This week
On Tuesday, the lesson in our Introduction to Value Investing series was published: Lesson 17- Why your stocks won’t make you rich
While a lot is happening in the world, things have been relatively quiet when it comes to news about our companies.
This week, a brief update from: Brederode, Sofina, and Somero Enterprises.
Doing the Math
Sometimes it feels a bit strange to focus solely on writing about companies when so much is happening in the world. So many moving parts make valuing businesses quite a challenge.
Take the fact that the stock market barely reacted to the ongoing war between Israel and Iran — a conflict that could easily escalate and pull the rest of the world into it. And that’s on top of the war in Ukraine, which shows no signs of ending. Let’s not even get started on the other 43 armed conflicts (according to former Prime Minister Leterme, there are 45 globally) that receive little to no media attention.
Admittedly, most of these conflicts won’t materially impact corporate profits. Only the war in Ukraine — which caused Europe to stop buying Russian gas — has had a significant effect on the profitability of European industry.
So perhaps the market isn’t wrong to respond only mildly, choosing to do the math instead of acting emotionally. Hopefully, we're not miscalculating the long-term impact.
The EBITDA Concept
The Flemish government recently invested in Brussels Airport. According to the minister’s report, they paid 24 times the EBITDA. Based on the 2024 financials, that number might even be 30 times. So either EBITDA has suddenly skyrocketed, or the minister isn’t calculating based on Enterprise Value (which includes debt). But even if you take EBITDA…
This perfectly illustrates why I don't want the government as a shareholder or partner in any of the companies I own. Economic thinking or basic math just isn’t their thing. Everything revolves around political motives and party goals. The fact that the public has to foot the bill — and will be left with a financial hangover — is just a footnote to them.
Let’s go back to basics: paying 24 times EBITDA is too much in 98% of cases. The remaining 2% are exceptional growth companies. Brussels Airport isn’t one. Over the past ten years, it grew by 3.8% annually — about the same as inflation over that period. Understandable, since its growth is naturally limited to the number of flights the airport can handle.
EBITDA stands for Earnings Before Interest, Taxes, Depreciation and Amortization — in other words, profit before interest payments (Brussels Airport has significant debt), taxes, and depreciation. It's a somewhat fictional profit metric, because interest must be paid, taxes unfortunately too, and depreciation exists for a reason: to account for the wear and tear of assets like buildings and runways, which will eventually need to be replaced — and that costs money. That’s why Charlie Munger once called EBITDA “bullshit earnings.”
Compare that with a recent deal: Copenhagen Airport was sold at 14 times EBITDA — less than half the valuation. Publicly listed airports are much cheaper too.
But no worries — to help fund this expensive acquisition, the Flemish government plans to sell part of its stake again, at a profit. Where they’ll find an even bigger fool who’s willing to wait 60 to 70 years — the price-to-earnings ratio is around 78 — to earn their money back, is beyond me.
And the interest the government has to pay on the loan for this deal is higher than the dividends it’ll receive from Brussels Airport. In other words: this will just be another budget expense for years to come.
Try walking into a bank with that business plan. You’ll be back on the street before you know it.
Let Me Complain a Bit More
Since I’m already grumbling, let me continue. The government would be better off investing in financial education and corporate governance oversight in Belgium.
Take Exmar. After a lowball bid that didn’t reach the required threshold, Nicolas Saverys now wants to pay out a special dividend. Shareholders can choose to receive it in cash or in new shares.
Again, a bit of simple math tells you all you need to know. Paying a dividend basically means taking part of the company’s value and handing it to shareholders. It’s a good move if the company has surplus cash that can’t be invested profitably. If the money can be invested with a return, it’s better left in the business — otherwise, investors pay dividend tax (withholding tax), which in Belgium is a hefty 30%. Unless you’re a large shareholder using the EU parent-subsidiary directive.
In this case, 35% of the bid value is being paid out — at least, before tax. Saverys can subscribe to the new shares with 100% of his payout; small investors only 70%, since they still owe the 30% withholding tax.
This is a dirty trick to squeeze out small investors — there's no other way to describe it. Some will sell on the stock exchange to avoid losing 10% of their share’s value. Those who don’t sell will make the taxman happy — and likely end up with nothing. The odds are high that Saverys will then pass the 95% ownership threshold, enabling him to squeeze out the rest at his original offer.
The fact that this is allowed to happen is a disgrace for Belgium and its corporate governance standards.
And the fact that the share price actually went up on news of this dividend just shows how much we need better financial education.
The De Nolf family of Roularta is in a similar situation. After failing to convince investors with a weak offer, they clearly saw Saverys’s trick and decided to copy it.