While SPY may be flat for the year, we are all aware of the absolute chaos that has been happening under the surface of global markets. First the software stocks, then anything with AI risk, and just recently the Iran war has sparked a sell off of international stocks, especially within my area of focus, Asia. With that in mind I want to introduce you all to a company that while being an attractive business in its own right, is also an AI beneficiary and benefits from volatility in global markets: Viel & Cie $VIL.PA. Before I get into this writeup I want to do a quick shoutout to East 72 Dynasty Trust, which is where I first saw this idea presented.
VIL is a holding company with stakes in a few large, European financial institutions. The bulk of their value comes in a 70% majority holding in publicly listed Swiss broker Compagnie Financière Tradition ($CFT). Tradition deals in high barrier OTC markets like money markets, interest rate derivatives, currencies and commodities. We’ll break down the valuation later, but this holding alone is worth more than the current market cap. Additionally to this they have an 81% holding in French online broker Bourse Direct $BSD.PA, along with a 40% interest in SwissLife Banque Privée, a private investment bank that does wealth management and advisory services for high net worth individuals.
I want to focus on their holding in Tradition, as that’s where most of the value will come from. As an interdealer broker, Tradition essentially acts as a middleman between large financial institutions for illiquid, over the counter products such as interest rate derivatives, currencies, money markets and commodities. While these products may be liquid for a retail investor such as you or I, large financial institutions can’t trade size in these markets without moving the markets themselves. Tradition takes these large, complex orders and finds a buyer for them. Tradition doesn’t take a directional bet, instead just taking commission on all orders. This means that Tradition revenue is purely a product of market volumes, and as a result Tradition benefits from periods of high volatility and intense market activity.
I see exposure to Tradition as attractive as it has a strong competitive position and is countercyclical. Tradition operates as the smallest in a big 3 oligopoly in the sector including TP ICAP and BGC group. Tradition has been performing well within this group, being the strongest performing in the last few years as far as growth goes, while currently sporting a very good 30% ROE. Additionally, Tradition should be an AI winner. Their core interdealer brokerage work shouldn’t be at risk to AI automation. Meanwhile their data services division becomes more valuable in a world where AI requires high quality data to build effective models. On the flipside, Tradition is a clear beneficiary of AI driven efficiency gains in areas such as software, support, reporting and compliance. The most attractive aspect of Tradition however is their countercyclicality. In an increasingly volatile market and world, they are a clear beneficiary. As a recent example, while the Iran War saw global markets melting down over a few days, Tradition would have benefited as global institutions rushed to hedge currency positions or buy oil and gas derivatives in the face of the changing environment. This type of countercyclicality is fantastic for portfolio diversification.
The valuation is where this is most interesting, and I think this looks good from a sum-of-the-parts valuations or from a classic cash flow analysis. From a SOTP perspective, VIL’s holding of CFT is worth €1650m alone, vs a €1120m market cap. With a net cash position at the company level this alone makes it very attractive. The 81% holding in $BSD is worth another €209m. Meanwhile Swiss Life is carried at a fair value of €72m and has been consistently profitable, though their recent results weren’t fantastic. Swisslife is currently earning roughly €9m annually making that €72m valuation reasonable. Put this altogether and it’s clear to see why I find the company attractive at a SOTP valuation of €1930m vs €1120m market cap.
That SOTP valuation is nice, but realistically the company isn’t going to be doing anything to realise that value. However, I think the company is still attractive from an earnings and capital return perspective as well. The company is trading at around 9x trailing earnings, which feels far too cheap for a decent quality business. Some comparisons here include $TCAP.L at 12x earnings, $BGC at 30x and $CFT itself at 17x earnings. $TCAP trades so cheap because it’s the legacy player and has been struggling to grow over the past few years, however it is still more expensive than $VIL in spite of that underperformance. There are no capital return worries either. VIL has been a consistent, growing dividend payer, returning €322m in dividends since 2006 while additionally buying back around 18% of shares over the past decade.
As far as management alignment goes, this is a classic, tightly held conglomerate with CEO and Chairman Patrick Combes owning 70% of the company, The company performance has been pretty strong under his watch since taking over in 1979 at the age of 27. According to yahoo finance the company has had a total return CAGR of 24% over the past 35 years. Even going back the last 10 years the CAGR has been 23%, demonstrating outperformance relative to the market over every timeframe. Investors are well aligned with a smart operator in Combes, at an attractive valuation.
A core question I like to ask in all of these writeups is “why is the stock so cheap”. The core reasons here are some of my favourites. The company is an unknown, illiquid conglomerate. The average daily volume over the last 90 days is €220,000, so it would be almost impossible for a large, institutional investor to build a meaningful position here. Meanwhile, there have been very few writeups of VIL that would drive retail investors to own it, along with very little activity around the name on Twitter. As far as the actual risks facing the stock, at this valuation the main concern would be around future market activity. VIL benefits from volatile markets, so a period of consistent market stability would hurt the business and see earnings drop. Additionally, there is competitive risk here with BGC Group building out the FMX Futures Exchange, a standardised, central electronic exchange for US Treasuries and interest rate futures. Currently BGC is gaining market share in these markets, however it’s important to note that the majority (70%) of VIL’s revenue in these segments comes internationally. VIL has deliberately focused on more niche, complex markets that are harder to centralise onto an exchange. BGC is currently focused on stealing market share from much larger competitor CME group in the US treasury market, it’s very easy to see VIL continuing to slide by within their own niches that they dominate. This is evident in last year’s performance where they grew revenue 10% in spite of BGC growing their own market share from 28% to 40%.
With all this in consideration, I find VIL to be one of the most attractive stocks on the market currently. Not only is it at an attractive valuation, but it works as a natural hedge for any portfolio that should outperform during periods of high volatility. With a smart operator at the helm, and clear reasons for the cheap valuation I think this is a classic opportunity for smaller investors to benefit from a liquidity based mispricing. I see a few different ways of playing it. The obvious way is to just own the stock outright, but I could also see the benefit of going long the stock while shorting either $CFT or $TCAP. Shorting CFT would isolate the huge conglomerate discount and hedge out the broader business volatility. Meanwhile shorting TCAP would focus on the valuation difference as it is more expensive in spite of significantly better business performance from VIL. VIL is currently my largest position at 10% of the portfolio, with a 2% short position in CFT and a 1% short position in TCAP to offset it.
Are you sure about the following stats you mention?
According to yahoo finance the company has had a total return CAGR of 24% over the past 35 years.
Thanks for the write-up! One thing I’d challenge, is the discount to NAV. It doesn’t seem particularly meaningful if the core holding CFT was valued closer to peers like TP ICAP. My sense is that CFT’s premium multiple is at least partly driven by Viel’s significant ownership stake. That raises two questions for me: what justifies CFT high multiple relative to peers? And shouldn’t the holding company structure itself warrant a discount? I’m also wondering whether capital allocation at the group level has truly been efficient in recent years.