the secondary market in Greece gets worse drive them to Italy or Germany then sell them.").

 

I just don't have any idea of how the politics of the area will affect them so this could end up being a non-compounder for a few years (will still have solid simple returns!). However, this is probably 'cheap enough' to make the whole matter moot. Depending on the terms of the licensing agreement, it really shouldn't matter how the Greek situation plays out since Greece will always be a tier-1 tourist destination and they are still the local cost-leader for corp leasing (at least they look like the local cost-leader...).

 

If I wanted to buy a Euro-based company then I think this would be on my short-list.

 

Questions I can't answer yet:

What is their market share?

What does the market-share pie look like? How has it evolved over the past 10 years or so (or has it changed much at all?)

How consolidated is the market in Greece?

How much of the EUR 20m profit can they intelligently reinvest?

How much of that reinvestment would be growth based vs. protecting market-share?

Likelihood of future dividends?

Is leverage low historically or because of the current environment?

When was the last licensing renewal [with Hertz] and what was the % increase at that point?

Does the license restrict them to certain locations or are they free to expand to other countries? What are those countries?

Is the license just a yearly fee or is there a royalty/profit-sharing clause incorporated?

Any details on the license agreement would be really appreciated!

 

Packer:

Any potential for Hertz to buy them out? How stable has the family's stake been?

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  • 3 months later...
  • 3 years later...

Having been a long-term holder, I was wondering if anybody else was still following Autohellas.

Since the above discussion 3 years ago, the stock has roughly doubled in EUR terms (and pais some dividends on the way).

 

Still I think the current setting is interesting: Autohellas has over the last few years started a number of car hire business in various South-Eastern European countries, most of which are starting to contribute to earnings. My impression is that there is more potenital in the International business.

 

Greece has been doing well in terms of tourism, also because some of its "competitors" for tourists appear to be unstable and currently are avoided by Northern/Western europeans (countries in Northern Africa plus Turkey) - this is fueling the companies core car hire business. The Greek economy has only recovered recovered slightly, so that the corporate client base still has to come back. The dismal situation of many businesses has permitted Autohellas to pick up some Greek firms on the cheap - they have established a Car Trading & Services business which in terms of revenues is already their largest segment - it was losing money when they bought it, is now slightly positive and has the potential for further improvement in my view.

 

Founder and chairman Theodoros Vassilakis passed away in May 2018, aged 78. His son Eftichios Vassilakis has been in charge as CEO since 2017. He has been in the business for a long time and holds a Columbia MBA, but I have no more in-depth info about him. The Vassilakis family are controlling the group so this is still a family business.

 

The company has invested significant amounts in its fleet which has driven up its (absolute) debt levels. Per June 2018 total financial debt was reported at 390 mm EUR vs cash of 40 mm EUR for a net debt of 350 mm EUR. Subtract the stake in Aegean which they still hold (70mm EUR) and add the market cap of 280mm EUR and you will get to a current EV of 560 MM EUR. They did 120MM EUR in EBITDA last year but are up almost 30% in H1 this year so might reach 160MM EUR this year for a multiple of 3.5x. Alternatively, you are currently paying about 1.1-1.2x BV for a growing business which generated 14% ROE in 2017.

To me, this still looks interesting, but I am wondering if anybody else had any thoughts here...

 

 

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  • 2 years later...

Annual Results came out today. Net profit of 17.4mm EUR or  0.33 EUR/share. In my view this is not bad for a car rental company relying heavily on tourism in a pandemic year - given that Hertz went bankrupt and Sixt achieved a mere 2mm EUR net profit.

They have also been repurchasing shares when the price was around 5 EUR. On the flipside, the market value in the Aegean Airlines stake suffered greatly during 2020.

 

2021 will depend on the tourism recovery in Europe which in turn willdepend on the speed of vaccinations. In my view, this is still an attracive and well-operated business and I am sticking with my position here.

 

https://www.autohellas.gr/en/investors/financial-statements/

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  • 2 months later...

Net profit of 4.5mm EUR in Q1 2021, the strongest Q1 in history if I am right, while the quarter was still impacted by Covid.

Q2 will probably suffer from a rather weak tourist season as much of Europe is  just slowly exiting lockdowns. Q3 might well see some improvement. Autohellas sterngthened their operations over the last few years with reasonable acquisitions/expansions in the International and Auto Trade segments. They made >1 EUR/share in 2019 and should be able to do more in the future (potentially even this year).

The macro environment in Greece appears relatively strong given the government looks stable and pretty competent, the risk premia are down and even the banks (like Eurobank) are getting back on their feet. A stronger Grrek economy may help the Corporate Car Rental/Fleet Management business.

Last week, Autohellad announced that they will participate in the recap of Aegean Air and so avoid dilution of their stake. Also, they have been buying their own shares around current prices of 7 EUR.

Still pretty confident in with my sizeable position here.

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