Belreca: An Investment Holding Trading At A Discount With The Overhead Cost Of An ETF
Summary
- Belreca is an investment holding with the majority of the shares controlled by one single family.
- The company's dividend has been increasing or kept at least stable for longer than two decades.
- Despite the market turmoil, the share price hasn't decreased which means the discount to the NAV/share has decreased.
- The stable share price is likely caused by the lack of trading in this holding. Be aware of low trading volumes.
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Introduction
Every once in a while one can come across a company that may not look interesting at first sight but gets more intriguing after completing a deeper dive into the financial results and business model. Belreca (no US listing) is an excellent example of this type of company. This tiny and obscure holding company with no secondary listings is firmly controlled by a private banking family which owns over 2/3 rd of the shares. The intrinsic value of the company is much higher than where the share price is at and the continuously increasing dividend is also very appealing.
Source: Yahoo Finance
Belreca has only one listing, on the Double-Fixing market of Euronext Brussels (which means there are only two trading moments per day, and limit orders are required). The average daily volume in Brussels is approximately 80 shares (although there have been some heavier trade days in the past few weeks with a few hundred shares changing hands on a daily basis, and some days where there was no volume at all, so working with a limit order is imperative). The ticker symbol is BELR and the current market cap based on a share price of 125 EUR and less than 316,000 shares outstanding is 39.5M EUR. Note: some brokers appear to be using the full name of Belreca so in case there are no search results for ‘Belreca’, try ‘Belgian Resources and Capital Company’.
Belreca also has a very annoying website which does not contain ‘unique’ URLs as all direct links are contained within the normal website page. You can find all relevant information HERE.
Belreca: a listed holding that shouldn’t even be public…
Belreca is one of the strangest companies I have ever encountered. Not only is this a small holding company, it is also family controlled as the Van de Put family controls approximately 67% of the shares. On top of that, the family owns a small private bank as well which acts as the trading agent for the holding and charges its usual commissions on transactions.
This allows Belreca’s cost structure to be one of the lowest I have ever seen for a listed company. The combined payments to the management and board of directors is less than 60,000 EUR for the year. The total expenses (including non-recurring expenses) in FY 2019 totalled just 107,000 EUR (including auditing and listing fees) and based on the fair value of the portfolio (see later), the expense ratio is just 0.21% of the financial assets. Not only is this substantially lower than what a mutual fund or investment fund would charge its investors, it clearly indicates the Van de Put family isn’t using the listed vehicle to enrich themselves. In fact, even if the overhead expenses would double of triple one could still argue this would be acceptable and reasonable.
With 67% of the shares owned by the Van de Put family and an additional 6.7% owned by chairman de Pélichy (a local baron) almost 75% of the shares are in strong hands and one could wonder if the Van de Put family is planning on keeping the Belreca entity listed for much longer. The float is just 83,000 shares and given the undervaluation of the listed entity versus the underlying assets (see later) one could wonder if the Van de Put family is considering to take the company private.
Transparency is key, and Belreca lists its entire portfolio, making it easy to determine the fair value
Belreca appears to be very transparent and has listed its most recent position overview on its website. As it is a relatively small holding, there’s only a handful of stock positions (15).
Source: company website
14 positions are publicly listed (with a focus on Western European companies) and one company, Aliaxis, is private. Aliaxis also is the most interesting one but also the most difficult one to estimate the fair value. For the purpose of running a back of the envelope calculation I will use the average of Aliaxis’ most recent book value and most recent published cash flow statements using a required free cash flow yield of 8% (based on the FY 2018 results (FCF: 211M EUR) as the annual report for 2019 hasn’t been published yet). Granted, there is a margin of error as it is an unlisted company, but at least it will provide us with a rough idea of the value of the Aliaxis position. The average of the FCF valuation (2.64B EUR) and book value (1.25B EUR) would be around 1.95B EUR. I feel this is a relatively conservative approach as the 1.95B EUR value represents a free cash flow yield of in excess of 10%.
I have used an EUR/USD exchange rate of 1.09 and an EUR/CHF exchange rate of 1.06 for the McKesson (MCK) and Roche Holding (OTCQX:RHHBY) (OTCQX:RHHBF) positions.
Source: author table, based on closing prices on February 28, 2020
The value of the stock portfolio after the correction is 49.66M EUR and Belreca had an additional 1.45M EUR in cash & receivables on the asset side and 1.02M EUR in liabilities for a net asset value of 50.09M EUR or 158.72 EUR per share.
The recent share price increase makes Belreca a bit too expensive
While Belreca came up on the European Small Cap Ideas chatboard a few weeks ago, before I could do my final due diligence Belreca’s share price has gone up 20% without any apparent reason.
And that’s surprising as the recent weakness on the world markets in the past few weeks (and especially last week) has sent the share price of the investees lower which means the discount has decreased to just over 21% coming from 36.8% at the end of 2019 (a share price of 108.00 EUR versus an intrinsic value of 170.95 EUR.
Given the fact the historical discount was substantially higher than the current discount, it could make sense to wait for the Belreca share price to come down a bit before initiating a position.
Belreca pays an attractive dividend and has been doing so for ages: Checking the sustainability
Belreca has been a very loyal dividend payer since its inception and the past few decades it has been focusing on increasing its dividend on an annual basis. For FY2019, Belreca announced a dividend of 3.20 EUR per share, up a symbolic 10 cents from the 3.10 EUR per share that has been paid in the year before. Using the current share price of 125 EUR, the dividend represents a 2.56% dividend yield. The standard dividend withholding tax in Belgium is 30%, but the country has plenty of treaties in place with other nations to reduce this withholding tax for foreign shareholders.
Source: Belreca website. The four respective columns are 'financial year', 'shareholders equity, in EUR', 'gross dividend in EUR' and 'gross dividend per share in EUR'.
Considering there are a total of 315,594 shares outstanding, the dividend is costing Belreca 1.01M EUR. As its entire portfolio (but one position: Aliaxis) consists of companies listed on an exchange, it is easy enough to determine the actual dividend income from the companies in its portfolio to check A) what percentage of the dividend payable by Belreca is covered by incoming dividends from investees and B) to what degree (if necessary) Belreca needs to generate capital gains in order to continue to pay out the dividend at the current rate.
To determine the dividend income, I am using the average analyst consensus for the dividends for 2020 as found on Marketscreener.com. Of course consensus estimates are a moving target and the final result may be different from these expectations but at least it gives us an idea of how much cash could reasonably expected to come in. I am once again using an EUR/USD exchange rate of 1.09 and an EUR/CHF exchange rate of 1.06 to convert the McKesson and Roche dividends into Euro.
Source: author table based on Belreca documents and analyst consensus estimates
As you can see above, Belreca’s dividend is absolutely sustainable. However, keep in mind the table above refers to the gross dividends and in some cases taxes will be payable. I’m not sure how the tax structure of Belreca works. All I could find was that the dividend income of 2019 was subject to total taxes of around 104,000 EUR.
Investment thesis
Belreca is an odd duck. While I generally like investment holding companies, especially when the family capital is involved, I am very surprised the share price didn’t move at all during one of the worst weeks on the financial markets in the past few decades. The liquidity of Belreca stock is very low, and there haven't been any trades since February 24th, which helps to explain why the share price didn't move down along with the general market.
That’s the only reason why Belreca isn’t a ‘buy’ right now as the discount of the share price compared to the NAV has decreased to just 21%. That’s still a very nice discount, but considering the discount to NAV was around 30% before the crisis has hit the street.
The ever-increasing and safe dividend is intriguing, but I am still waiting and hoping for weaker moments for Belreca before initiating a position.
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This article was written by
The Investment Doctor is a financial writer, highlighting European small-caps with a 5-7 year investment horizon. He strongly believes a portfolio should consist of a mixture of dividend and growth stocks.
He is the leader of the investment group European Small Cap Ideas which offers exclusive access to actionable research on appealing Europe-focused investment opportunities not found elsewhere. The a focus is on high-quality ideas in the small-cap space, with emphasis on capital gains and dividend income for continuous cash flow. Features include: two model portfolios - the European Small Cap Ideas portfolio and the European REIT Portfolio, weekly updates, educational content to learn more about the European investing opportunities, and an active chat room to discuss the latest developments of the portfolio holdings. Learn more.Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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