Italmobiliare Stock: That’s why I bought this brand building company w/ a 50 percent discount

Overview Italmobiliare Stock

Date	October 16th 2023
Shares Outstanding	42,3 Mio.
Share Price	23,50 EUR
Market Capitalization	1.000 Mio. EUR
Net Cash Position (Holding)	160 Mio. EUR
Enterprise Value	840 Mio. EUR
ISIN	IT0005253205

Investment thesis Italmobiliare

Highly attractive assets: The investment company has acquired a stake in one of Italy’s leading coffee manufacturers and a rapidly growing luxury perfume company. The growth rates of both companies are in the double digits and the profit margins are heading towards 30 percent.

Brand Building Company: Italmobiliare follows a private equity-like investment style that aims to maximize value. To do this, the company acquires companies with potential, hires excellent managers and then develops a long-term growth plan.

Significant undervaluation: Despite the very successful operational development and the clean balance sheet (net cash), the Italmobiliare share is traded at a discount of 50 % to the NAV. How can that be?

Business activities of Italmobiliare

Before we get started with the content, we would like to thank the following fellow bloggers:

• „Value and Opportunity“ for the fantastic article on Italmobiliare (be sure to read!)
• Matthias Schmitt (Finanzgeschichten.com) for the joint discussions with Italmobiliare Management and the good thoughts
• as well as a very valued friend who, although not active on social media, brought the case to our attention in the first place.

Due to the publication of the Value and Opportunity article, we considered whether we should add another article of our own. We ultimately decided to go for it due to the significant undervaluation and the excellent portfolio quality.

In some places we adopt ideas and models from the blogger colleagues mentioned above, which was coordinated with the respective people. The focus and what is new in our article is therefore on the three “deep dives” on the crown jewels.

Company History

Italmobiliare 1.0 / investment company /Year 1946

The company was founded to pool family investments outside of the activities of the Italian cement manufacturer Italcementi. In the 1950s and 1960s, investments were built up in various industrial companies and banks.

Italmobiliare 2.0/Focus on the cement business/Year 1979

At the end of the 1970s, the shares of the cement manufacturer Italcementi were also brought into the company, and in 1980 the investment company went public on the Milan Stock Exchange. In the following decades, the cement manufacturer is the most important holding.

Italmobiliare 3.0/Brand Building Company/Year 2015

In 2015, Italmobiliare sold the share package in the cement manufacturer Italcementi to Heidelberg Materials. Since construction activity in Italy is stagnating, there was hardly any potential left in the old business. With the inflow of cash, there is another transformation into a brand building company.

Since then, a broadly diversified portfolio of high-quality entrepreneurial investments has been built, including a leading coffee company and a luxury perfume manufacturer.

The management decided on this repositioning because there are a large number of promising companies in Italy that actually have a lot of potential, but which lack financial and strategic support. Let’s take a closer look at how Italmobiliare has positioned itself.

Business model of Italmobiliare

„Italmobiliare 3.0“ is an investment company that focuses on investing in medium-sized Italian companies with great development potential. Financial, human and strategic support is provided in order to realize the full value creation potential of the holdings.

However, unlike Berkshire Hathaway, Italmobiliare is not a buy & hold owner, but takes a more active approach which reminds us of private equity investments. Let’s look at the breakdown of the company’s assets as of June 30, 2023:

In its role as a holding company, Italmobiliare invests in five different assets.

1. Corporate investments (portfolio companies): 67 % of NAV.

Around two-thirds of the company’s assets are invested in this asset. The usual approach is as follows:

1. Acquire companies or brands with significant potential
2. Find outstanding managers
3. Develop a long-term partnership plan
4. Let the managers do the work
5. Sell when most of the value increase potential has been realized
6. Use the proceeds of the sale to start again at step 1

These are direct investments that are controlled and influenced (providing capital and know-how, serving on supervisory boards, etc.).

What reminds us of private equity investments:

• The focus on maximum value creation,
• ambitious growth and margin targets
• as well as the targeted sale once the majority of the value enhancement has been achieved.

But there are also elements that differ:

• Little or no debt capital is used,
• the time horizon is longer
• and the development of the company is done in a spirit of partnership.

The company does not engage in turnaround stories or other „difficult situations“. The focus is much more on rough diamonds that still lack polish. This is where Italmobiliare comes in as a brand building company.

In Italy, the capital market is underdeveloped, which means that the holding company is always able to acquire highly attractive assets at fair prices. Currently, the portfolio consists of twelve entrepreneurial investments.

Even if some readers are sceptical about investing in Italy: The southern European country is, in fact, the eighth-largest economy in the world (out of almost 200 countries). In addition, „Made in Italy“ products in the food, fashion and luxury goods sectors sell extremely well all over the world. Although the political environment is challenging, there are a number of extremely interesting and flexible companies that are coping well even under such circumstances. In the „Valuation“ section, we present some of the most valuable holdings in detail.

2. Non-strategic investments (Other investments): 11 % of NAV

In these investments, Italmobiliare does not intervene in the business development (purely financial investments). The investments are smaller, passive and have a shorter time horizon.

With a share of 11 % of assets, the asset is not really significant. In some cases, Italmobiliare acts as a co-investor in private equity deals. This asset also includes the remaining Heidelberg Materials shares still held by Italmobiliare, which Italmobiliare received in addition to a cash component following the sale of Italcementi.

3. Private equity investments: 11 % of NAV

In addition to the direct entrepreneurial investments already mentioned, the Milan-based company also acts as an investor in private equity funds. According to the management, this should improve diversification and lead to further opportunities for returns.

We are generally more skeptical about private equity investments, because of, among other things, the high ongoing fees and the typically heavy use of leverage (increased interest rates). Nevertheless: A considerable part was not allocated to external funds, but to „in-house“ PE funds: This is because one of the twelve entrepreneurial investments is the Italian private equity house Clessidra. Thus, the high fees move from one pocket to the other of the company and do not flow out.

4. real estate: 3 % of NAV

Not very significant, so we will not go into detail here.

5. cash and other activities: 8 % of NAV

Cash and cash equivalents serve as a financial buffer for the entrepreneurial investments in the event that these need additional capital. It is also used to acquire additional investments and pay dividends.

Strategy: This is how Italmobiliare plans its own future

The cash inflow in 2015 and 2016 has been gradually invested in new entrepreneurial investments over the past few years. Now, shareholders will have to be patient for a few years until most of the value creation potential has been unlocked.

Italmobiliare will sell the investments or IPO them when there is a good opportunity to do so. Then the development cycle will start all over again. Since the transformation into a brand building company took place only a few years ago, almost all investments are still in the development phase.

With a cash position of EUR 160 million (June 30, 2023) and EUR 250 million (December 31, 2023, Abilitato estimates), Italmobiliare has sufficient financial resources to build up one or two additional holdings even now. So the store remains open.

Management and Shareholder Structure

Management

Italmobiliare has been managed by Carlo Pesenti since 2014. One year after taking office, he has completed the transformation to „Italmobiliare 3.0“. The CEO is a mechanical engineer and business economist and previously held positions including COO of the holding company and CEO of Italcementi.

In addition to his role as CEO, he serves as a member of the Supervisory Board of the main entrepreneurial holdings.

The manager is 60 years old and has no plans to retire in the near future. At least two of his total of six children are also already working for the company (at market salaries or even rather low salaries).

The Pesenti family holds 49.3 % of Italmobiliare shares. Pesenti is therefore primarily an entrepreneur rather than a manager.

Shareholder Structure

During our research, we did not come across anything negative about Carlo Pesenti. The chairwoman of the company’s supervisory board, Laura Zanetti, is a business administration professor in her main profession and has already written various publications on the subject of corporate governance.

There is no absolute certainty in any investment; the purchase of any share involves the takeover of entrepreneurial risks. Therefore, investors should diversify well. This is the only way to reduce dependence on individual countries/sectors/companies and managers.

What reassures us about Italmobiliare is that the CEO has plenty of „skin in the game“; the Pesenti family’s share package is worth about half a billion euros at the current stock market price. But that’s not all: in the last twelve months, Italmobiliare has seen a full 56 (!) insider purchases (and not a single sale). The majority of these purchases were made by CEO Carlo Pesenti.

Although the CEO is already heavily invested, he is constantly adding to his holdings. Since October 2022, insiders have purchased shares worth more than EUR 7 million. Insider purchases on this scale are an indicator that the company is significantly undervalued.

Valuation

Having looked at the history, the business and the strategy, we will now try to value Italmobiliare stock as best we can.

Historical share price performance

Although the company has been listed for more than 40 years, we only look at the share price development from 2018 onwards. Prior to that, the focus was on the cement business, a completely different activity. Therefore, nothing can be derived from a longer-term view of the share price development. Since 2018, the portfolio of entrepreneurial investments has been built up and developed.

But Italmobiliare’s share price has not really taken off yet, despite great operational progress in recent years. So why are insiders buying up so many of their own shares? To find out, let’s look at the development of the net asset value.

The net asset value is the key valuation indicator for investment companies. It is calculated in a similar way to the value of a share portfolio: The individual investments are added together, then debt is deducted (if there is any).

However, investors must be careful, because the value of unlisted investments in particular is often not so easy to determine. So it is important to critically analyze the NAV published by the company. We’ll do that in a moment, but before that we’ll show you the following chart, which shows the development of the NAV (dark blue) and the share price (light blue) since 2018.

In the last five and a half years, the NAV has risen from EUR 37 to EUR 49, including dividend payments even to EUR 53. This corresponds to a compound annual growth rate (CAGR) of 7.5 %, which initially appears low compared to the long-term return of a broadly diversified ETF.

However, investors should not forget that the cash ratio was still very high at the beginning of the period (36 %) and was only reduced over time by the build-up of new holdings (to currently 8 %).

Adjusted for the cash ratio, the return was therefore already around 10 %. Better, but still not a highly attractive investment.

Another reason for the (seemingly) slow growth of the NAV so far is that a large number of the portfolio companies are still in the books at the acquisition prices, although the value has already increased significantly in the meantime. The average holding period of the investments is just 3.4 years.

With the business model followed by Italmobiliare, most of the increase in value achieved becomes visible at the time of sale only. The real value of the individual investments becomes apparent only after the company exits the investment.

In our view, the company’s performance since 2018 has been very positive overall. It is therefore even more surprising that the gap between NAV and share price has increased recently. Insiders probably also see it that way, which explains the high level of activity in insider buying.

Valuation based on the Net Asset Value (NAV)

Now we keep our promise and show you our self-created calculation of the fair value (NAV) of the Italmobiliare company. Some points in advance:

• It should be clear to everyone anyway, but please keep in mind that this is not investment advice. Make your own thoughts. Also, you are invited to post any differing opinions in the comments, we would greatly appreciate it.
• We have tried to adjust the profitability of each investment for special effects (Corona after-effects, energy prices, inflationary pressures, supply chains, etc.). As a result, the EBITDA/EBIT figures we have calculated do not match the 2022 results.

Let’s start with the conclusion: Italmobiliare calculates the NAV per share at almost EUR 50. After deducting a number of safety discounts, we arrive at a fair value of EUR 37.

The question now arises as to what discount on the NAV the security should be traded at. In principle, we consider a discount of 25 % to be appropriate for investment companies in order to take into account the various disadvantages: Ongoing management costs of the assets, risk of costly wrong decisions, little ability to influence performance, etc.

Ultimately, investors take a seat in the passenger’s seat when buying investment companies and must trust the driver to steer the company successfully.

In addition to this 25 % rule of thumb, there are often reasons for a higher discount. At Porsche Automobil Holding, which we also cover, the following problems exist, for example:

• Weak operating performance (the Volkswagen volume brand is a restructuring case, increasing competition from Chinese carmakers).
• Debt, which increases the risk (at Porsche Holding it is currently around EUR 6 billion)
• Weak capital allocation (why is Volkswagen AG not being split up: sell more Porsche AG shares, spin off Lamborghini, etc.)
• Weaknesses in corporate governance (dual roles of personnel, state of Lower Saxony as shareholder, etc.)

In such cases, it often happens that the capital market applies significantly higher discounts to the NAV until the problems are off the table.

Interestingly, however, none of the points just mentioned apply to Italmobiliare:

• all relevant investments have performed excellently since the acquisition
• the company is debt-free at the holding level and even has a cash position of EUR 160/250 million (30.06.2023/31.12.2023e), which corresponds to around 16 to 25 % of market capitalization
• all acquisitions of the last years look highly attractive
• we are not aware of any weaknesses in corporate governance so far

So why is Italmobiliare still trading at such a high discount to NAV? We can only attribute this to three reasons:

• short history: The transformation to a brand building company took place only a few years ago, and no complete cycle has yet been completed (build-up, develop, exit). Consequently, the successes achieved so far do not yet show up in the P&L/balance sheet, etc. and the company is therefore likely to be largely overlooked by stock screeners as well
• lack of awareness: we could hardly find any research/discussions on the company on the internet. Even in a forum of Italian private investors the exchange has almost come to a standstill.
• who invests in Europe (and then also in Italy)? There is no momentum in the share price, which makes the stock uninteresting for short-term investors. In addition, many shareholders are still magically attracted by the glittering, innovative and well self-marketing US tech companies

We, on the other hand, like to act countercyclically (as long as the operating performance is right) and are also very patient. It is quite possible that Italmobiliare’s share price will remain almost fixed for a few more years.

However, we are completely indifferent to this as long as the investments develop well operationally. One day, the exits will follow and then the harvest will be reaped in all at once. We will go into more detail on the progress of the three most valuable investments in a moment.

Conclusion: We are of the opinion that a maximum discount of 25 % on the NAV calculated by us is appropriate. There are currently no identifiable reasons for a higher discount. On the contrary, most entrepreneurial investments have developed so positively since their acquisition that a valuation without any NAV discount is definitely acceptable. This is because Italmobiliare is not only a passive investor, but also a Brand Building Company capable of significantly increasing the value of the acquired companies.

And now let’s finally go through the individual assets one by one.

Entrepreneurial investments

Deep Dive 1: Caffè Borbone (60 %)

Overview	Caffè Borbone
Year of acquisition	2018
Sector	Consumer Staples
Website	https://www.caffeborbone.com/
Revenue (2023e, normalized)	300 Mio. EUR
EBIT (2023e, normalized)	78 Mio. EUR
EBIT margin (2023e, normalized)	26 %

Business model

Caffè Borbone is a Naples based coffee manufacturer founded in 1997. The focus is on the production of coffee capsules (for all common systems), in this business the company has already become the market leader in Italy (25 % market share, Nestle reaches a similar level).

The products offer excellent value for money (original Neapolitan coffee at very competitive prices).

Industry development

Compared to other non-cyclical consumer good markets, the global coffee business is growing at an above-average rate: from 2015 to 2019, sales growth of coffee drunk at home was 4.4 % per year.

More relevant for Caffè Borbone, however, is how strongly the market for coffee capsules is growing. This technology, which is still quite new, impresses with its simple and quick preparation and is therefore continuously gaining market share over other ways of consuming coffee.

From 2015 to 2019, the growth rate of the coffee capsule market was 7.8 % per year.

And the growth has only just begun: In developed countries, 10 % of units consumed are currently prepared via capsule technology. In emerging markets, it’s only 1 %. With convenience almost always winning the race, we can certainly imagine that one day each third coffee will be prepared with capsules.

Caffè Borbone has therefore established a leading position in the fastest growing part of the coffee market.

In 2022, however, the EBITDA margin declined noticeably. This is due to enormous price increases for coffee beans. The price of coffee beans has more than doubled since the outbreak of the corona pandemic.

In the meantime, however, Caffè Borbone has been able to procure beans more cheaply again, and prices have fallen by around 40 % compared with their peak. We therefore expect a full recovery of the profit margin in the range of 30 % and 26 % (EBITDA and EBIT margin) in the near future.

But how was Caffè Borbone able to gain a leading position in such a short time?

Competitive advantages

First, the company covers the entire value chain. By purchasing coffee directly or cutting out middlemen, it is able to collect the profit margins from them itself.

Secondly, the products are manufactured at the low-cost site in Naples. Per coffee capsule, the manufacturing costs are only 6 cents – and that without cutting back on quality. In German supermarkets, on the other hand, a Nespresso system coffee capsule often costs 40-50 cents.

Especially in southern Italy, where wages are lower but coffee consumption is higher (some Italians drink up to 10 espressos a day), the price makes a big difference. Caffè Borbone products can be purchased in bulk packs for as little as around 15 cents per unit, making them even cheaper in some cases than the private label products offered by supermarket chains.

Word has spread quickly and as a result the company has been able to rapidly gain market share.

Strategy

Sales are expected to continue to grow at double-digit rates in the coming years, with management focusing on the following growth drivers:

• Positioning in the fastest growing segment of the coffee market (the capsules)
• Sustainability: expansion of the product range to include fully compostable and recyclable coffee capsules
• Listing with more Italian supermarkets and increasing and optimizing shelf space in supermarkets
• Increased expansion into Europe and the USA (currently more than 90 % of sales are still generated in Italy)

The fact that the international expansion is already well underway can be seen, among other things, by looking at the Amazon.de bestsellers in the area of coffee capsules: Caffè Borbone’s products reach positions 1 and 4 in the charts and are also given excellent ratings. In a management interview, we were told that the growth rates outside Italy are currently at 150 % (but we may have misheard or the cumulative growth of several years is meant).

In particular, the newly founded American subsidiary promises great potential, since Italian food products are typically very popular in the USA.

In various Italian media reports, it was reported that Coca-Cola and PepsiCo have already knocked on the door regarding a takeover/shareholding. However, we could not find any official statements on the rumors. This would only be logical, as the company is, after all, a real crown jewel (market leader, strongly growing, highly profitable), while the consumer goods giants have to gradually say goodbye to the production of the unhealthy products and at the same time re-start their growth.

However, as the international expansion has just started, we hope Italmobiliare will keep the coffee investment in its portfolio for many years to come, as there is still significant potential for growth and value creation.

Expectations for the future development

• Normalized sales (2023e): EUR 300 million
• Sales growth (per year): 12 %
• normalized EBITDA margin: 30 %
• normalized EBIT margin: 26 %

Valuation

If you value the company with a P/E ratio of 20, you can calculate a value of just under EUR 16 per Italmobiliare share, which already corresponds to two-thirds of the share price. In view of the high growth rates, a P/E ratio of 25 can also be applied, in which case the value is already EUR 20 per share. Looking ahead one or two years, the entire market capitalization of Italmobiliare is already covered by the coffee investment.

In addition, there is the cash position of about EUR 250 million at the end of the year, which corresponds to another EUR 6 per share. With this, we could actually already conclude our article at this point, as all other assets are currently not priced in by the capital market.

The biggest challenge for Caffè Borbone in the coming years will be to balance out the sales growth, which is expected to flatten out in Italy, by opening up new markets.

Deep Dive 2: Santa Maria Novella (95 %)

Overview	Santa Maria Novella
Year of acquisition	2020
Sector	Consumer Discretionary
Website	https://eu.smnovella.com/
Revenue (2023e, normalized)	50 Mio. EUR
EBIT (2023e, normalized)	12,5 Mio. EUR
EBIT margin (2023e, normalized)	25 %

Business model

Santa Maria Novella has a history of more than 800 years, during the entire period the company has never closed down.

The company is a luxury group that produces perfumes and other cosmetic products of the highest price and quality class.

The production is done exclusively with natural herbs grown in the hills around Florence. Animal testing is completely avoided.

Sales are currently distributed as follows: 60 % Europe, 20 % USA and 20 % Asia.

Industry development

Luxury fragrances in particular are growing much faster than the already fast-growing market for luxury beauty products.

An article in the New York Times has the following to say about the industry development:

Niche high-end perfume businesses such as Santa Maria Novella have been growing nearly six times faster than the total luxury beauty market during the past five years, Claudia D’Arpizio, a senior partner and the global head of fashion and luxury at Bain & Company, wrote in an email.

The New York Times

In 2022, Santa Mariella Novella’s sales increased by more than 50 %, with part of the growth due to a normalization of social life after the Corona pandemic. In the first half of 2023, sales increased by more than 20 %, and in the second quarter by more than 30 %.

Competitive advantages

Until the acquisition by Italmobiliare, Santa Maria Novella grew solely through the recommendation of customers. No marketing or sales activities were undertaken.

It is a unique company that has its origins in the oldest pharmacy in Europe. No other luxury perfume company can look back on such a history.

The flagship store in Florence is now a museum that also serves as a retail space. More than 500,000 visitors come every year.

Strategy

Italmobiliare has very ambitious growth plans.

To achieve this, Gian Luca Perris was appointed CEO, who is an entrepreneur himself and can develop his own perfumes. Supporting him is Davide de Giglio, who built up a group of various luxury brands within four years and then sold them for almost EUR 700 million. Since then, he has been increasingly active for Santa Maria Novella and has even acquired a 5 % stake in the company for EUR 10 million in 2022 (keyword: Skin in the Game).

In the management meeting, we were told that sales are expected to roughly double in the next three years and increase fivefold again in the following six years.

Whether this will succeed is, of course, uncertain. However, some success factors are given:

• a unique brand,
• positioning in a highly attractive and rapidly growing segment,
• and the right people

The operational momentum built up recently (2022 sales growth: +55 %, half-year 2023: +22 %) also points to a positive development. Before the Italmobiliare acquisition, Santa Maria Novella was an unpolished diamond, which is now being sharpened.

We therefore hope that Santa Maria Novella will also remain in the Group for many years before it is sold. There are also interested parties with strong purchasing power for this asset (e.g. LVMH, L’Oreal, Kering).

Expectations for future development

• Normalized sales (2023e): EUR 50 million
• Revenue growth (per year): 20 %
• normalized EBITDA margin: 35 %
• normalized EBIT margin: 25 %

Valuation

A somewhat larger competitor of Santa Maria Novella achieves even significantly higher margins. With increasing sales size, there should also be potential upside for Santa Maria Novella (for reference: 100 milliliters of perfume cost around EUR 250-300).

We have decided on a valuation with a P/E ratio of 30 to reflect the unique company position. This leads to a value of EUR 6 per Italmobiliare share, which corresponds to another 26 % of the share’s current price.

If the operational development does not weaken, there is very large potential for value appreciation in the future.

Deep Dive 3: Tecnica (40 %)

Overview	Tecnica
Year of acquisition	2017
Sektor	Consumer Discretionary
Website	https://www.tecnicagroup.com/
Revenue (2023e, normalized)	560 Mio. EUR
EBIT (2023e, normalized)	67 Mio. EUR
EBIT margin (2023e, normalized)	12 %

Business model

So that the article does not get completely out of hand in terms of length, we will be a little shorter on this investment.

Tecnica Group is a group of various outdoor and winter sports brands. These include the following:

• Tecnica (ski boots)
• Nordica (skis)
• Blizzard (skis)
• Moon Boot (winter boots)
• LOWA (hiking boots)
• Rollerblade (inline skates)

Industry development

The LOWA (hiking boots) and Moon Boot brands account for 60 % of the Tecnica Group’s sales, so we believe the company can grow by around 5 % per year overall.

Competitive advantages

The LOWA brand has an excellent reputationhttps://www.welt.de/wirtschaft/plus246169366/Lowa-800-Euro-pro-Paar-der-Aufstieg-eines-deutschen-Wanderschuh-Herstellers.html. Anyone who walks around for hours in a bad hiking boot can expect to be in terrible pain in the evening. Consequently, consumers in this segment are willing to put down a little more money for a high-quality product. All shoes are still produced in Europe, and a repair service is also offered.

Sales of the Moon Boot footwear brand have increased sharply recently (by 50 % according to management, if we understand correctly). Italmobiliare has managed to attract the former marketing director of the luxury company Moncler as CEO. With prices of 200-300 EUR for a pair of shoes, there should be a healthy profit margin left over.

Strategy

Italmobiliare holds a stake in Tecnica Group for six years already. During this time, EBITDA has roughly tripled and debt has been significantly reduced. In the meantime, the investment is generating 45 % of the purchase price at the time as operating profit (EBIT) each year.

The outlook remains okay, but the majority of the value creation potential has probably already been realized. In addition, the Olympic Games will be held in Milan in 2026.

This could lead to an exit or IPO in the next two to three years. However, this step has not yet been announced. It is also interesting to see what will happen to the fast-growing Moon Boot brand, which is positioned close to the luxury segment. Actually, this part does not really fit in with the rest of the activities.

Expectations for future development

• Normalized sales (2023e): EUR 560 million.
• Sales growth (per year): 5 %
• normalized EBITDA margin: 16 %
• normalized EBIT margin: 12 %

Valuation

In an interview, the management of Technica Group stated that an EBITDA margin of 20 % is the target. We prefer to play it safe and estimate the company’s EBITDA margin to be around 16 % and its EBIT margin to be around 12 %.

Multiplying the normalized earnings by a P/E ratio of 15, we also arrive at a value of EUR 6 per Italmobiliare share, which corresponds to 26 % of the share price.

Other entrepreneurial investments

The three most valuable corporate holdings alone already cover 119 % of the current share price, on top of which there is the cash position at holding level, which is expected to cover a further 25 % of the stock market value at the end of 2023.

The other nine holdings also include some highly interesting companies, such as an operator of almost 30 hydropower plants or a rapidly growing but already profitable car insurance company. Our assumptions on the normalized profitability and the respective value of the holdings can be seen in the valuation table above (Italmobiliare valuation model).

Non-strategic investments (Other investments)

For financial investments, we apply a discount of 25 % to the NAV calculated by Italmobiliare, resulting in a value of EUR 4 per share.

PE investments

We take only 60 % of the investments in private equity funds into account ( in other words, we apply a 40 % discount), as these are typically highly leveraged and interest rates have recently risen considerably. Nevertheless, this results in a value of a further EUR 3 per Italmobiliare share.

Real estate

We include the real estate investments in our NAV calculation at a discount of 50 %, as these are not part of the core business and interest rates have recently risen sharply. This results in a value of just under EUR 1 per share.

Cash

By contrast, we take the cash position of EUR 160 million (June 30, 2023) into account in full, as it is part of the corporate strategy and will be used for further acquisitions and dividend payments. Per share, the liquidity currently amounts to EUR 4.

At this point, a note on the corporate structure: At holding level, Italmobiliare is debt-free and has the cash position just mentioned. The individual corporate investments partly use some debt capital, but Italmobiliare is not liable for this (non-recourse).

Subtraction of holding costs

Last but not least, when we calculate the NAV, we also take into account the ongoing costs of managing the assets that are incurred at the head office. These amount to around EUR 30 million per year, which corresponds to 1.5 % of NAV. We do this by also assigning a fictitious P/E ratio to this negative result ( 15 times loss), thus arriving at a negative value of EUR 450 million.

Summary

In total, the NAV we have calculated is EUR 37 per share. Starting from the current price, the Italmobiliare share would have to rise by 57 % to reach this value.

Annual value growth potential

Calculating the current value of a company is one thing. For long-term investors, however, another consideration is even more important: how fast can the fair or intrinsic value grow per year?

That’s why we once again dug through numerous documents, asked Italmobiliare management questions, and gave a lot of thought to the positioning and prospects of the company’s main holdings.

As with any other company, the expected return on Italmobiliare shares is fed by two sources:

• the current cash inflow generated by the holdings
• the increase in the value of the investments when the intrinsic profitability increases.

In order not to get completely lost, we have therefore only looked at the four most valuable holdings. In the following table you can see our assumptions and the resulting increase in value for the Italmobiliare share.

In the „Cash generation“ section, we have determined how high the free cash flow of the four most important shareholdings is. Based on the assumptions we have made, the cash inflow is currently EUR 1.16 per Italmobiliare share and year, which corresponds to a free cash flow yield of 5.0 % compared with the current share price.

Once again, it should be noted that only the four most valuable investments have been taken into account. Caffè Borbone (EUR 0.62 FCF per Italmobiliare share) and Tecnica (EUR 0.27) are particularly cash generative.

In the „Value growth“ section, we have addressed the value growth that will one day be visible at exit. The idea behind this is simple: if for example the earnings power of an investment doubles, it can be resold at double the price. If the normalized profit of Caffè Borbone increases by 12 % per year, the value of the investment will also increase by this rate.

All in all, the increase in value from growth amounts to EUR 3.48 per Italmobiliare share and year, which corresponds to a return of 15 %. The biggest value driver is again the Cafffè Borbone investment. Santa Maria Novella also has great potential. In Tecnica, on the other hand, the potential for value growth has already been largely realized, which is why there could be an exit in the near future.

If we now add up the increase in value from cash generation and growth in operations, the result is an increase in intrinsic value of EUR 4.65 per share, which corresponds to a 20 % expected return per year compared to the current share price.

Therefore, strictly speaking, the Italmobiliare share is interesting less because of the current undervaluation and much more because of the high value growth potential of the coffee and luxury holdings. And because we can’t say it often enough, here’s the reminder: this 20 % is the result of the calculation model presented above. In the calculation, we have to make assumptions that may later turn out to be too cautious, but also too optimistic. Therefore, the value is by no means guaranteed, but solely a calculation example.

Capital allocation

Having discussed fair value and the annual upside potential, let’s conclude by taking a look at capital allocation.

Investments in organic growth

Since Italmobiliare does not invest in turnarounds, most of its entrepreneurial investments are highly cash generative. They therefore do not require any financial resources from the holding company, in fact they even pay dividends to the parent company.

One exception is Bene Assicurazioni, an extremely promising motor vehicle insurance company, which is growing by around 30 % per year. Therefore, capital increases may be necessary here in the future, in which Italmobiliare could then invest further money and thus increase its share in the company.

And then there is the cash-burning special case of Callmewine, which does not fit in at all with the other investments and to which we have assigned a negative value of EUR 15 million in our NAV calculation. However, this investment is at most a rounding error in relation to total assets, which is why we do not discuss it further.

Distribution of dividends

Italmobiliare pursues a „soft“ (i.e. not written in stone) dividend policy, which provides for a distribution of 1.5 % of NAV as a basic dividend. This is currently around EUR 0.70 per Italmobiliare share and year.

In addition, there is a participation in successful exits, which amounts to approximately 40 % of the cash inflow. As the exit of a small financial investment (Florence Investco) for EUR 78 million will take place in fiscal 2023, this should result in a special dividend of EUR 0.70 to 0.80 per share.

The dividend yield of the basic dividend is thus currently 3 %, but due to the successful sale there should be a dividend payment of EUR 1.40 to 1.50 per share next year, which corresponds to a dividend yield of over 6 %.

Share buybacks

Italmobiliare shares are trading well below their fair value (NAV), and the company also has a large cash position. Actually, a perfect moment to create additional value through share buybacks.

However, in the management meeting we were told that the liquidity of the security is already so low that share buybacks are not an option. The purchase and following cancellation of shares would result in fewer and fewer shares being traded, which would lead to exclusion from indices. Furthermore, the share would then hardly be held by institutional investors, as they often have minimum liquidity requirements for their investments.

In this way, Italmobiliare would increasingly block its access to the capital market, which could well be needed one day (if a major purchase opportunity arises for which a capital increase is necessary).

Buy-and-Hold Checklist

Criteria	Opinion	Met
1. high return on capital employed	The margins of the top holdings Caffè Borbone and Santa Maria Novella are fantastic.	Yes
2. long-term growth opportunities	The markets for coffee capsules and luxury perfumes promise great growth potential.	Yes
3. stable moat and competitive advantages	Italmobiliare is a brand building company capable of increasing brand attraction.	Yes
4. recurring revenue	The coffee and luxury markets are subject to comparatively low fluctuations in demand (habitual products).	Yes
5. no major dependencies	We cannot identify any major dependencies (except on the Italian state and CEO Carlo Pesenti)	Yes
6. solid balance sheet	At holding level, Italmobiliare is debt-free and has a cash position of EUR 160 million.	Yes
7. good capital allocation	All major acquisitions made in recent years are performing extremely well.	Yes

That is why the Italmobiliare share is a very good investment for the long term. Of course, investors should follow how the portfolio develops operationally and what transformation measures the management undertakes.

Opportunities and risks of investing in Italmobiliare shares

Investing in shares exposes you to entrepreneurial opportunities and risks. An investment should only be made if the risk-reward ratio is considered to be positive on the basis of the investor’s own considerations.

Opportunities

🍀 Excellent portfolio with great potential for value growth (see the detailed view of the top 3 investments).

🍀 Further acquisition opportunities: Many investors avoid Italian companies, which leads to attractive purchase prices. CEO Carlo Pesenti has a very good reputation and can offer sellers a „good home“ (similar to Buffett): A long-term development based on partnership without a lot of leveraging.

🍀 Solid balance sheet: The net cash position at holding level is expected to increase to a value of approx. EUR 250 million by the end of the year, which will then already represent 25 % of the current market capitalization

Risks

⚠️ Italy discount: Italy is one of the most heavily indebted countries in the euro zone. Recently, the interest rate on Italian government bonds has risen significantly.

The Italian government currently has to pay around 5 % interest on its debt, compared with only 3 % for the Federal Republic of Germany. Consequently, investors should deduct at least the difference of two percentage points from the expected return on Italian shares, as this is a risk premium for increased political risks in the southern European country.

Government coalitions regularly collapse in Italy, and the mafia also has a major influence in the background. However, investors can control/limit the risks by diversifying investments in different countries. This can be done, for example, by setting a limit of a maximum 5 % share of Italy in the portfolio.

To be clear at this point: If you expect a major government crisis or even Italy’s bankruptcy in the next few years, it is better not to invest.

⚠️ Ongoing management costs: Managing the company’s assets costs around 1.5 % per year, which is a considerable amount of money. Investors should take this into account in their valuation (see NAV table).

⚠️ Taxation of dividends: The article is already long enough, so here only in brief: Although the Italian capital gains tax is only 26 %, it is not automatically netted against the German tax. Due to the double tax deduction, therefore, only a comparatively small part of the dividend payments arrives in the account.

In view of the currently particularly favorable valuation, this issue has not prevented us from investing. In addition, we will test various tax recovery or avoidance routes and then share our findings with you.

⚠️ other risks:

• Which investments are bought and sold at which prices, is this always done in the interest of all shareholders?
• Price development of various raw materials and other costs (coffee bean, energy and transport prices)
• Introduction of new „excess profit taxes“ by the Italian government
• Increased competition in the coffee and luxury perfume business
• etc.

Italmobiliare share conclusion: unique brand building company trades at a large discount to fair value

Operational view

Italmobiliare is a family-run investment company that has built a number of extremely attractive entrepreneurial holdings in the coffee, luxury fragrance and outdoor sectors in recent years.

Those who invest in Italmobiliare stock are taking a stake in some of Italy’s best assets, which also have great growth opportunities internationally.

Management is taking a cautious yet ambitious approach: On the one hand, it is thinking in terms of partnership and the long term, and it hardly uses any outside capital. On the other hand, the company hires the best managers it can find and develops very ambitious growth plans. In addition, an exit is targeted after a few years of holding.

The balance sheet is more than respectable so far.

Valuation view

In our opinion, the two companies Caffè Borbone and Santa Maria Novella are unique assets that have excellent prospects and where in a few years there will be a pool of interested buyers that other companies can only dream of: Coca-Cola, PepsiCo, LVMH and L’Oreal could be interested in acquiring the two holdings.

Despite the very positive performance of the main holdings, the valuation is extremely attractive (57 % upside potential to the NAV we calculated). The expected return is also higher than for almost any other share on our watchlist (see section „Value growth potential“).

Personal view

Therefore, I have built up a position in Italmobiliare shares in recent days and reduced my holdings in Berentzen and Heidelberg Materials to finance the transaction.

I now plan to keep the Italmobiliare position in the portfolio for the long term and am now participating in the opportunities in the luxury sector for the first time via the Santa Maria Novella and Moon Boot activities.

Since there is hardly any coverage on the company, we will closely follow the company’s development from now on and provide you with regular updates. Sign up now for our free newsletter and from now on never miss any articles on Italmobiliare stock.

What to watch out for in the future?

In our view, the following points should be observed particularly closely in the future:

Operational development of the top 3 companies: Will the main holdings continue to perform well in the coming years?

Company	Caffè Borbone	Santa Maria Novella	Tecnica
Expected revenue growth	12 % p.a.	20 % p.a.	5 % p.a.
EBITDA margin	30 %	35 %	16 %
EBIT margin	26 %	25 %	12 %

Capital allocation: what acquisitions and disposals are made, increasing or decreasing the value of the company?

Sources

This section is for those who wish to research further on their own. Here follows a list of the most important research sources:

Source	What can be found?
Aktienfinder.net	Charts and key figures on fundamental development
Marketscreener.com	Analyst estimates on future development
TIKR.com	Charts and key figures on fundamental development
Value and Opportunity	Stock analysis Italmobiliare (englisch)
Italmobiliare	Website
Italmobiliare	Company Overview 2023
Insiderscreener.com	Italmobiliare insider transcations
Italmobiliare	Annual Report 2022
Italmobiliare	Half-year report 2023
Italmobiliare	Press Release May 2023: Sale of the stake in Florence Investco
tradingeconomics.com	Coffee price development
JDE Peet’s	Investor presentation March 2021
Handelsblatt	Article about the turnaround of Tecnica Group
Forum Finanzaonline	Forum in which the Italmobiliare share is discussed
COFFEETODAY	Interview with Caffè Borbone CEO
The New York Times	Article about the rise of Santa Maria Novella
WWD	Article about the secrets of Santa Maria Novella’s success
worldgovernmentbonds.com	Yield of ten-year Italian government bonds
Business of Fashion	Portrait Davide De Giglio
Santa Maria Novella	Website
Fashion Network	Article on Davide De Giglio’s departure from NGG
Amazon.de	Top sellers in the area of coffee capsules