Isaac Schwartz, “Hidden in Plain Sight”

by Travis Johnson, Stock Gumshoe | April 4, 2014 12:35 pm

These are my notes and instant reactions from a presentation at the Value Investing Congress, the notes below might contain errors, paraphrases, incorrect quotes, or misinterpretations.

Isaac Schwartz is from Robotti and company, and he started by updating us on Kazakhstan and the bank he recommended there last year. Which climbed in price nicely last year, but then collapsed on the Russia/Crimea crisis.

The original argument was that the bank was cheap because Kazakhstan was booming and it brought a bubble that burst — but the fundamentals were excellent.

He thinks that stock is more timely than it was last year (my notes on last year’s presentation are here[1]). Why? Because local Kazakh buyers have been buying back the banks. The biggest bankruptcy in Kazakhstan was sold earlier this year for a billion dollars (cash) to a wealthy investor.

But Halyk is a company you can buy today for 1X book that has a ROE of 20%, it trades in London at HSBK and it has traded down to book — no longer a premium, and it’s still one of the fastest growing countries in the world (projected 12% GDP growth) and has very low banking penetration.

But his new idea is a company “on the ground floor of global growth.”

It’s an old European company, family owned, with good business selling to emerging markets. Global leader, overlooked, at discount to peers, he thinks it can double in five years.

Company is Tarkett (TKTT in Paris), which went public last fall. one of the leading companies in the global flooring industry, the IPO has not done well and it’s smallish, market cap around $4 billion. Price is down by about 20%.

A strong business controlled by a family is a great kind of investment — and they also have private equity involvement, they brought KKR in to provide liquidity to some owners who wanted to sell many years ago but it never put on crazy leverage or lost family control.

The company sells all kinds of flooring, including vinyl and linoleum floors as well as wood, laminate, carpet and specialty sports flooring. They’re not in tile, but are otherwise the most global and diversified flooring company.

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Flooring is highly consolidated globally, segmented for different climates and cultures. It has low price elasticity, pricing is muddied by contractors, and it’s an every-ten-years purchase for people.

He says there is significant demand in Russia and emerging markets.

This company dominates France, Sweden, Russia and trades at a much lower valuation than other flooring firms.

Competitors are owned by many value investors, but the other big flooring companies trade at PEs of 23 or so, Tarkett is around 15.

Tarkett has a powerful position in Russia, with 2/3 share in vinyl, the most popular flooring category. There are large barriers to entry because they have the world’s largest vinyl factory and have spent a decade building a brand and distribution in Russia, they’re the only big global player with a strong presence in Russia.

He says that Russia has 85% home ownership, and lots of that is old Soviet buildings that are “in need of substantial renovation.” That was part of the pitch for the IPO, which excited Robotti but didn’t light a fire for most investors.

So … is it a good time to be selling a product in Russia? he thinks so — flooring is not a discretionary purchase, and Russia has had huge gains in consumer discretionary income over the past decade. He’s not worried about political posturing or Crimea because he thinks it will blow over eventually.

He thinks they will have significant margin improvement — you can’t just win because they are relatively undervalued, because that could persist, but he thinks they have depressed margins compared to their peers and that this is about to change.

They rolled up a dozen companies in the few years up to 2013, and the acquisitions have been very successful and many key managers came from the acquired companies.

They’re doing some factory movement and rejiggering, but they already produce flooring in 16 countries. North America has been a big drag on their business for years because they were an “also ran” player.

In 2012 they bought Tandus, which was extracted from the bankruptcy of Collins & Aikman by Oaktree Capital, who later sold it to Tarkett. This more than doubled their revenue in the US and was a perfect fit — so they now have scale in a country where they were sub-scale and suffering from weak margins.

So now that they have more scale in the US, there’s great opportunity for cross-selling, particularly in the commercial market (their business has been mostly residential in the US).

Along with Berkshire Hathaway’s Shaw, they dominate the sports surfaces business — a small business, highly consolidated, and he thinks there is a rebound needed from recessionary underinvestment.

The reason it’s cheap? Here’s what the “naysayers” say:

Most investors just aren’t looking at the company, he thinks Russia growth can continue and there’s huge pent up demand… and the opportunistic global acquisitions is a good endorsement of management and the family owners. They built up in places where it wasn’t popular to do business, and where other people didn’t want to invest, which will put them in good stead.

They see many possible paths to 50% EBITDA growth in five years. The family did not sell at the IPO when KKR sold some (KKR held for ~7 years), the family bought more from KKR.

I don’t think this one can be traded on the pink sheets just yet and there is no ADR, so the best places to trade would be directly in Paris if you’re interested. Sounds interesting, but I actually think Halyk, the Kazakh bank, is a little more interesting (HSBK for the GDRs in London, also doesn’t have a pink sheets listing that I know of).


Endnotes:
  1. notes on last year’s presentation are here: http://www.stockgumshoe.com/2013/05/grahamanddoddistan-and-kazakh-margin-of-safety/

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