Future Enterprises Ltd (FEL) : Spin off with lot of hidden value

Let me explain the working again,

675 cr is the lease rental revenues, Opex is 75 cr (half of total standalone opex as per FY17 results), hence EBITDA is 600 cr for just lease rental, EBIT is 45 cr - hence depreciation is EBITDA - EBIT = ~550 cr.

You are right, I did some very simplistic calculation, yours is a better approximation, this means that the calculated yield will go down even further. So if total gross block is 7825 cr and ~90% is lease rental, the company is earning just 600 cr net lease rental which I think is not even 9% but 8%, even lesser.

Yes, in no official release or presentation that I know of, it is mentioned that management guidance is 400-500 cr gross CapEx. You should ask this question to @SecretInvestor since he claims this to be the management guidance. My problem is how come a business whose CapEx requirement is ~1200 cr this year can change overnight to a CapEx requirement of just 400-500 cr. You may even ask this question @shaggyjo who has written a blog on this company.

Please refer to my first post on this : This is exactly my worry, two of the assets (FRL and FLR) have been transferred to promoter group at 1/3rd and 2/3rd of current value within the last 6 months. Whether this is coincidence or something else is open to speculation. But certainly raises red flags in my mind.

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Just got one more piece of detail, got to know from CARE, the credit rating agency of FEL that both FEL and FRL have actually provided full corporate cross guarantees to debt in both the companies. This changes everything one knows about the bonds trading above par because in no way FRL milking FEL by giving it an abysmally low yield of just 8% on the investment made in leaseholds on its behalf is going to affect the bond-holders of FEL. Bondholders’ money is safe and if FEL is not able to provide the same then FRL would be liable and will provide the same. So the unfair related party arrangement between the two companies - which is definitely against the interests of FEL shareholders, given present audited numbers, is not against the interests of FEL bond-holders as they are safeguarded by FRL cash flows and assets.

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@SecretInvestor

Can you point me to the source of this guidance you mention?

Thank you!

@8sarveshg I am still waiting for hard numbers from you as I have asked in my previous post. You seems to have all the data points expect the approx picture of how FEL’s balance sheet and P&L statement is going to look after 2 years.

That’s a terrific insight. CARE Ratings in their April 17 report for rating Commercial Papers do say that they have considered combined financials for FEL and FRL for assessment. CARE CP Rating rationale. Brickwork rated them on some of their recent NCDs.

Wow, I think the moves have just started in FEL - Mr. Biyani has given a BSE Notice that he has bought 4 cr worth shares in FEL recently. This obviously speaks volumes and shows how aligned his interests are.

With light of the upcoming Future Supply chain IPO this stocks perhaps looks as good as it did a year ago (the investments have done so well).

People forget that the underlying investments have really appreciated in value since then because of demonitisation and GST as huge tailwinds (Insurance and Supply Chain respectively).

Mr. Biyani seems to acting in the best interests of the company - selling Future Consumer for 500 cr, Future Lifestyle and now the FSC IPO. Then has bought some stock and finally if you look at the AGM resolutions he seems to be broadening the scope of the company - by making this a sourcing co for the group (pls take a look at them). So it really looks like the promoters want to make this a real company.

If we look at the financials of the company:-

1150 cr EBITDA in FY17
this should grow comfortably in FY18 because of the space additions in the Future Group and the expanded scope of operations, I think it will comfortably be more than 15%.

As interesting is the EV.
As of today the Market Cap is 2300 CR
Debt is 5000 CR (March 2017)
Total EV: 7300 CR

Now FEL has sold 480 cr worth Future consumer post the last balance sheet, so we can reduce the EV by 500 cr.

Then there is:-
a 50% holding in Future Generali (which seems to be on sale according to media reports).
Valuing that at (a fair) 1.8x GWP which is a decent discount to other comparable deals.

That gives a value of approx 1700 cr

a holding in Generali Life:-
Unlike General this is not profitable and seems to be much smaller. Yet, with decent growth it is not a bad asset. The last deal was done @ 1550 crore in 2013. With the serious growth + multiple re-rating in the life business since then I think we can safely say it would be worth conservatively 2000 cr (which is fair on an embedded value multiple too)
so their 27% stake would be valued at around 550 cr

Then there is the FSC stake. A 60% stake in a growing business that will be listing soon - this is definitely the joker in the pack as we do not know what it will list at. Assuming it lists at 3000 cr, the stake is worth 1800 cr

If we look at the total of the FCON stake sale + the investments (I’m not applying a holdco discount as FEL very clearly states that they have a monitisation plan for this, unlike a holdco which doesn’t do anything for years…) the Enterprise Value comes to:-

Market Cap (2400 cr)
Debt (4000 cr)
(-) future consumer sale + the holdings

The enterprise value comes to around 2850 cr
If we divide this by the EBITDA calculations from the beginning we get an EV/EBITDA of around 2.1x

However poor the quality of the business is there is if one atleast gives a 5x multiple to this (20% yield!) - there looks like there is something left on the table for us investors.

Disclosure: Entered recently.

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Perfectly summarized why FEL is still a value buy. One point you missed is that Biyani has guided at least 1500Cr EBITDA in FY18 for FEL. General Insurance stake sell is pretty close, Life Insurance stake sell is 18-24 months away.

There is another way to look at FEL. All debt are almost matched by investments, so can safely be ignored in rough calculation. That will give a EV=Mcap, and divide by 1500Cr EBITDA of FY18, it seems a value buy even at cmp.

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Hi DevKohli,

Could you confirm your source where we can see that Mr Biyani has bought 4cr worth shares ?

Actually ended up buying 15 cr worth shares.

Disclosure - Not Invested

Recent Update and a nice article on Future Group Retail Arm on Acquisition Spree.

Future Group Overview.pdf (392.7 KB)

Apart from the numbers - what are the risks to the above hypothesis? @subashnayak_19_ @SecretInvestor?

Capex for half year FY 2018 seems to be close to Rs. 720cr. Do you still trust managements guidance of Rs. 400-500cr of capex per year?

You should read my earlier posts on this topic. I had predicted the probable capex requirement of this business last year. Ofcourse it has increased further this year. Plus one can’t and shouldn’t trust this management is all I can say as far as their guidance goes. I am not saying invest or not in this stock but atleast don’t depend on management guidance for creating your hypothesis on this stock.

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Yes I’ve read your comment. I wanted @SecretInvestor to comment now that more data is available. I’m not privy to the information that was shared at the Analyst meet in May 2016. I’m also not certain on how much of the Rs. 720cr in capex is for maintenance and how much for growth. Rent income has increased by 18% yoy so it can be argued that the excess capex was to increase leasing income. Their margins have also improved for the 9 month period.

Frankly, I don’t have enough information right now to know whether the model makes sense or not. It really comes down to whether maintenance capex is significantly less than the D&A.

Further, as @DevKolhi pointed out - promoters did step up to purchase shares in September when the shares were trading close to todays print.

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SEBI Discloser

Where is FEL investors? Whats ur latest update on the news floating around stake buy of Amazon or Google. ?

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Dont think that FEL would be benefitted in any way as the deal being talked with is FRL and not FEL. FEL continues to be business with extremely poor economics and with no guidance or promise on how capital allocation with take place in the future. Cash generated in FEL, if any, is at the whims and fancies of Mr B with random businesses with no assurity of long term success being put together. Best to stay away in my opinion.

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Its been close to 3 years where @SecretInvestor & others discussed FEL in detail…what would be your thoughts on it now.
Thanks