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CED IM - Caltagirone Editore


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I originally posted about Caltagirone complex on the 15th March 2015 where I initiated a 2.5% position at EUR 1.000 (see: https://hidinginplainsightblog.wordpress.com/2015/03/15/caltagirone-group/) but thought it was worth having a separate topic on Caltagirone Editore. As is the way since adding the position the stock has got drilled falling to a low of EUR 0.820 and currently residing at EUR 0.858 a healthy 14.2% loss since initiation. However, the Q1 2015 results released on the 7th July 2015 tell a different and more positive story.

 

As a brief reminder Caltagirone Editore owns 6 newspaper titles, 1 TV station, an ad agency and a web portal in Italy. It is part of the wider Caltagirone SpA which is a complex web of companies that form the family holdings of Francesco Gaetano Caltagirone an Italian billionaire ranked number 258 on the Forbes list (as an aside I have a position in the holding company which I will update on separately).

 

At investment my basic thesis on Caltagirone Editore was:

 

•  Market cap was trading at a 50.6% discount to (i) cash on balance sheet, (ii) equity stakes in Unicredit & Generali, and (iii) liabilities without ascribing any value to the operating business

•  Caltagirone Editore is the second largest Italian newspaper group with c. 22.5% share of average daily readers and also has the 4th most visited news website in Italy. Pulling all the titles together the group has a 61.4% share of average daily readers in Central Italy vs Gruppo Espresso at 28.3%

•  From a macro perspective Italy has the lowest internet penetration in the European Union and the highest number of Small & Medium enterprises meaning that Caltagirone should have the time and opportunity to ride the internet wave as opposed to having been already left behind by google and other first movers

•  Finally, and most importantly, whilst Caltagirone is EBITDA negative the cash burn of the group is very small vs its liquid net assets and has been improving due to (a) reducing rate of revenue declines, and; (b) impressive cost cutting by management

 

So what has changed since investment?

 

 

2014 FY Results & Q1 2015 Results

 

The first thing that is illustrative is to look at the creation value of Caltagirone Editore at the time I invested vs today (see attachment: Catlagirone Editore Creation Price (2015.07.25) v1.pdf)

 

Not a huge amount has changed with cash increases (some of which will be season working capital) offsetting the decline in value of their stakes in Unicredit & Generali.

 

 

What is much more interesting and informative is the performance of the business in Q4 2014/FY 2014 & Q1 2015 (see attachment: Catlagirone Editore LforL Results Evolution (2015.07.25) v1.pdf)

 

Positive takeaways

•  Ad revenues have shown a continued reduction in decline rate which I hoped for as Europe and in particular as Italy recovers from the crisis and is helped by Dragi's QE binge

•  They continue to successfully cut costs to address the declining top line

•  The business was P&L EBITDA positive for FY 2014 for the first time since LTM H1 2011! This trend has continued into 2015

•  Cash burn is decreasing driven YoY and if they maintain the latest run rate you are only burning 1.3% of your c. 60% margin of safety a year

 

Negative takeaways

•  The pace of circulation revenue decline is increasing which is worrying. The business in the past has been able to offset readership decline which began in 2008 and as of 2013 ran at 12.2% decline YoY with price increases. If they have reached the limit the customer will bear we could see double digit decline rates on this line item

•  Cash taxes are high. I think this is because each paper is owned in a separate entity and whilst the combined group is PBT negative some of the titles are tax payers. This is really annoying as without tax they are in touching distance of cash flow breakeven

Unfortunately IR has not yet posted the 2015 annual general meeting presentation which in the past has contained useful data on the market including Caltagirone's average daily readers which allows you to look at revenues and costs on a per reader basis which I think is a more insightful way to analyse the evolving performance of the business. As an aside I have spread annual performance back to 2007 and quarterly performance to Q1 2012 and am happy to share with people but haven't posted as it is in a messy format. Also the business only produces a cash flow at the half and full year so we unfortunately cannot look at cash burn on a quarterly basis. 

 

 

Caltagirone Editore is not for the faint hearted. Whilst there is a massive pile of cash and liquid securities vs where you are creating the company if they stop being able to cut costs or push through price increases to offset the declining readership (the pace of which has not stemmed yet) then the cash burn could absolutely balloon. Newspapers are also trophy and political assets to the owners and the Caltagirone family may value having the influence these titles bring over protecting the value in the group by shutting down struggling titles.

 

Ultimately I think that creating a business that has real market leadership in the 8th largest economy in the world for free and being protected by monetisable asset worth 2x your creation price is too cheap an opportunity not to have in my portfolio. Having said this I have only sized the position at 2.5% which speaks volumes although I do have a 2.5% position in Caltagirone SpA which at the time I thought was effectively a 5.0% position in the Caltagirone complex as they were effectively correlated (not sure this is really true). Interested to hear peoples thoughts

 

My blog post on this topic can be found at: https://hidinginplainsightblog.wordpress.com/2015/07/25/caltagirone-editore-q1-2015-results-onwards-upwards/

Caltagirone_Editore_Creation_Price_2015.07.25_v1.pdf

Caltagirone_Editore_LforL_Results_Evolution_2015.07.25_v1.pdf

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