D’Ieteren; Our Beady-Eyed Catch

January 2023 - Asset Value Investors

Not many readers will have heard of the tarsier, a small nocturnal primate found in the rainforests of south-east Asia. We mention it because of its enormous eyes, the largest of any mammal relative to its body. It uses these beady assets to scan for prey and does so most effectively, using the tools it’s been given to sustain its future.

The analogy isn’t perfect. At AVI, we don’t describe stocks as prey and none of us have disproportionately large eyes, but we do constantly use our highly attuned experience and knowledge to look for opportunities. Our beady eyes are focused on fast-moving markets as opposed to fast-moving undergrowth, and what we’re looking for is valuation anomalies.

The AVI Global Trust (AGT) strategy is to build positions where the market price doesn’t reflect the estimated value of the underlying assets, and in March 2022 we spotted an opportunity in Belgium-listed holding company, D’Ieteren. Following the publication of its full-year results, their shares fell -11% on a day the MSCI Europe index was up +6%. We quickly initiated a position the very same day. If the tarsier is pleased to catch spiders and beetles, we’re delighted with undervalued holding companies.

 

Holding companies

The holding companies we are after should have a portfolio of high-quality businesses with the potential for sustained, above-average, long-term growth. Ideally these businesses are run by a controlling family or shareholder with a strong track record, and if we can invest in the business at a discount to NAV, that generates another potential source of returns.

D’Ieteren exhibits all these attractive hallmarks, but its crown-jewel asset is a 50% stake in Belron, the global number one operator in the vehicle glass repair and replacement industry. Belron is many multiples bigger than its competitors (~45% US market share) which gives it significant scale advantages. Increased windshield complexity and the requirement for advanced driver-assistance system (ADAS) cameras to be recalibrated upon replacement has widened margins from 6% in 2018 to 19% in 2021. As ADAS penetration continues to grow, Belron will continue to ride this wave. Over the medium term, sales should grow at high single-digit level with margin expansion translating to mid-teens growth in operating profit.

We have been holding D’Ieteren in our other funds since 2018 but back then the company was too small and illiquid for AGT; when we visited Belron’s European distribution centre four years ago their market cap was £1.7bn but it’s since shot up to £8.2bn. This long-term relationship meant we were well-placed to pounce and take advantage of a short-term adverse share price reaction. Knowing our investment universe as well as we do allows us to move quickly and act with conviction.

 

Good things come to tarsiers who wait

So, how’s it performed since? There’s never any harm in reiterating the long-term view we take across all AVI’s companies and their underlying assets. We don’t enter new positions lightly and building to a position in D’Ieteren was no exception. Positive returns don’t always happen overnight and like the tarsier, we are prepared to sit and wait. But so far, it looks like we purchased D’Ieteren on time. In nine months, we have generated a +40% return, or an internal rate of return (IRR) of +80%. There’s merit to putting beady eyes to work, if not on rainforests, then on plenty of spreadsheets.