GCO: Grupo Catalana Occidente - A Secular Compounder at fair price !!
GCO is a very well run family owned (65% insider ownership) insurance business with strong track record of organic & inorganic growth since its listing 25 years back. The business has consistently compounded value at 12%+ CAGR through a combination of book value growth and dividends over every 5 years trailing period for the last 2 decades.
The company has a strong market position and durable moats in both the insurance segments it operates in. It gets 46% of profits from credit insurance segment that is a global oligopoly with a strong moat for the 3 primary incumbents. It’s conservative underwriting culture and strong distribution networks has helped it to deliver strong numbers across economic cycles.
The general short tail nature of the book along with strong market position and robust balance sheet (207% solvency with excess capital) would help GCO to continue compounding value even in a low interest world with an optionality of strong acquisition pipeline if there is a large market dislocation or economic crisis.
For an extremely well run business with a long track record of value creation, the stock is trading at fairly attractive valuations of 1X book and 9.7X earnings. We believe that shareholders can expect long term compounding of 10%+ euro returns in GCO at current market price.
GCO has two broad well-run insurance segments: Traditional Insurance (58.5%) and Credit Insurance (41.5%).
The company’s traditional business is primarily providing short tail P&C insurance and life savings products in Spain. The company has been continuously acquiring small bolt-on opportunities to expand the traditional segments that it operates in Spain.
Credit insurance (Atradius) is a well diversified global insurance operation. It is the global No:2 leader in this niche space. At a broader level, we believe that the traditional Spanish business is less moaty but is also less cyclical when compared with credit insurance.
On the traditional insurance side, there is still a lot of scope for market share gains through both organic and inorganic growth. While the company might not be the largest in the traditional business segments, but it's one of the most profitable because of good cost discipline on operating and underwriting.
The management team has a good long track record of smart capital allocation and inorganic growth through prudent acquisitions.
The management team took advantage of the crisis in 2008, by consolidating Atradius. With a balance sheet that has excess capital, it is well positioned to do something similar if such a crisis emerges back. Historically, the firm has been disciplined on both the acquisition cost and the operations of the newly acquired bolt-on businesses. There are enough weak players in the market to be consolidated going forward as well.
The pre-synergy multiples that GCO paid in its latest acquisitions of traditional insurance companies in Spain are: Seguros Bilbao (3.08x P/BV, 15.6x PE and an initial ROIC of 6.4%), Previsora Bilbaina (2.14x BV, 14.7x PE and an initial ROIC of 6.8%) and Antares (1.22x P/BV, 14.9x PE and an initial ROIC of 6.7%).
The company has been able to maintain ROE’s at 12%+ despite these low initial ROIC acquisitions because of the value creation post acquisition through cost synergies and better operations. This strong operational experience will be a tremendous asset for future acquisitions as well.
The company has delivered consistent shareholder value creation. The Book Value per share has grown from 1.34 Euros/ share in 1994 to 29 Euros/ Share now at a compounded rate of around 13%. Even if someone had invested at the peak of the Spanish or global bull market pre-GFC, the book value per share has grown from 8.95 Euros/ Share in 2007 end to 29 Euros/ Share now.
For reference, the Spanish equity index IBEX 35 is still down over 40% from the pre-GFC peak. So, the book value compounding has happened despite a very weak equity market and a depressed economy that had to endure a tough decade.
The firm is guided by long term thinking family owners. The total outstanding shares in 1994 during listing was 118.4 Million and the current share count is 119. The firm has grown without diluting the existing shareholders. The total insider ownership of shares were 76.8 Million shares in 1994 and 77 Million shares currently. The family hasn’t sold a single share throughout this wealth creation period, indicating their long term commitment to the business. Insiders together hold 65.3% of the total shares of the firm.
The Serra family have built a conservative and long term thinking culture within the firm. The family had also instituted proper councils for successional planning for working with professional executive management teams. The next generation of the family is involved in the business as well.
GCO - Credit Insurance Business (Atradius) :
Premiums usually vary between 0.25% to 0.35% of the total receivables of the insured firm. This 35 basis points of costs is paid back to the firm through lower financing/ factoring costs and increased sales potential. Hence, there is a tremendous value add to clients through credit insurance. A credit insurance business creates value through risk monitoring, bad debt collection and informational services. There are tremendous advantages of pooling risk together as no single firm can potentially diversify the way a credit insurance firm does.