ENA Investment Capital Calls on Ontex Board to Take Immediate Action to Create Shareholder Value
ENA Investment Capital (“ENA”), a long-term, value-oriented investment firm and the second-largest investor in Ontex Group NV (“Ontex” or the “Company”) with a long economic exposure to 14.5% of the Company’s outstanding shares, today sent a letter to Ontex’s Board of Directors.
In the letter, which is being issued publicly for the benefit of all Ontex employees and shareholders, ENA stresses that:
- Ontex has underperformed the BEL 20 index by 39% since its May 2019 Investor Update where, despite high expectations, management failed to communicate an appropriate value creation plan for Ontex, leaving employees and shareholders with vague, confusing and underwhelming targets for 2021. Ontex shares dropped 29% in value in the two days following the event.
- Ontex has underperformed its peers as well as the BEL 20 Index over 1, 2, 3 and 5-year periods, and since its IPO in 2014.
- In light of this chronic underperformance, the Board and management must take the opportunity on 4 March to update its vague and underwhelming May 2019 plan with clear 3-year targets that restore growth and profitability and which also create shareholder value.
The full text of the letter is included in the release below.
The Board of Directors of Ontex Group NV
Korte Keppestraat 21
9320 Erembodegem (Aalst), Belgium
Attn: Chairman Luc Missorten
28 February 2020
Dear Members of the Board:
We are writing to you on behalf of ENA Opportunity Master Fund LP (“ENA”, “we” or “us”). ENA has a long economic exposure to 11.9m shares equivalent to 14.5% of Ontex Group NV’s (“Ontex” or the “Company”) share capital, making us the Company’s second-largest investor.
The upcoming Full Year 2019 Results announcement on 4 March is a crucial value-determinative event and we are writing to clearly express our expectations, which we believe are shared by other investors. In addition to sending this letter directly to you, we are also making it public so that all Ontex shareholders and employees benefit by understanding our position.
During the past year, we have conducted extensive due diligence on Ontex, working with operating partners with decades of industry experience, other industry experts, investment bankers, lawyers, and consultants. As a result, we have based our substantial investment in Ontex on our high conviction in the deep value turnaround opportunity that exists, and our view that there are material leverswithin the control of managementand the Boardof Directors (“Board”) to unlock significant value for shareholders.
As you know, we have been constructively engaging with the management team and the Chairman and have had multiple discussions about the Company’s strategy and its potential, especially in light of the material business and share price underperformance.
A Sustained Period of Shortfalls
Ontex has considerable potential, but strategic missteps and the lack of focus on its core competencies have resulted in Ontex shares underperforming its peers as well as the BEL 20 Index over 1, 2, 3 and 5-year periods (and since its IPO in 2014). The shares currently trade near all-time lows.
- Share underperforming over multiple time periods1
Ontex Relative Total Shareholder Return
Since Ontex IPO
Ontex vs. BEL 20 Index
Ontex vs. EuroStoxx 600
Ontex vs. HPC Peers
We are sure that the chronic underperformance matters not only to us and other institutional investors, but also to the thousands of Ontex employees and the management team. Management, in particular, must be demoralized by owning a substantial number of shares at depressed valuations and having incentive plans which are out-of-the-money at the current share price.
- Margins at lowest levels in 25 years
The well-known strategic mistakes of recent years, such as Brazil, have resulted in EBITDA margins slumping to their lowest levels in 25 years2. Margins are down more than 300bps over the past 4 years3. In addition, EBITDA has not grown since 2015, despite revenues growing 35% (primarily through acquisitions)4.
- Negative organic revenue growth in core business
Organic revenue growth in the core European private label business has been negative for 2 years5. After an organic drop of -2% in 2018, the rate of decline accelerated in 2019 as revenue was lost to competition: organic decline of -6.7% in Q1 2019, -10.0% in Q2 2019 and -6.0% in Q3 2019.
It is evident that the underperformance and the current valuation gap to its peers comes down to the market’s fading confidence in management’s ability to present and execute a plan that capitalizes on and reflects Ontex’s true potential.
Rejecting a Premium Bid Without a Credible Stand-Alone Plan
It has now been approximately 18 months since (a) the approach by Private Equity firm PAI was rejected as it “significantly undervalued the Company”6 and as a result (b) the Company announced the review “to accelerate the delivery of value for the benefit of our shareholders,”7prior to which shares were trading at €24.
It also has been almost one year since the May 2019 Investor Update where management presented its 2018-2021 mid-term plan and the “Transform2Grow” program.
However, in its presentation of the “Transform2Grow” program at the May 2019 Investor Update, management failed to communicate an appropriate value creation plan for Ontex, leaving shareholders with vague, confusing and underwhelming targets for 2021. The resulting share price collapse (down 29% over two days) was a clear indication that investors were doubtful of the plan’s ability to create shareholder value, and it did not justify rejecting the 2018 approach by PAI.
This is also reflected in the downgrade of the average analyst price target for Ontex, dropping to €17 following the Investor Update8, materially below the valuation implied by PAI’s approach. The associated commentary was equally downbeat:
- ABN Amro, 14 May 2019: “Ontex rejected [the non-binding offer from PAI] as management was convinced it could handle things on its own…Ontex’s presented plan…also requires renewed faith in management. The outcome of the strategic plan made us more cautious concerning the latter.”
- Kepler, 9 May 2019:“Despite the size of the one-off costs, management declined to give a breakdown…It only indicated that restructuring, advice and employee incentives are included. This limited level of detail on these costs raises uncertainty and clouds the judgment of future execution of the turnaround plan.”
- Kempen, 10 May 2019: “We deem the Transform2Grow plan as massively underwhelming as it is comprised of over 1,900, mostly small improvements…this plan also does not enhance the much needed robustness against adverse raw material and FX headwinds.”
The Board and management team have the benefit of:
a) A seasoned CEO who over his seven years with the company has seen various raw material cycles and driven the acquisitive growth strategy of the past years;
b) a new CFO who has been on the job for more than one year; and,
c) the experience of implementing over the past year the “Transform2Grow” plan, which was developed with extensive advice and in-house presence by management consultants from McKinsey & Company (at a considerable cost of ~€20m9 out of €240m 2019e EBITDA10).
It would therefore be reasonable for investors to expect that the management team is ready to update its vague and underwhelming May 2019 plan with clear 3-year targets that restore growth, profitability and create shareholder value. With a 125-175bps constant currency margin improvement target, “Transform2Grow” was not such a plan.
Moreover, the management has refused to articulate what gross margins, EBITDA margins and resulting cash generation a business with Ontex’s geographic footprint and product mix (enjoying a combination of high-margin European private label and a basket of emerging market branded businesses with varying margin profiles) should have. The management should lay out the potential and provide a bridge to get there.
Ontex Must Articulate – and Implement – an Updated Strategy Without Delay
The management and the Board must draw a line, overcome the shortcomings of the past and bring together employees and shareholders alike behind a coherent value creation plan.
We urge Ontex to step-up, seize the opportunity, demonstrate confidence and live up to the challenge.
The Board and management team owes this not only to shareholders, but to the many employees at all levels of the organization who have worked hard to create success over the last few turbulent years.
- Update the vague 2021 mid-term targets by providing a new 3-year plan with clear and transparent financial targets for value creation.
- Provide unambiguous 2020 guidance, including quantified absolute financial targets (such as revenue, gross margin, EBITDA, cash generation), to which the management and the Board will be held accountable. We expect such guidance to be transparent regarding the recent FX developments and the significant positive raw material tailwinds and not repeating the mistake of prior years by giving a vague and confusing outlook. We know that raw material prices have dropped substantially (fluff pulp prices were down 19% in 201911) which was positively reflected in the results and outlooks of several of your peers.
We cannot stress enough the importance of what management communicates at the Full Year 2019 results announcement and the opportunity afforded by this communication. The Board and management cannot fail again.
As always, we remain open to continuing a constructive dialogue and look forward to discussing the results and the expected updated targets with both the management and the Board and comparing with our own expectations and thoughts about creating equity value.
1 Market data as of 26 February 2020. Peer group average as defined by equity research analysts (e.g. JPMorgan, UBS) covering Ontex, including European HPC companies Unilever, L’Oréal, Reckitt Benckiser, Henkel, Beiersdorf, Essity and US category peers Kimberly-Clark and Procter & Gamble. Total shareholder return per Bloomberg includes dividends reinvested.
2 With the only exception of 2008 (during the financial crisis). Statement refers to 2019e EBITDA margin per 31 January 2020 company-compiled consensus, pre IFRS-16 adjustments for comparison. 2002-2007 revenue and EBITDA sourced from press articles.
3 2019e EBITDA margin per 31 January 2020 company-compiled consensus relative to 2015a, adjusting for the impact of IFRS-16 for comparison.
4 2019e estimates per 31 January 2020 company-compiled consensus relative to 2015a. 2019e EBITDA estimate of €240m less €30m of IFRS-16 lease impact for comparison, in line with 2018 impact.
5 Mature Market Retail division had -1.8% organic growth in FY’18, the Europe division had -7.6% in 9M’19 and is expected to report -6.5% organic growth in FY’19 as per the 31 January 2020 company-compiled consensus.
6 Ontex press release, 6 July 2018. “Ontex board of directors has unanimously rejected [an unsolicited and non-binding proposal from PAI Partners SAS (“PAI”) relating to a possible cash offer for the outstanding shares in Ontex] on the basis that it significantly undervalued the Company.”
7 Ontex press release, 3 September 2018.
8 Average price targets of ABN Amro, Barclays, Bank of America, Credit Suisse, Deutsche Bank, Goldman Sachs, ING, JPMorgan, Kempen, Kepler, Liberum, Morgan Stanley, UBS following the May 2019 Investor Update.
9 Management consultant costs based on ENA estimates.
10 Per company-compiled consensus 31 January 2020.
11 Source: RISI. December 2019 price vs. December 2018.
Charlotte Balbirnie; CBalbirnie@keplercomms.com; +44 7989 528421
Michael Henson; MHenson@keplercomms.com; +44 7551 720441
ENA Investment Capital
firstname.lastname@example.org; +44 2037 720170
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