CIR group is an Italian mid-cap holding company with ownership in Sogefi, an automobile parts OEM and KOS, a healthcare group specialising in long-term care. Due to recent divestitures, the holding company is in a net cash position, with a net financial position of €400MM, worth more than 80% of the entire groups market cap.
Investment Thesis
We believe that the market is fundamentally misunderstanding the performance of CIR due to its reporting structure. Sogefi is a cyclical zombie company, which regularly makes losses that wipe out the profits from the healthy KOS group on consolidated statements, leading investors to think CIR as a group is regularly loss-making.
Importantly, under Italian financial laws, CIR group will not be liable for any of Sogefi's losses in the case of insolvency. Meanwhile, KOS is a well-run rapidly expanding long-term care provider with a significant defensible moat, which we believe will continue to do well from the secular tailwinds created by an ageing population in Italy.
Catalysts
The utilisation of the significant cash pile at the holding company, whether as buybacks, dividends (both of which are suspended as a condition of Italian government Covid assistance), or acquisitions should lead to increased scrutiny of the company and better understanding from the markets
The continued performance of KOS will eventually outweigh the negative performance of Sogefi. If Sogefi goes bankrupt, or CIR wholly acquires KOS the simplified ownership and financial reporting will lead to a better understanding from the markets. Management has been focusing on simplifying company structure in recent years, with several divestitures and the elimination of an overly complicated corporate structure.
Risks
Mismanagement. Although the CEO Monica Mondardini is competent and independent, CIR is the family holding company of the DeBenedetti family, who control the board and have 30% ownership, bringing with it obvious perils over minority shareholder protection.
Continued investment in Sogefi. Despite promises made by management and IR against further investment, the implication of CIR investing much of its cash in Sogefi in an attempt to turn it around would be so disastrous that it forms one of the biggest risks.
Valuation
We have assigned a value of € 0 to Sogefi, as we do not feel it has the capability to turn the business around.
Our DCF for KOS suggests a value of € 0.33 /share, or €427MM
When combined with a value of the cash position, we arrive at a roughly 30% margin of safety.