When larger shareholders take money in the till, flee – the Uponor example.

Bonjour,

Today I will have a look at Uponor, where I think there is a significant risk of business and market underperformance.

The key reason: the main shareholders have taken so much cash out of the business for their other ventures that Uponor’s is now bloodless.

Who are Uponor? According to their website, they are a leading international provider of plumbing and indoor climate systems for the residential and commercial building markets. In the Nordic countries, Uponor is also a prominent supplier of pipe systems for the utility infrastructures.

=> They do plastic pipes and heating.

The company is dependent on the construction cycle, on the competitive landscape and on raw material prices (PVC plastic mainly). It has no particular pricing power.

In the current environment, it is suffering from a triple hammer blow:

-          Competitors are integrating vertically with ethylene manufacturers. For instance, Wavin (Dutch rival) was bought by Mexichem. This will reinforce pricing pressures.

-          Plastic prices are stubbornly high and do not show signs of falling even if the oil price recedes somewhat.

-          Construction activity in Western Europe is poor albeit moderately improving.

For that package, the valuation is assuming some cyclical recovery:

-          20x 2013e PE, 15.5x 2014e PE, 13.6x and 10.6x EV/Ebit for 13e and 14e.

-          Dividend yield is expected at 3.5% and net debt/Ebitda is around 1x.

What is the problem then? 

It comes from the largest holders: Oras Invest.

Controlled by the Paasikivi brothers, Oras bought in 1998 into Uponor and have extracted already as much in dividends as they paid for the company then.

Those dividends have been used to ramp up their stake into Kemira, the Finnish chemical champion and force it to spin-off its jewel: Tikkurila.

This would not have been a problem at all if Uponor generated enough internal cash to afford investing in the business and dividends.

However, Uponor could not do both and it has been looted by its main holders.

Figures tell the damage: capex/sales is half what the competition spends and equity has dropped from nearly €550 to €211m in 10 years, i.e. half the annual dividend then paid roughly.

The lack of investment has prevented them from moving up the value chain.

If you take a look at Geberit, they have been spending nearly 2pp more in relation to sales and have managed to enrich their core product, hereby helping margins and cash-flows.

The consequence is that the dividend has fallen by 22% pa in the last 5 years as Uponor cannot continue to keep paying dividends and invest in the business.

Now the key risk for the shareholders is that Uponor stop paying dividends to reinvest in the core business and be able to take market share in the competitive market.

With a valuation suggesting a decent recovery scenario (10% sales growth in 2013 and 15% in 2014e) and the risk of dividend cut, I would bail.

Lesson: watch out whether the main holders are not extracting too much as dividends.