TABS Holland: a Dutch stock trading at 6.8x earnings

This post is mainly for Dutch readers. I’m writing it in English, because I’m much more familiar with English accounting terms than the Dutch terms. Perhaps the post is of some interest to non-Dutch readers as well. I think you need a Dutch bank account to be able to buy this stock. Also, trading in this stock is going to stop on November 18, 2017 and it is unclear, if, or when, trading will resume.

I’m Dutch, but I’ve never owned a Dutch stock since I started to learn about value investing, excluding a few short term special situations. Dutch stocks have always seemed quite expensive to me during this period. I feel the same way about German stocks. I don’t have a good explanation for why these markets always look so pricey.

Since this year, I do own one Dutch stock and it is an unusual investment. I came across it by accident. I read a press release somewhere about a company that was listing on a Dutch trade platform called NPEX. NPEX is not a traditional stock exchange and is mainly used as a financing platform for small and medium businesses (“mkb-ondernemingen” in Dutch).

Most of the listings on NPEX are bonds, but there are a handful of stocks listed there as well. After I stumbled on this list, I just went through it until I found the company Timber and Building Supplies Holland (TABS Holland).

TABS Holland profile

TABS Holland is a supplier of timber products and building materials, mainly to contractors and to a lesser extent, retail buyers. The company offers a one-stop-shop formula. Customers can drive their cars/trucks into a TABS warehouse and load supplies directly onto their vehicles, saving a lot of time and hassle.

TABS Holland’s business is closely linked to housing construction in The Netherlands and the housing market in general. A healthy housing market increases the number of housing transactions, which stimulates prices and building activity for new houses, renovations and transformations (e.g. from office buildings to houses).

After the financial crisis, the Dutch housing market went through a crisis. I think average prices dropped around 25% from the top of the market to the bottom. Building activity ground to a halt. Every company that was linked to construction or housing felt the pain. Many companies went bankrupt. The bottom was reached around 2015 and since then, prices have started to recover and building activity has picked up.

The company that was to become TABS Holland felt the pain as well. It wasn’t called TABS Holland before 2015 though, the company was doing business as PontMeyer at the time. Revenues dropped from north of €400m in 2007 to €264m in 2013. Operating profits dropped from ~€19m in 2007 to just €2.3m in 2013. There were a couple of small losses in some of the years in between as well.

HAL: majority shareholder

One important aspect of TABS Holland is its shareholder structure. The majority shareholder is HAL Trust (AMS:HAL), which owns 78.1% of the outstanding shares. They have held this position since 1999. Based on some discussion with other shareholders, I think the management owns around 6.5% and there are one or two other larger shareholders. All the other small investors collectively own around 3%.

HAL (website) is a very interesting family owned company. It is majority owned by the Van der Vorm family. HAL is their investment vehicle and they are a long term, value oriented investors. If you take a look at a long term graph of HAL’s stock price, you’ll see that they have been very successful. I don’t think TABS Holland has been a successful investment for them for a long time. The company had pretty poor results in the early 2000’s, I believe due to a weak construction market. Then a few decent years from 2006-2008, but after that a very depressed market. Only in the last two years has business been looking up again.

HAL managed to increase their investment in PontMeyer in two stock emissions in 2014 and 2015 at €6.52 per share. By then PontMeyer’s stock had already been deleted from the “incourante markt” of the Amsterdam Stock Exchange. The incourante markt was closed by the Amsterdam Stock Exchange in 2010. It was a section of the market that only held six (illiquid) stocks. The NPEX listing was suggested as an alternative listing. PontMeyer decided to list on this platform.

Purchase of Deli Building Supplies

PontMeyer became TABS Holland in 2015 after a transformative acquisition took place. The proceeds from the stock emissions, combined with a loan, funded the €47.9m acquisition of Deli Building Supplies (DBS). The acquisition closed in September, 2015 and the combined company was renamed TABS Holland. Deli Building Supplies is in the same business as PontMeyer and PontMeyer’s CEO, Anne Schouten, previously had a management role at Deli.

I don’t have any firsthand numbers about Deli’s performance before the acquisition. I have had contact with another shareholder and he mentioned that Deli’s net income for the years 2013 – 2015 was €2.9m, €4.8m and €4.7m respectively. I think they made a pretty good deal with Deli, because business was very depressed in these years. DBS was owned by two private equity firms, Avedon Capital and NPM Capital, who were looking to exit. The building supplies segment of Deli Maatschappij was a relatively small, cyclical and less profitable part of Deli Maatschappij.

I think the wish to cash out and the less attractive nature of the building supplies part of the business allowed PontMeyer to make a very good deal. HAL’s 2016 annual report notes that the positive effect of the acquisition of DBS on TABS Holland’s operating income was €9m, which also looks very favorable compared to the purchase price.

After the takeover, the combined company has roughly doubled and has revenue of €650m and around 1,500 employees. The Deli and PontMeyer companies have kept their own trade names in the market and they remain competitors. Synergies were achieved in purchasing, IT, logistics and the back-office.

TABS Holland results for 2016

The year 2016 showed the first full year of DBS ownership. Revenue was €650m and net income was €28.3m. In 2015, revenue was €422m with net income of €15.4, but this included just three months of Deli ownership.

TABS Holland’s benefited from the recovery of the Dutch construction market and was able to realize synergies from the Deli takeover. The near term prospects for the construction market are positive as well:

Het aantal faillissementen nam af. De vooruitzichten voor 2017 en 2018 zijn eveneens gunstig. Volgens de meest recente rapportage van het Economisch Instituut voor de Bouw blijft de woningbouw in deze periode de belangrijkste groeisector en de groei trekt geleidelijk ook aan bij de utiliteitsbouw en de infrastructuur. Op middellange termijn (2019-2022) kan de bouwsector een solide groei realiseren van gemiddeld 2% per jaar. Het productieniveau komt dan weer boven het niveau te liggen van voor de crisis.

Cash generation was strong. Cash from operating activities was €41.0m and capex was €5.1m, giving free cash flow of €35.9m for 2016. For 2015, free cash flow was €17.2m. There were no major working capital movements that were impacting the operating cash flow.

The results for the first half of 2017 showed a modest improvement over H1 2016.

Valuation

TABS Holland has 6,768,303 shares outstanding. The last few trades on the NPEX platform were around €28.60, giving the company a market cap of €193.6m.

Here are some current multiples of earnings and cash flow:

Net income, 2016: €28.3m
P/E: 6.8x
Free cash flow, 2016: €35.9m
P/FCF: 5.4x
Enterprise value: €284m (based on year-end 2016 financials, should be lower now due to debt repayments)
EBITDA, 2016: €48.2m -> €41.1m (EBIT or “Netto-omzetresultaat”) + €7.1m (deprecation & amortization)
EV/EBITDA: 5.9x
EV/FCF: 7.9x

This looks pretty cheap to me. It should be noted that this is a cyclical business and if the construction market has a downturn again, earnings will go down significantly. As such, I think a company like TABS Holland doesn’t deserve a very rich earnings multiple. At less than 7x earnings it looks too cheap though. Given that the Dutch construction market just went through a severe downturn, I don’t think a downturn is likely in the near future.

Will HAL sell or IPO the company?

I’m also treating TABS Holland somewhat as a special situation investment. Minority shareholders are riding along HAL’s coattails with an investment in TABS. My theory is that HAL will be looking to monetize their stake in the company in the next few years. They’ve held their position since the late nineties and the business went through a couple of big downturns.

I think the company is going to realize some more efficiencies over the next couple of years. They can then present the improved results of a now much larger business, to either take the company public again, or sell the company. I don’t think HAL is going to wait until the next downturn hits and ride out another full cycle. HAL took a somewhat similar approach with Grandvision NV (AMS:GVNV), which they put together by buying up optical retail chains and then IPO’ing them in 2015.

It should be noted that TABS Holland is a very small investment for HAL. They have been actively managing this investment though: HAL has someone on the board of directors and it has participated in the stock emissions that allowed TABS Holland to buy Deli Building Supplies. So even though it won’t move the needle much for them, that doesn’t mean they don’t want the value of their investment in TABS Holland to grow.

If HAL does decide to IPO the company or sell it to a competitor or another investor, I think they’ll be able to get a lot more than ~7x earnings for the company. I think there is a decent chance that this scenario will unfold.

It’s also possible HAL will take a much longer term approach and that they will make more acquisitions in the future. I think this is not as likely, because the building supplies business just isn’t that great a business. Additional acquisitions aren’t going to give you much more scale in this very fragmented industry and it won’t change the cyclical nature of the business either.

Trading on NPEX

I’ve painstakingly built my position in TABS Holland. The NPEX platform has a strange trade system that only allows buyers and sellers to trade once a week. A seller can offer a certain number of shares and set a minimum price. Buyers are able to make bids throughout the week, but the deadline is always at noon on Thursday.

This means that everyone tends to wait until the very last seconds before the deadline passes, before making a bid. This is not a very good system at all for determining a fair price for the shares. I think this is a major reason why shares are trading at these low levels. The current offer of TABS Holland shares can be found here.

I’ve lost several bids in the last few seconds, because someone was able to sneak in another bid. It’s pretty frustrating, but I think this is what creates the bargain in the first place. This is also the main reason I didn’t write up the company earlier. A couple of extra competitors in this sort of bidding process are very unwelcome when you’re trying to build a position.

To make matters worse, the trading on NPEX is set to stop on November 18, 2017. NPEX has had conversations with the AFM (the Dutch “SEC”) and they’ve concluded that the current trading system isn’t suitable for the future. NPEX expects substantial growth in financing transactions, because the guidelines for requiring a prospectus from the AFM are being eased. NPEX’s current platform isn’t really up to standard to handle this growth.

This means that soon it won’t be possible to trade stocks anymore on the current platform. I’ve read elsewhere that NPEX is looking to license a different platform that has an actual order book and increased transparency. I think NPEX will be able to find another solution, but it probably means that it is impossible to trade TABS Holland shares for some time after November 18. NPEX has said that dividends will be collected and paid out, so that shouldn’t cause a problem.

Conclusion

I think TABS Holland is probably the cheapest Dutch stock out there. Compared to current opportunities in other countries, the company also looks attractive to me. There is a decent chance that HAL will sell or IPO the company in the next few years and that minority investors will be able to profit alongside them. A near term catalyst could be the possible introduction of a new trading platform with an actual order book on NPEX. This could allow the shares to trade at more reasonable levels.

That said, liquidity is terrible and trading is likely going to stop completely for at least some time. The business is cyclical as well. TABS Holland is certainly not a high quality compounder that I’d want to make a large part of my portfolio. I do think that, given the low valuation and HAL’s involvement, TABS Holland warrants a place in my portfolio.

More information:

• TABS Holland: Annual Reports and documents
• Presentation by CEO Anne Schouten in 2012 (in Dutch): this was still during the downturn
• (PDF) Interview with René Olsthoorn (CFO) from September, 2014.
• Forum-topic on IEX.nl

Disclosure: long TABS Holland