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D’Ieteren was the most significant contributor to performance over the month, adding +113bps to NAV as the position returned +13%.

As highlighted in September’s letter, last Autumn the company announced an extraordinary €74 per share special dividend, equivalent to 39% of the company’s market cap at the time. Selling pressure from tax-sensitive investors – who faced Belgian Withholding Tax rates of up to 30% vs. AGT’s 10% net rate – pushed the shares down from €226 to a low of €188. During this period, we increased our position by more than 70% at an average price just shy of €200 per share.

This made D’Ieteren our largest position at a 9.3% weight on the 9^th December when the shares closed at €200 per share. On the 10^th December the company traded ex-dividend of the €74 per share special dividend yet closed the day at €160 i.e. some +27% above the implied ex-dividend price of €126. Net of 10% tax, AGT received proceeds of £35m, equivalent to 3.1% of NAV.

As we look ahead, we expect investors to retune their focus on D’Ieteren’s fundamentals. The last year has seen a relatively difficult operating environment for Belron, the crown jewel asset that repairs and replaces vehicle glass, which accounts for 68% of NAV. As higher insurance premiums have seen customer propensity to repair decline, and the insured market (to which Belron are more exposed than peers) cede share to the cash market.  During Q3 we saw a number of US auto service peers cut guidance, however D’Ieteren re-affirmed Belron’s guidance, which, in our view, speaks to the continued and considerable self-help measures the company can utilise. In 2025 we expect D’Ieteren to hold a Capital Markets Day – the first since Carlos Brito was appointed Belron CEO. We view this and new Belron long-term margin guidance as key catalysts, which should help re-focus investor attention on the attractive long-term outlook for the company and its structural tailwinds.

D’Ieteren shares currently trade at €162, which represents an 50% discount to our estimated NAV. The October 2024 transaction between Belron minority shareholders at a €32.2bn enterprise value (“EV”) pegs D’Ieteren’s 50% equity stake at €221 per D’Ieteren share. This valuation was higher than we had modelled – having previously estimated Belron to be worth €24.5bn EV, or 17x our estimate for 2024 EBIT. It does however put a line in the sand for future, more meaningfully sized transactions in Belron’s equity, such as an IPO or further private equity sales. As and when these occur, we expect this to be a positive catalyst for D’Ieteren’s very wide discount to narrow. As such, despite strong recent performance, D’Ieteren is our second largest position at 7.4% weight.

We wrote about D’Ieteren in our last newsletter and have continued to add to the position such that it is now a 9.6% weight. At the end of October, minority shareholders in Belron exchanged a 1.4% stake in the company at an enterprise value of €32.2bn. This was considerably higher than the 2021 private equity transaction (€21bn) and also much higher than our own carrying value (€24bn). At such a valuation D’Ieteren’s equity stake is worth ~€222 per D’Ieteren share. The shares currently trade a little shy of €200 and are due to pay a special dividend of €74 before the end of the year. We believe this to be a highly attractive valuation and are positioned accordingly.

If at the start of the month we had been told that D’Ieteren would report a healthy set of half-year results and announce a €74 per share extraordinary dividend, our best guess would not have been for the stock to be the largest detractor – but that is exactly what happened. In early September, D’Ieteren announced that there was to be a reorganisation of the controlling family’s shareholding. Nayarit (the vehicle of Nicholas D’Ieteren) is to acquire a 16.7% stake from SPDG (the vehicle of Olivier Périer) at €223.75 per share (the then market price). Concurrently, and to help fund this, D’Ieteren announced their intention to pay a special dividend of €74 per share. At current prices, this equates to a yield of 39%.

The dividend will principally be funded via a €3.8bn dividend recapitalisation at Belron (of which €1.9bn will flow to D’Ieteren), as well as a new €1bn debt facility at the holding company level and cash on hand. We view this as highly positive – receiving a large portion of your market cap back at NAV is an inherently good thing and investors suggesting otherwise are missing the wood for the trees. It is our understanding that tax-sensitive Belgian retail investors have been sellers of the shares. In turn, price has led narrative and various negative views have emerged.

Some investors have raised concerns about supposed governance failures in so far as the controlling family’s interests are leading to taxable events in the form of the dividend. Not only are taxes a fact of life, but we believe such a view misguidedly focuses on the wrong thing. Indeed, we believe the family have handled the succession between generations (now into the seventh) rather well, and the payment of a dividend to all shareholders and resulting long-term stability in ownership is something to be celebrated.

Other investors have queried the increased debt at Belron, which will rise to c.5.5x EBITDA. Yes, this is high by public market standards, but the company is a prodigious cash generator and has a track record of deleveraging following previous dividends. Moreover, the dividend recapitalisation is enterprise value neutral for Belron and – in our view – most likely warrants a tighter, not wider – “fair” level of holding company discount.

D’Ieteren has now fallen -16% from the preannouncement level, such the capital return now equates to 39% of D’Ieteren’s market cap (gross of tax). On an ex-dividend basis D’Ieteren is trading at an implied -54% discount to NAV.

D’Ieteren was the top contributor during a month in which the company reported full year results. The shares rose +16% adding +78bps to AGT’s NAV. We had been adding to the position during January and February, which combined with strong share price performance has pushed the company to be our third largest position (5.8% of NAV).

Although in our last update we wrote more extensively about D’Ieteren’s newer holdings TVH and PHE, the bulk of the value and crux of the investment case lies in Belron, the global no.1 operator in the Vehicle Glass Repair and Replacement (“VGRR”) industry which accounts for 61% of our estimated NAV.

Belron continues to benefit from structural trends toward increased windshield complexity and the proliferation of Advanced Driver Assistance Systems (“ADAS”), with recalibrations now accounting for 36% of replacement jobs. Belron is many multiples larger than competitors with >40% US market share and this results in significant scale advantages in terms of purchasing economies of scale and cost leadership, as well as relationships with insurance partners who are industry gatekeepers and account for c.70% of jobs. Moreover, scale has allowed for technological investment, which has become increasingly relevant as ADAS recalibrations – which require more expensive capital equipment – have grown to become a larger proportion of replacement jobs. Mom and pop operators are increasingly illsuited to meet the increased technical complexity required for new vehicles. As such we expect Belron to continue taking share and driving growth.

For FY23 Belron grew sales +9% organically with a further boost of +2% for M&A. Positive mix effect and price increases saw operating margins increase +226bps to 20.5%, which led operating profits to increase +22% year on year. For the year ahead, management are forecasting sales to grow at mid-to-high-single digits and margins to continue towards what for some time now has appeared a relatively modest 2025 margin target of 23%. We expect Belron to provide updated targets at next year’s Capital Markets Day – which will be the first since Carlos Brito became CEO. As readers may remember, in 2021 a consortium of private equity investors (led by Hellman & Friedman) became minority shareholders in Belron at a €21bn enterprise value.

We estimate the EV is closer to €24.5bn today (17x our 2024e EBIT), and D’Ieteren’s 50% equity interest accounts for 61% of D’Ieteren’s NAV. In due course we expect a liquidity event for these investors to help highlight Belron’s significant value, and like situations such as this where we are aligned with highly incentivised PE coowners and management teams. As such we see scope for a further narrowing of D’Ieteren’s 33% discount, as well as NAV growth underpinned by strong earnings growth prospects.

Over the last few months, we have been adding to our position in D’Ieteren on share price weakness, such that the company is now a 4.2% weight in the portfolio.

Since reporting what we considered to be a strong set of full year results in early March the shares have declined -13%, underperforming the MSCI Europe by -11%. Whilst operating profit for D’Ieteren’s underlying assets “beat” consensus expectations, investors were perturbed by significant working capital build-up and correspondingly low free cash flow generation. We believe such fears are undue, with the key culprit being D’Ieteren Autos (9% of NAV), where free cash flow swung from €108m to negative €101m as VW accelerated deliveries during the last two weeks of the quarter. This led to a €155m working capital outflow – or as management described it on the earnings call “a photo finish that was not very pleasant”. This is a heavy-handed tactic we have seen from VW before (e.g. 2018), but one that normalises over time.

In our December newsletter we focused on D’Ieteren’s key asset, Belron, which accounts for 63% of NAV following its payment of a €1.1bn dividend earlier this year. As discussed then, Belron has considerable scale advantages and benefits from the long-term growth trend of the proliferation of Advanced Driver Assistance System (“ADAS”) cameras and increased windshield complexity.

Whilst Belron will remain the key asset in terms of NAV growth and investment case, we are increasingly encouraged by D’Ieteren’s newer smaller assets, namely TVH Parts (TVH) and Parts Holding Europe (PHE). We believe the successful operation of these assets has the potential to boost management credibility and alleviate investors’ concerns about re-investment risk / capital allocation, thereby reducing the wide discount at which the shares trade.

Although TVH is the larger and higher quality of the two assets, we believe the 2022 acquisition of PHE – a predominantly French automotive spare parts distributor – appears to be a particularly astute one, with D’Ieteren acquiring the business from Bain following a failed IPO.

Automotive spare parts flow from manufacturers, through distributors to retail and service centres and eventually end customers (drivers). The spare part aftermarket is divided between the Original Equipment Manufacturers (OEM) aftermarket and Independent Aftermarket (IAM), in which PHE operate. In the OEM aftermarket, automakers sell premium-priced branded parts, most typically for newer generation in-warranty models, which are principally distributed through their dealer networks. The IAM on the other hand, operates independently of automakers and is much broader, covering cars typically aged >5 years old, with the average car served by PHE circa 13 years old.

Unlike the auto industry at large, demand for spare parts is highly defensive and stable with the bulk of sales non-discretionary in nature. Moreover, there is an element of counter-cyclicality, in so far as customers are more likely to “make do” and repair during times of economic hardship. Within this the IAM is in turn even more predictable, as the stock and flow of the existing car parc and its resultant demand can be modelled out for many years to come: 100% of the vehicles PHE expects to service in 2025, and ~50% of those in 2030, are already on the road.

In distribution businesses scale is a key determinant of success. PHE are a top three customer to most large suppliers, resulting in considerable purchasing economies of scale compared with smaller operators. Scale also creates distribution centre density and allows for automation of complex logistics processes, both of which support best in class delivery times, with 90% of SKUs deliverable in two hours and some customers receiving up to six deliveries per day. Combined

with inventory breadth, this gives PHE an unmatched ability to have the right part in the right place at the right time. In turn this translates to >40% gross margins, which drop down to high single digit operating margins.

Sales have grown at c.6% p.a. since 2010, although a decent chunk of this has been in-organic as PHE have rolled up many small operators. The market remains highly fragmented, particularly compared to the US, and we expect PHE to continue to pursue a consolidation strategy, with considerable synergies as acquirees are plugged into PHE’s procurement systems. In the main these will likely be funded through internal cash flows, but over time there could be opportunities for D’Ieteren to deploy more meaningful amounts of capital.

D’Ieteren’s acquisition of PHE came at an enterprise value of €1.7bn and an initial equity outlay of €571m. This equated to a trailing EV/EBITDA multiple of 7x and ~11x free cash flow. This represents a significant discount to listed peers, as well as M&A transactions, with GPC and LKQ having paid 10-11x EBITDA for Alliance and Rhiag in recent years. To complete the deal the EU mandated the disposal of PHE’s windscreen repairs activities for just over €100m. As such the net equity outlay for PHE equates to less than 5x this coming year’s profit before tax. We believe this represents a steal and should, combined with the acquisition of TVH, help ameliorate some of the market’s concern surrounding re-investment risk (which became a valid criticism for the company following its ill-fated, and now immaterial, acquisition of Moleskine in 2014).

Returning to D’Ieteren, the decline in the shares combined with NAV growth means the company now trades at an 42% discount to our estimated NAV. Belron, TVH and PHE collectively account for 79% of NAV and exhibit largely non-discretionary demand drivers; combined with the prospect for margin expansion at Belron and accretive bolt-on acquisitions at TVH and PHE we believe the prospects for NAV growth are attractive, with potential further upside from discount narrowing. Given the presence of private equity co-ownership at Belron we believe some form of corporate event is probable in the coming years, with management highly incentivised to increase the equity value, which should act as a catalyst for D’Ieteren shares.

One new position purchased in 2022 that we have not yet discussed is D’Ieteren, a seventh-generation Belgian family-controlled holding company whose crown jewel asset is a 50% stake in Belron, the global no.1 operator in the Vehicle Glass Repair and Replacement (“VGRR”) industry.

We have invested in D’Ieteren across our other funds since 2018 however liquidity was historically insufficient for AGT to build a meaningful stake. In March 2022, following the publication of disappointing full year results, the shares fell -11% on a day the MSCI Europe index was up +6%. We initiated a position the very same day and added to the position shortly thereafter.

The bulk (68%) of D’Ieteren’s NAV is accounted for by Belron, which readers might be more familiar with as Autoglass (UK), Safelite (US) or Carglass (EU).  Belron is many multiples larger than competitors with >40% US market share, giving it significant scale advantages in terms of purchasing economies of scale and cost leadership, relationships with insurance partners who are industry gatekeepers, and technological investment, which has become increasingly relevant.

Increased windshield complexity and the requirement for Advanced Driver Assistance System (“ADAS”) cameras to be recalibrated upon replacement has re-accelerated top-line growth and taken margins from 6% in 2018, when we visited the European Distribution Centre in Bilzen, to 19% in 2021. We expect Belron to keep riding this wave, with ADAS set to become a larger proportion of the global car parc, supported by a legislative tailwind. Over the medium-term sales should grow at a high single digit level with margin expansion translating to mid-teens growth in EBIT, and even higher free cash flow growth as capex spend moderates. Longer-term a possible IPO will likely help crystalise value, with the recent appointment of Carlos Brito – who built AB InBev into a global behemoth – perhaps indicative of this plan.

As well as this, D’Ieteren owns a collection of other smaller assets 1) a 40% stake in TVH Parts, a spare parts distributor focussed on forklifts and other industrial machinery; 2) a 100% stake in D’Ieteren Autos, which distributes VW brands in Belgium; 3) a 100% stake in Moleskine, the luxury notebook group; and 4) a 100% stake in PHE, a European automotive spare parts distributor focussed on the Independent Aftermarket (IAM). Both TVH and PHE are more recent acquisitions, and appear highly attractive, with strong market positions and the potential for accretive bolt-on acquisitions.

Over AGT’s nine months holding the investment has generated a +46% ROI and an +85% IRR. The discount has narrowed materially and now stands at 21%. However, the defensive and resilient nature of the underlying asset’s earnings and the prospect for NAV growth remain attractive.