A Snapshot (2)

By Gotham Insights Team

Grupo Empresarial San José, S.A.

20-January-2020
Content

1. The investment opportunity .................................................................................................... 1

2. Introduction ............................................................................................................................. 2

3. Methodology ............................................................................................................................ 2

4. Description of gsj’s core business ............................................................................................ 3

5. Other assets ............................................................................................................................. 4

5.1 DCN .................................................................................................................................... 4

5.2 La Tablada .......................................................................................................................... 5

5.3 Carlos Casado ..................................................................................................................... 6

5.4 Tax Credit ........................................................................................................................... 6

5.5 Others ................................................................................................................................ 6

6. Valuation of parts (€ million).................................................................................................... 7

7. Shareholders and stock market data: ..................................................................................... 8

8. Disclaimer ................................................................................................................................. 9
1. The investment opportunity

1. - Grupo Empresarial San Jose (GSJ) is a company highly undervalued unknown to the
market:
• The Company is very easy to analyse given its sector and size but there are no analyst
reports.
• It does not make presentations to investors and analysts and does not publish its
strategic plans. It simply fulfils the obligation to publish the quarterly results.

2. - A key transaction has recently taken place that has increased the attractiveness of the
company and its balance sheet and it is not well known by the market.
• On 31-10 2019 GSJ sold to Merlin (MRL.MC) 14.5% of DCN, receiving 169 MM€ and a
loan of 86 MM€ with a 20-year bullet maturity at 2% interest.
• This operation allows the company to cancel all syndicated debt from the restructuring
of 2014 and a 114 MM participative loan.
• GSJ will save annually €10 million on financial expenses.

3. - Company undervalued with an optimal return-risk situation:

• Stable and mature sector.
• Company reasonable diversified with strong free cash flow. As a result solid cash
position with no debt.
• Business model well managed and conservative with significant improvement in the
quality of P&L for the coming years.
• Net income and EBITDA growing above 35% during 2019.
• In addition, there are in the balance sheet hidden assets.
• There are assets specially DCN with high development potential.

4. - Multiple options to reduce the gap between the fair value and the market value:
• Ease of making it known to the market.
• Company communicating its situation and presenting their Strategic Plan.
• Purchase and amortization of treasury stock.
• Dividend payment.

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2. Introduction
Grupo Empresarial San José, SA (GSJ) is a diversified Spanish Company founded in 1961, with
businesses that include construction, real estate development, agriculture and energy. GSJ has
been listed on the Spanish stock market since 2009, following the completion of the takeover
of the then listed company, Parquesol Real Estate. As a result of that takeover and the
subsequent collapse of the Spanish property market, GSJ fell into severe financial difficulties.
The Company was restructured in 2014, when creditors assumed Parquesol’s assets and debt.

On 31-10 2019 GSJ sold to Merlin (MRL.MC) 14.5% of DCN, receiving 169 MM€ and a loan of
86 MM€ with a 20-year bullet maturity at 2% interest. This operation allows the company to
cancel all syndicated debt from the restructuring of 2014 and a 114 MM participative loan.

Perhaps not surprisingly given the group’s low capitalization, and the fact that only a minority
of its shares (30%) are held in the free float, there is no market research on GSJ and the
company seldom issues information about itself. As a result, the group’s activities are poorly
understood and the improvement in its financial position and prospects has gone largely
unnoticed. This document describes GSJ’s main business interests and assets and values them
accordingly. The conclusion is that the company it is undervalued by between 60 and 80%. As
of the 17-1-2020 GSJ´s shares were trading at €5.70 and our sum of the parts valuation shows
€15 per share.

3. Methodology
There are two distinct parts to GSJ’s business: the core business, which we value according to
EV/EBITDA multiples, and a range of other assets (described below), valued most important at
a conservative market price or book value, excluding analysing its potential value.

Sources: public information, CNMV, Grupo San José Annual Reports

(2014,2015,2016,2017,2018), GSJ General shareholders meetings insights, Mazard's
construction sector reports.
https://www.cnmv.es/portal/Consultas/DatosEntidad.aspx?nif=A-36046993
https://www.grupo-sanjose.com/english/
https://www.cnmv.es/AUDITA/2018/17879_en.pdf

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4. Description of GSJ’s core business

Construction. Construction is GSJ’s principal activity, accounting for 89% of revenues in the
construction business overall and 67% of EBITDA. Half of these revenues are generated
domestically and half internationally, in Germany, France, Portugal, Romania, Malta,
Argentina, Chile, Peru, Colombia, Mexico, Panama, Paraguay, Uruguay, the United States,
India, Timor, Cape Verde and the United Arab Emirates. Around 90% of activities are focused
on the most profitable segments of the market – residential and non-residential construction
in the private sector. In the three years to end-2018, revenues grew at an average annual rate
of 12%, boosting profit ratios. In the nine months to end-September 2019, it is growing at
38.7%.

Real estate and urban development. Historically an important business line for GSJ, revenues
fell between 2015 and end-2018 as the company focused its attention elsewhere after
restructuring. Now, however, GSJ is reviving this business with the development of 1,100
homes at the Nuevavista Condominium in Lima, Peru. GSJ has previously developed homes in
the same district, and is thus familiar with the potential profit margins of around 35%. Given
these margins, we believe the further development of GSJ’s real estate and urban
development business will be an important driver of the group’s EBITDA growth. At end-2018,
it owned 4,783,276 m2 of land, 27% of which qualified as buildable. Of this area, 723,140 m2
are in Spain, 20,000 m2 are in Peru, 3,000,000 m2 are in Portugal and 1,000,000 m2 are in
Argentina.

The GSJ board commissions annually an independent valuation of its land inventory and
property investments. At end-2018, these were estimated to be worth €103 million more than
the book value, indicating a latent capital gain of €105 million. (Note these figures exclude the
DCN stake, discussed later)

Energy. This accounts for 1% of revenues. It is a stable and profitable business, with an average
EBITDA margin of 32 % over the past years.

Concessions and services. This business accounts for 5,4% of the construction business’s
overall revenues.

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 CORE BUSINESS FIGURES

2015 2016 2017 2018 2019(*) 2019(**)

SALES 536 613 682 758 688 980
EBITDA 43 45 46 52 44 63
OPERATING CASH FLOW 43 75 23 85 N.A. 190

(*) reported 30-9-2019 (Backlog 1,898 MM) /(**) estimated 31-12-2019 (will be
reported at the end of February 2020)

5. Other assets
Besides its construction activities, GSJ has a number of what can be regarded as hidden assets,
as there is no market research on them. Several have significant value- creation potential.

5.1 DCN

Property developer, has the option to buy and develop 60% of the land earmarked for Madrid
Puerta Norte, the biggest real estate development in Europe today and similar in ambition to
La Défense in Paris in the 1960s, Canary Wharf in London in the 1980s and, more recently,
Potsdamer Platz in Berlin. Plans for the 2,680 million-m2 sites include residential buildings,
commercial buildings and a new railway station for fast connections to Madrid airport and
other Spanish cities. The area covered by DCN’s option includes the prime site, next to the
Chamartin railway station, designated for a new financial district. GSJ has a 10% stake in DCN
and the option to acquire a further 2.5%. The remaining 90% of shares are owned by banking
group BBVA (75.5%) and MERLIN PROPERTIES (14.5%), who is bidding to buy another 25-30%
from BBVA when definitely approved by the Comunidad de Madrid Board.

Initial approval took place on July 31th 2019 by the City Board. Thereafter, the final approval
process is likely to take another four to five weeks to complete from today. DCN will exercise
its option to buy and develop the site.

In addition, GSJ will be the Industrial partner of Merlin and BBVA, giving its core business huge
growth potential over the next 15 years.

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DCN key figures:
• Total investment €6.8 billion
• Total income expected €16 billion

https://distritocastellananorte.com/?lang=en

5.2 La Tablada

La Tablada is a densely populated city in the municipality of La Matanza, which is part of the
Greater Buenos Aires metropolitan area. Here, GSJ owns 1,222,665 m2 of land earmarked for
what will be the largest private urban development scheme in Argentina in the past 50 years –
the Parque Lagos Urban Transformation Project. Some 20,500 new homes will be built, as well
as commercial property.
Existing housing stock (not new-build) in the area, which borders the city’s central districts,
currently fetches more than $1,600/m2, compared with $700/m2 a decade ago. These are the
key figures:

• Plot: 1,222,665 m2
• Constructed residential floor area: 1,635,946 m2
• Constructed commercial floor area: 221,775 m2
• Total constructed surface: 1,857,721 m2

Even the fire-sale value of the company’s land there is currently worth between €50 million
and €100 million. GSJ’s intention is to develop this asset once the economic situation in
Argentina improves, thereby minimizing its financial risk. We are not including the valuation of
this project on our report, just the land.

https://www.grupo-sanjose.com/english/p_PARQUE-LAGOS-TRANSFORMACION-URBANA-LA-
MATANZA--BUENOS-AIRES_8

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5.3 Carlos Casado

Founded in 1909, Carlos Casado is one of Latin America’s foremost agricultural companies,
listed on the Buenos Aires and New York stock exchanges since 1958 and 2009 respectively.
GSJ has been a majority owner of the company since 2007, with a 50.4% holding.

One of its main assets is 220,000 hectares of land in the Chaco region of Paraguay, which
borders Argentina, Bolivia and Brazil. The land is used for cattle rearing (20,000 livestock) and
soybean and corn production (4,000 hectares).

http://www.carloscasadosa.com/en/

5.4 Tax Credit

GSJ has a tax credit of €470 million, arising mainly from losses incurred following the 2014
restructuring. It will therefore make fiscal savings of €118 million in total over the next 15
years.

5.5 Others

GSJ also has a number of less significant assets. These include:

• Comercial Udra. Through various companies – Arserex, Outdoor King, Running King,
Athletic King and Trendy King – Comercial Udra distributes internationally prestigious
sports and fashion labels such as Arena, Teva, Hoka, Diadora, Hunter, Fred Perry and
Dr. Martens.
• Panamerican Mall. Shopping centres in Argentina.
• Other minority interests. These include Bodegas Altanza, SA (wine producer), Unirisco
SCR, SA (venture capital), Filmanova, SA (film production company), Editorial
Ecoprensa, SA (publisher of Spain’s El Economista) and Oryzon Genomics, SA (publicly
traded biotech company).
• 200,000-m2 of land around the new International Buenos Aires Airport “El Palomar”.

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6. Valuation of parts (€ million)
Core business: 7* 2019 EBITDA = €441

7-10 times EBITDA 2019, taken into account it has grown at 36.8 % (income at 34.9%)in the
first 9 months of 2019, stable gross margin of 6.4% from sales, reduced capex (average capex
in the last 5 years is under €10 million), strong free cash flow generation, positive net cash
position, well diversified by customer, by contract size and by geographical area, potential
future growth and sufficiently tested business model.
We assume 7 times as conservative, as average ratios on Europe of quoted construction
companies are well above that ratio (source: Mazars sector reports)

Net debt position: €120 cash

As a result of the deal related above (sale of DCN 14.5% last October 31th)

Tax Credit: €118

The company can recover the total amount due to its recurring benefits and potential capital
gains.

10 % DCN: €180

That is the minimum value as of today, because it is the price that BBVA and Merlin where
negotiating 6 months ago. Several independent analysts value 100 % of DCN between €2,000
and 2,500 million, upon approval in the coming weeks.

Real State assets (excluding DCN): €105

We just include the potential capital gains (according to valuation by independent third party)
on the real state assets vs. book value, which was €125 million at 31-12-2018, as it appears in
the annual report of 2018.
These figures include the effects of the Argentina´s currency devaluation.

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50.4% Carlos Casado: €24

According to last quote on de Buenos Aires stock Exchange (CADO)

We do not include the valuation of the rest of the assets described above; we consider that
they are simply potential upsides and positive surprises.

The sum of the parts we have valued is €988, which means €15,19 per share.

7. Shareholders and stock market data:

Since its listing on the Madrid stock Exchange in 2009, GSJ has had 65.026.083 issued shares.
The main shareholders are:

Jacinto Rey González (Chairman) 48.3%

The Avalos Family (company founders) 20%
Board Members 1%
Free Float 29.7%

Ticker: GSJ.MC
Share price on Jan, 17 €5.70
Market Cap €371
Average daily volume (52 weeks) 120,000

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8. Disclaimer
This document is provided solely in connection with the valuation of GSJ based on the information obtained and
analysed from public sources (CNMV, Group San José Annual Accounts Reports FY14- FY18, GSJ Shareholder
Meetings insights, among others). This document must not be made available or copied in whole or in part to any
other person without its author’s express written permission. For these purposes, its author does undertake to
assume any kind of liability with third parties with regards to the information contained in this document.
This document summarizes the material findings of certain financial analysis conducted by its author regarding GSJ
and, if applicable, its affiliate companies, and it may however from time to time contain certain information on
other companies related to GSJ which should not be considered as falling within the scope of the document.
This document is limited to matters of the information contained and obtained from public sources in compliance
with the laws applicable in the jurisdiction of Spain and does not cover the laws of any other jurisdiction or any
documents, proceedings (judicial or otherwise) or agreements, which may be subject to, or governed by the laws of
other jurisdiction. Our review of any entities or materials not governed by the laws applicable in the
abovementioned jurisdiction has been done with regard of the information contained in public sources.
Consequently, no reliance is given as to our review and findings relating to any entities and materials not governed
by the laws applicable in the jurisdictions of Spain.
For the avoidance of doubt, the information reviewed for the purpose of the issuance of this document include only
that public information specifically obtained from public sources for the purpose of preparing this document, and
do not include any other documents or information relating to GSJ Group made available from time to time to other
person than its author.
Regarding the information obtained for review, we have limited our review to the scope of valuating GSJ and should
not be treated as a recommendation for investing in GSJ nor should be read as extending by implication to any
other matters.
We are not in a position to assess whether the affairs of GSJ and its affiliate companies have been conducted in
accordance with the terms of the documents and public information reviewed, nor are we in a position to comment
on the further commercial or financial implications of such documents.
This document should be read in conjunction for understanding the valuation of GSJ. This document does not
address or purport to address any details, items or matters dealt with in those other reports. To the extend this
document contains or refers to reports, memoranda, opinions or advice from any other person, that person
remains exclusively responsible for the contents of such reports, memoranda, opinions or advice.
This document speaks solely as at the date hereof.
This document is not a legal opinion and accordingly it is not to be taken as expressing any opinion as any legal
matter, value or condition of GSJ and its affiliate companies. This document is also not a recommendation to
potential buyers to proceed to purchase or invest in GSJ and its affiliate companies. This document is based on its
author’s professional experience from a financial perspective and its content may not be correct or accurate, the
decision to proceed with any investment should be a commercial decision from an ultimate buyer to be executed
with its relevant advisors.
This document should not be treated as a substitute for specific financial and/or advice concerning individual
matters, situations or concerns to execute any kind of investment in GSJ.