Yet Another Value Podcast - Redwheel's Shaul Rosten unpacks thesis on French leasing company, Ayvens $AYV.PA

Episode Date: February 19, 2025

Shaul Rosten, Equity Analyst, Global Value at Redwheel, joins the podcast to share his thesis on Ayvens ($AYV.PA), a provider of full-service leasing, flexible subscription services, fleet management and multi-mobility solutions to large international corporates, SMEs, professionals and private individuals.For more information about Redwheel, please visit: https://www.redwheel.com/uk/en/institutional/Chapters:[0:00] Introduction + Episode sponsor: Daloopa[1:39] What is Ayvens and why are they so interesting to Shaul[3:04] What is Shaul seeing with Ayvens that the market is missing[5:46] How do they compete against capital Finco's / understanding the business, how they make money[14:58] Red flags: what's going on with the "big merger" they did (LeasePlan)[23:12] Electric vehicles[28:02] Right to grow right now[32:54] SocGen's 52% ownership[38:29] Regulatory risks[42:20] What could go wrong / what could break Ayvens thesis for Shaul[46:14] Final thoughts: revisiting question - what does Shaul think the market is missing here, how'd they do during the GFC[49:19] Financing businessToday's sponsor: DaloopaEarnings season is hectic—there’s no way around it. But what if you could take back the time you spend on manual model updates? With Daloopa, you can.Daloopa automates your audit and update process, instantly pulling accurate, fundamental data from filings and reports directly into your models. That means no more wasting hours on repetitive tasks. Instead, you can focus on analyzing trends, refining strategies, and staying ahead of the competition.Stop letting manual work slow you down. Set up a free account today by visiting daloopa.com/YAV and see how Daloopa can transform your workflow.

This podcast is sponsored by Delupa. Earning season is hectic. There's no way around it. But what if you could take back the time you spend on manual model updates? With Delupa, you can. Delupa automate your audit and update process, instantly pulling accurate, fundamental data from filings and reports directly into your models. That means no more wasting hours on repetitive tasks.

Instead, you can focus on analyzing trends, refining strategies, and staying ahead of the competition. Stop letting manual work slow you down. Set up a free account today by visiting Delupa.com. slash yavie and see how and see how dilupa can transform your workflow that's the lupa d a l oopa dot com slash y a v all right hello and welcome to the yet another value podcast i'm your host andrew walker mean a lot if you could rate subscribe review wherever you're watching or listening to it with me today i'm happy to have on for the first time though i believe you told me before the podcast it's first time long time uh shall roston from red wheel shell how's it going yeah great

thanks great to be on thanks andrew hey look really appreciate I appreciate you coming on. Before we get started, let's just do a quick disclaimer. Same way I start every podcast. Nothing on this podcast is investing advice. Consult a financial advisor, do your own diligence. That's always true, but you know, we're going to be talking about a French Finco. So, you know, I threw out French, Finco, international.

Everybody should just remember that comes with hiding risk, hiding issues. There's a big owner here who owns about 52%. If I'm reading the filings correctly, I believe you guys are guys are a top 20 shareholder here. So you guys are pretty large in this thing, too. But just remember all that comes with extra work, extra tax, whereas we're not tax advisors, all that sort of stuff. Anyway, Shall, I've rambled. Company we want to talk about today is kind of new. They came out from a merger about two or three years ago now. The company is Avens. They're listed in France. The ticker is

AYV. And I will just pause there and turn it over to you. What is Avens and why are they so interesting? Yeah, sure. Absolutely. Very quickly, before we get into them, just to add for my own compliance purposes, the disclaimer, we're not recommending any investments. There's not investment advice, just talking about the company. Yeah, so Avens, so Avens is a French listed fleet leasing company. So that basically means what they do is they buy cars and they lease them to customers. Typically, that is not individuals like you and I. That is corporates and small businesses. So large corporates like multinational type companies are about 65% of the customer base and small to medium-sized businesses are kind of 25 to 30 with

the balance being kind of individuals around the margins. So that's what they do. That's perfect. So this is, I, I thought it was going to be kind of bored when I was researching this, to be honest. You know, again, Finco, leasing cars and everything. I was actually pretty, pretty interested in them. But we'll hit all of that. I'll give listeners a teaser. 80% of tangible book, ROE is brushing right up against double digits and they think they can get it to 13 to 15%. Pay a 5% to 6% dividend yield because they pay out half of earning. So, you know, a nice little teaser. This is a cheap company that thinks they can improve. I gave that teaser. I want to ask you the same question I start every podcast with. Market is a competitive

place. What are you seeing that you think the market is missing that's presenting this opportunity in Athens? Yeah, I think, as you say, the numbers look attractive, and we'll kind of talk about the attractive upside in a minute. But it is a company where you can kind of understand why there's a lot of pessimism and also not so much attention. So they've talked about in the past. We're not an OEM, and we're not a finance, pure finance company. So in terms of buckets and who looks at them and who covers them, it's kind of half split between people who look at car companies, people look at finance companies that don't fit into a perfect bucket.

That's sort of point number one. Point number two is this company used to be called ALD. It used to be a subsidiary of SOCGen. As you mentioned, Sochgen still owns 52% of the company. And they did a big acquisition in 2022 of their kind of number two rival, a company called lease plan based on the 11th. So it's kind of a new business in terms of what the go forward earnings look like. And that's a bit difficult to unpack. It's a bit difficult to unpack just in general because it's a new business. Lease plan was private. So in terms of historical financial

information, it's a little bit more tricky. But also, since they've done the acquisition, there have been a number of issues that have affected them. Some of them kind of their own issues and some of them, just external issues that they've had to face. So presenting like a pro forma, this is the company today. These are the go-forward earnings. It's been quite difficult to unpack. And I can go through each of those in turn, if that makes sense, in terms of why it's been tricky, what the issues are. But effectively, I think there's a lot of noise around the company, there are potential slight credibility issues. But we think if you take a step back, if you look long-term at the business, the ALD business and the general fleet leasing market,

this is a really high-quality business. It's not just a financial company that yields well and is cheap on a book basis. It's actually a super high quality business. You talked about the return on tangible equity kind of touching double digits. If you look historically, like pre-pandemic, and obviously in the car market from a demand perspective, but also the use car pricing perspective, it's been a mess since the pandemic. But pre-pandemic, this was a business that earned on average about 20% return on equity, not just tangible equity, equity. And in a market where there was substantial growth as well. I mean, the revenue line here grew about 11% annual. pre-pandemic, sort of on a 10-year view.

So it's a growth business with a high return on equity, which is not something you associate with like a French financing company. So that's kind of also an overhang. But we think it's a really high-quality business that can sort of get back to a much more normal historical level of profitability. I'm happy to maybe jump through the issues, if that makes sense now that people have been. Why don't we save the red flags for a second?

I'd love to just start high level just so listeners can understand the business a little bit more. So French leasing company, you know, my first thought when you sent it to me was, oh, I've looked at Hertz, I've looked at Avis, this is leasing to individuals. It's not that, it's leasing to corporates. But I guess the thing that jumps out to me is two things. The two

major things that were jumping out to me is, hey, their big competitors are subsidiaries of large companies. So, you know, I think Toyota is a big competitor or someone, right? So a Toyota captive Finco, and I've read some of your notes, a lot of people who know, like look, all the car

manufacturers in the early 1920s, they had captive Finco's to try to spur demand because these are expensive companies. My first question, how do they compete? Like, how do they earn ROEs of 20% when you're competing against captive Finco's? Because I would think Toyota would be like, hey, you know, to encourage sales of Toyota, we run this business at, you know, absolute cost of capital or maybe slightly lower. So my first question is like, how do they compete against captive Finco's, who are their largest and biggest competitor? Yeah, it's a really good question. And I forgot to mention that as well is one differentiator that they have is their multi-brand. Because they're not a captive, they buy all across brands. So the three biggest in the business, as you mentioned, there's

VW, there's Toyota, and there's Renault, and then sort of down the spectrum, there's some others as well. But they offer their customers, any car brand that you want. So we're not tied to a particular brand. That affects them both in preference, but also in resale value. So they don't take sort of a risk on a particular brand. And that kind of feeds into the business. So when you talked about VW, Toyota in terms of stimulating demand, that is very much something that applies to the individual market, but that is a very small piece of their business. Most of their business is in the corporate market. And in the corporate market, they have the number one share. So VW, Renault, these guys don't touch that market anywhere near in the same size as Avens do.

And the reason is, and we can kind of go into how this affects the revenue line, the reason is it's not just a here's a car, here's some financing, it works out cheaper on a monthly basis, or you can spread your payments. It's also a service business. Let's say you're a big German pharmaceutical companies and you've got a bunch of reps and you need to make sure that they've all got cars or your utility and you have a bunch of commercial vehicles and you need to make sure that they're on the road. You don't just need the cars. Number one, you need advice about which cars to get into kind of total cost of ownership, but you need the services that go along with them. You need the maintenance. You need spare parts. You need replacement

vehicles if something goes wrong. You need insurance. And all of that is something that Avons provide. So it's basically a complete turnkey solution for a large corporate. And that is a very difficult skill set to build. And the scale that they have in that market, they are the number one multi-brand by a long way. The number two competitor in terms of who offers all the different types of brands of car has 1.7 million cars. They've got 3.3. So the gap is big. And that gap, number one, means they can buy cheaper, which means they can pass on cheaper cost to their customers, which their competitors can't do, but also means that they can offer scale. Again, let's say you're that German pharmaceutical, but you need cars across Europe or across the world.

Avins can provide that in a way that the other companies can't really, and they can provide the servicing around it as well. Let me ask you on the servicing. Great point. Something I wanted to hit on. So one of the things with a servicing business like this, and again, it is not the same, but the thing I think about is the rental car companies in the United States, which have obviously been just terrible business, is very difficult.

But theoretically, they should have some mode, right? because they have the entire United States entrenched. They need servicing all over. They need different drop-off locations, everything. And if you and I said, hey, we want to start Andrew and Charles' competitor rental car company, it would be very difficult because, A, we wouldn't get the same price and we bought. But B, spinning up that network and being able to service cars. For these guys, they're across, if I remember correctly, 42 countries with partnerships

in another 16 or something. And it does make sense to me when you say, hey, they're scaled so they get better service. they can cover more. That makes sense, but it makes sense on a national level. And I guess once you start talking international level, like, it does strike me in the U.S., everybody who does car loans, like, they're domestic focus. There's no synergies to do doing card loans in Germany if you're doing in the U.S. Does that international scale really play? Like, if you're the German, if you're a German multinational, do you really need to go to these guys to lease for a cross-year-old business? Or wouldn't it be simpler and easier to just go, hey, here's the number one player

in Germany, here's the number one player in England, here's the number one player in Peru, like wherever you're going. Yeah, absolutely. And to be clear, Avons is the number one player in all of those markets. So in 29 countries, and including all the top European countries, that's France, the UK, Germany, Spain, Italy, and the Netherlands, they are the number one as well. So they are the number one player in those areas. And I'd actually argue that it's easier. If you're a corporation and you kind of have your head office in Germany, you contract with one counterparty and you deal with one person and you have any issues, you deal with them.

and because you're dealing in volume, you get the benefits of doing so. And I think that that does, as you say, it does insulate competition. Because if somebody wants to compete with you in your market, let's say they want to win that. There's a German company that wants to win that German customer. They're going to have to sell them on switching to them, even though they don't have the scale to also offer something in the UK, in France, in the Netherlands. Whereas Avens just has that covered.

And as you say, they have partnerships around. So North America is actually quite a different market because it's more finance. leasing than operating leasing. But they do have a partnership with a company called Wheels. So if you want to have your kind of fleet solutions in the North American market, they can take care of that as well. And they can do Australia, China, Japan, Asia, they've got you covered. We just talked about the services and the potential service margins, which is a really interesting aspect of this, right? Like, if I firmly believe, hey, these guys have scale that nobody can compete, that is difficult to replicate, difficult to compete

with, like, there's a reason for them to earn these well above average ROEs. I guess when I just look at their, they reported Q4 earnings last week, which is why we're talking now. I'm just looking at their thing. And I look at slide nine, gross operating income in Q4, 2004, 713 million EU, 675 of that is from leasing and service margins, and then they've got a little bit of use car. Like, how much of that is from the service versus the leasing, or is it too hard to just pull that out? No, they break it out really nicely. One of the things I think is really commendable about the company is they break out as absolutely much as possible. It's a complex business, so they kind of have to do that to try to simplify the story, but they really do break stuff out.

It's roughly 50-50 historically. In any given year, it varies. But if you look back historically, you take an average, it's about 50-50. With the right way to think about this, like let's say I believe they're going to 15% ROE, with the right way to think about this, actually believe you have a leasing business that is like cost of capital. And then you have a servicing business that is quite high margin, quite stable, really strong ROEs. And then you have them stapled together just because there are some overhead synergies and stuff. But it's like, you know, in my head, the leasing business kind of seems like a cost capital business. So when you say, hey, they used to do 20%, but the service business, I could see how that would be. And because it would be quite low equity

in, so it would be very high margin, very high ROIC. Does that make sense? Or am I just kind of making things up? I think it makes sense. I mean, if you look historically when they've talked about the different parts of the business, they do say that they earn a spread in that margin business as well, in the leasing business. And actually, what they do in terms of revenue, so kind of similar to a bank, they don't necessarily talk about just the interest income. They've got about net interest income. And you think about that as a margin product. So they talk about leasing margin. So the key number to focus on is how much they bring in in terms of the revenue associated just with the lease and not with the servicing. And then the cost underneath that are,

of the cost of financing and the depreciation, which they're sort of offsetting as well. And so they, that is always a positive number. So I think they would argue that that is very much a profitable part of the business as well. Now, it also depends in terms of how you split the equity, because, you know, if you say that the equity is kind of evenly split, then the returns are kind of even across those two businesses. But as you allude to, in reality, probably all the capital is going into the leasing business and the servicing is very capital light,

and so the returns might look different. But given that they aggregate the equity and given that they try to make net income from both of those lines as opposed to just breaking even, I would say they're sort of pretty evenly profitable, I think. This podcast is sponsored by DeLUPA. Earning season is hectic. There's no way around it.

But what if you could take back the time you spend on manual model updates? With Delupa, you can. DeLupa automate your audit and update process. instantly pulling accurate, fundamental data from filings, and reports directly into your models. That means no more wasting hours on repetitive tasks. Instead, you can focus on analyzing trends, refining strategies, and staying ahead of the competition. Stop letting manual work slow you down.

Set up a free account today by visiting dilupa.com slash y-A-V and see how Delupa can transform your workflow. That's Delupa, D-A-O-O-O-P-A-com slash Y-A-V. Perfect. Right. Let's go. I think this will be a nice transition to some of those red flags and stuff. You know, they announced a big merger back in 2022, and I'd love to talk about that merger and everything. I think that will be a good transition to red flags. But I look at this big merger and I say, hey, Shells over here telling me, good business, returns to scale. They do a big merger. The stock's down probably 35% since they announced the big merger. ROE is obviously, you know, you were talking about 20% previously. I said they're guiding to 15% in the future.

So ROE right now is 9%-ish. So I say, hey, they do this big merger that they say he's going to get scales. Their projected returns going forward are lower than he's talking about pre-market and pre-COVID. And they're much lower right now. So I'd say, hey, kind of what's going on with the what's going on with that, right? Like shouldn't this be scaling up? Yeah, exactly. That is the key question.

You look at this business. You look at the historicals and they don't look anything like what they're doing today and what they're saying they're going to do going forward. So it's kind of strange. So I'd say it's two parts. It's the stuff that's relatively within their control. And then it's the stuff that's kind of happened to them from the marketplace. So when they bought the business, the business they bought was lease plan.

And that business, so ALD, which was the former Avens that did the acquisition, had one of the industry best cost to income ratios. It was about 51%. Now, lease plan was about 60%. So part of the acquisition was the acknowledgement that, look, our costs are going to go up, but we're going to get that down. And actually, we're going to realize some significant synergies. And we can talk about the synergies in a little bit, but this is a business where scale really matters. And those synergies are quite mechanical. The argument was we're going to get cost synergies out. We're going to get it down to 47% by 2026. What ended up happening was they announced the deal in 22. To get regulatory approval, they had to basically be hands off, no visibility of lease plan. who was technically still a competitor until they closed the deal in May 23. When they closed the deal, what they discovered was that lease plan had like a big IT project spend, which had massively overrun the budget that ALD was aware of.

So that was kind of, yeah, it's always the way. So that was point number one. Point number two was there had been cost inflation. Obviously, that was a very inflationary period, which had infected in. Lease plan also apparently, according to their Avent's current management, had not been particularly proactive about sort of inflation protecting those contracts. So when you have a services contract and you say, you know, this is going to be the cost of the maintenance of the vehicle and the insurance, if you don't protect yourself and there's

significant inflation, which within the car, motor insurance, certainly in Europe, the motor insurance base, there was huge inflation and they suffered from that. So on the top line and on the cost line, they were suffering. And so what they had to do was come out to the market and say, look, we thought it was going to be 47, but actually we're raising our sort of cost income ratio target for 26 to to 52. So a lot of that cost, they're now going to have to digest. The synergies are going to be, you know, longer tailed in terms of their realization. And that burned them quite badly. So on the day that they made that announcement in September 23, they were down 8%. And they

continued to go down. They went from about 10 euros a share, which is still below book value, but they went from about 10 euros a share to basically around 6 by October. And since then, there's kind of been this credibility issue, all Finco's are black boxes at the end of the day and you have to feel like you understand what management's telling you that they have a good handle on the business and you can believe what they say. And that was an issue for them. And I think that's also fed through into the guidance. They sounded very kind of disappointed that they were going to have to guide that number down. And so since then, I certainly, and I think a couple of other investors have felt that they are basically undershooting what they think

they can actually achieve in 2026 and beyond. So that 13 to 15% are return on tangible equity, which they've talked about in from 26. You know, as I said at the beginning, if they can do that, we think this is wildly undervalued. But actually, I think they're going to do a lot more than that. And if you look at their guidance, so this year they said they were going to do a cost income in 24 of 65 to 67, and they did 63. And actually in Q4, there was 60. So the sort of run rate for the end of the year is significantly below the guidance. And next year they've said they're going to do 57 to 59.

In reality, you know, and bear in mind they're saying 57 to 59 for 25 and for 26 is going to be 52. So that's a big gap. And what I'm kind of reading from that is in reality, they're going to, I expect they were going to undershoot that cost income number this year. They've also got a lot of P&L synergies that are coming through, particularly in 2025 and then 26. So I think there has been a lot of concern about the company. The guidance was kind of muddled. And so what they've done is they've really retrenched in terms of the expectations that they're setting.

The other thing that happened, so that was sort of point one. Point one was lease plan, the acquisition was done, and there was a bunch of costs that they hadn't expected. And so they kind of got burned by that. Number two was the general market. So, as you know, there was a lot of inflation, which hurt the cost, but also as we talked about hurt the kind of servicing margin, but also used car pricing went kind of crazy. Now, that actually benefited them. They made more money from that, but it really hurt the visibility

of earnings. So we talked before about how they've got pro forma earnings. They're a bigger business. Trying to tease out the go-forward earnings is tricky as it is. But what this did was basically changed the depreciation assumption for all the cars that they had. On a cash basis, they were making more money because they were selling cars for more than they assumed they were going to sell them. But what it did was add a significant amount of volatility into the income statement. It boosted the margins. It massively drained the used car sales numbers. And it created a kind of overhang of a stock of this depreciation assumption that they're

going to have to wind down through the used car sales figures. So they're kind of those two factors. What was in their control in terms of the acquisition, which went wrong and they had to change the guidance. And also the market, which just made their earnings fluctuate wildly. And I think it's made people kind of reluctant to put any real faith in the numbers. If I can just hop in with one quick comment, you mentioned the used car. And one of my first things, like when we started playing this podcast, was like, oh, well,

the obvious question I've got to hit him with is use car results. And I was pleasantly surprised. Like, again, look, I looked at the rental car companies pretty in depth last year. And they all got just slaughtered last year. And one of the reason was the used car market in the U.S. sold out. And all these guys went from reporting huge gains to pretty big losses, especially once you're And these guys, you know, I'm just looking at Q4, right? $200 million of used car sales against $160 million of depreciation.

So even though the gains have come way down from the peak, like they're still actually out earning their depreciation. And what I would say was a pretty soft market for used cars. So I think that gives a lot of credits to what you're saying and what they would say, like, hey, we're really good at pricing these. We're conservative. Like, yeah, don't build in the 2022 peak use car profitability into your models forever. but this is not going to be a hurt situation where we're writing off hundreds of millions of cars and like we're just way over water. I don't know if you want to comment on that. You can talk about their culture in this or you can also just say agree. Yeah. No, I think it's a really good point.

And actually, to your point, you know, looking at the rental car companies has been an interesting ride. And yeah, I think one of the, it's the biggest risk for this business is that they keep the cars on the balance sheet. So the residual value risk sits with them. And so that was one of the key things that we were thinking about when we're looking at the company is how they manage that risk over time. All you can effectively do is like, you know, look backwards over the period of time that they've reported publicly and think about have they recorded gains on sale, even if they're small, which they typically are when they sell the cars, which means that they are appropriately reserving. And they pretty much have done by a reasonable margins. So it's about 5% of the value,

the average value of the car that they've been able to sort of record as a gain on sale. So we think that they've been really conservative in those figures over time. And yeah. Oh, no, just having said that, agreeing with that, but I'll just throw another like kind of variable in here. Look, Europe is actually, the Chinese EVs, to my knowledge, are really flooding Europe, which is the core market here. Now, these guys, 40% of their vehicle deliveries in 2024 were EVs or hybrids, if I remember

correctly. But that, you know, that's different than the stock, right? You can take for it U.S., like 10% of sales were EV in 2024, but I think EVs only represent 2% of the car of the car park. So is there residual risk in the worry here of, hey, electric vehicle sales go to 75% in the EU over the next 18 months? And then these guys are suck here saying, oh, 85% of our book is ice and there's no demand, there's no value here. Is there that type of like tail risk here? It's interesting. I thought you were going to go the other way, because actually what they're seeing is there's a very strong sales growth of ice cars, of sorry, of EVVs in Europe, but there's a really strong demand for ice.

So what you're seeing, because of the shortfall of new cars, used car pricing for the ice cars is really strong, and they're still making way more than they typically would do in the ice segment. What I thought you were going to ask, which is sort of the question I'd come back to, is losses on the used EVs. because the used EV market, particularly in Europe, has been really challenging. So they have struggled with that. What they've said are kind of two things. Number one, at the moment, the sort of outsized gains they're making on those used ice vehicles are kind of offsetting the used EVs. That's kind of point number one.

Point number two, they've been much more careful going forward when they're buying those cars. And as you say, the stock and the flow are kind of different. So the 40% is the number of EVs. And that 40% is comprised 27 battery electric, but also 13, like plug-in high. hybrid. So that 40% comes in. But actually, the book today is about 11 to 12% roughly EVs. So what they're doing is they're being much more conservative on the residual value assumptions buying them in. They're demanding guarantees from the OEMs as well when they buy them. So, you know, remember we all saw Tesla. I don't remember which year it was, but they had that issue where they were selling cars and then like the day after they slash the prices 20% and everyone was really irritated, presumably including Evans. So what they've done is they've negotiated, depending on the OEM, six to 12 month guarantee saying if you cut the price of your EVs because you're having trouble shifting them, you reimburse us that difference.

So they kind of protect themselves. It's really crazy. Like I could be wrong. I've never heard of that in an ice vehicle, in an ice company, right? Maybe in the 50s or when these are sold. But I've never heard of them mean like, hey, Ford F150. Yesterday it was 45K. Today, MSRP is 37K.

Now there's all sorts of other discounting something. But it's just kind of interesting that. With ICE, like these companies like, hey, we're really worried that the 20K vehicle we buy today, they're going to be market selling it for 15K. And I don't know. There's no insight there. I just find that very fascinating and really interesting. Yeah.

And it's a great point. And it's a fascinating market as well because it's, there's obviously an element of demand. I mean, I think EVs a great just to drive from an experience perspective. But there's also a lot of demand kind of control, especially in Europe in terms of the policy implementation, so that the feeling of, okay, how much like natural demand is there, how much kind of stimulated demand is there? And obviously, you've got to factor in the kind of Elon Musk factor as well, because he's obviously was a big factor in slashing those prices. The other thing I'd say is because of their scale, so they have this used car like online platform where they

basically sell a lot of their stock. I think it's about 60% of the cars they sell go through that platform. And they go through like dealers, used car dealers all over Europe. And what they can do is they can kind of manage that process so that they can put the cars in the markets where the prices are strongest. So in the Nordic regions, for example, there's actually really strong EV penetration, which means that the used EV values are pretty strong. So what they typically are doing is they're funneling a lot of the used EBs from France, Italy, the UK, where the residual values are lower. They're funneling them into the Nordics or into countries where the values are strongest. And they say that about 50% of the kind of resales are cross-border, which is another

a factor that sort of advantages them as a big scale player with that kind of scale and leverage. You know, I do hear you there, though, I start worrying when you said, like, if I, and I know they're the largest player in a lot of markets. So, but if I was the largest player in the French market, but I was only in the French market, and then there was a global player who was like in all the markets. And I don't feel like it would be an advantage that they could take their EVs to Norway, because I could just, you know, I can sell them in Norway and transport them myself. You know, like, I just don't know if that's as big an edge, but point certainly taken. Let's, another thing here that I think is interesting, they want to grow in 2025, right?

They set on their call, they're resuming growth. I guess I was just a little interested in that, right? Like, their ROEs are at 8 to 9 percent. I would call that about cost of capital territory, right? Now, they think they can get to 13 to 15 percent. You think they can go higher. Their historical returns certainly suggests that. But I was just a little surprised that they said, hey, we're going to resume growth when their ROEs aren't screaming to me right now, we kind of have the right to resume growth, you know?

So I just want to talk about that because your biggest worry in Finco's is, A, Black Box, as you mentioned, and, you know, you wake up the next day and they've taken, hey, we said we had 10 billion of equity. It's actually $3 billion. That's your big story. But your number two is these guys, if they do a 9% ROE, they can grow by 9% every year, right? Your worry is they just keep growing, keep growing, keep growing, feel like they have the God-given right to grow, and there already goes from nine to seven to six, and they can pay themselves more, but shareholder returns to space. So just wanted to ask you about that, do they have the right to grow right now? Yeah, absolutely. It's a great question. And I would say two things. I would sort of amplify your question, first of all, and then I'll try and answer it. So what they've said is they put out a target in 23, that they wanted to have a sort of compounded growth of the earning assets, which obviously drives. the revenue of 6% from 23 to 26, the end of 26. Now, they have undershot that in 23 and 24, but they still put out at the end of this year,

so that was last week, they still put out that target of 6% growth. So what that means is that that growth rate for 25 and 26 is actually going to have to be higher, so more like 7.5% annually, but they've stuck with that. So that's kind of amplifying your question, are they being over-aggressive of growth? Now, they actually have a really long track record of growing, as we've talked about, and growing profitably. So those returns pre-pandemic were consistently strong, even though they grew the fleet substantially. Now, one thing that's been impacting them, apart from all the issues that we've talked about,

is they had a big rival, a French company called Arval, which is owned by, wholly owned by BMP Paribar. So it's sort of the cross-town rival for these guys. And they have been really, really aggressive on growth and really aggressive. on pricing. Avans have talked about the fact that in their sort of key markets, particularly France, they have been had to be really cost competitive, which has affected the margins because Arval has been so aggressive. So a couple of things about that have changed. Number one, Arval has now become a consolidated subsidiary. So before they were like equity accounted for, and now they're consolidated. And what that means is that they're officially regulated by the ECB when they weren't

before, and their capital and the risk weight of the asset book, basically, sits on the BMP Parabar book. So if they grow aggressively and they're super keen on pricing, that is going to affect BMP Parabat in quite a negative way. And so if they are acting, they're already acting in the market, so Avens tell us, and other people seem to say, they're already acting much more rationally on price, which means that Avens feel really confident about their margin target that they've put out of 530 to 550 basis points. As you say, I think it can be higher. Typically, it's been closer to sort of six to 700 basis points. They've even been at 800 in the past. So I think it can be higher. But what they've said is we feel very confident at that

level within the context of growing. So could we earn a higher margin if we kind of stood where we are? Yes, we could. But can we redeploy some of the better pricing that we're seeing in the market into us being more aggressive about going after growth, still earning that. 530 to 550 and compounding our earning asset base at 6%. Yes, we can. And that's what we're going to do. Yeah. That competitor you mentioned, do you know what their ROE is? So they are, they don't publish because they so they yeah. So we don't know. No, it just be really interesting. Like one of the things I love is, you know, Silicon Valley Bank goes bankrupt. And they benefit of pine tide. And I think at the time, a lot of people say, hey, these guys are taking crazy risk. Their pricing was

crazy. And I think the really interesting thing is if you had a, and it doesn't work like this in banking, so it's not completely clear. But if you had a bank that was like the Silicon Valley Bank competitor and every piece of business, it was between them and Silicon Valley Bank and then Silicon Valley Bank goes away, if they had been earning a 12% ROE when Silicon Valley Bank was taking crazy risk and beating them on everything because they were just completely price insensitive, you'd imagine they're going to like 20, 25, 30. It doesn't work quite like that in banking, but I love situations where you have a price insensitive competitor. who gets removed from the market.

So I was wondering about that. Let's go to, you mentioned they've got a competitor who was equity accounted for who's now on the parent's balance sheet, and that's going to matter for regulatory reasons and because B&P Paribas has to now report them in their earnings. And that actually jumps nicely into the other red flags that jump out to me here. First one would be ownership.

Sochgen owns 52%. So I'm guessing they have to consolidate them, which is great. But, you know, I always worry when you say, hey, you've got a Finco where there's a control. shareholder who might not be a thousand percent aligned with you. You know, I could imagine a scenario where German pharmaceutical company who they're about to IPO and they're multinational to say, hey, we need some car leasing company. And Sochgen says, hey, we'll give you a deal on the leasing because, you know, the IPO

business is where the real money is going to be made. So just want to ask about, you know, Sochgen's ownership and kind of the red flags that you might think of there. Yeah, it's a great point. And I think, so the first thing to mention is the Sochgen is locked up. until 26. So in terms of their sort of what the other angle is okay, is they're going to be a huge overhang as they kind of sell down their stake. I think that's not necessarily an issue for the moment. And also they've been a long-term owner. As I say, they've owned the business since

2001. I don't think they're necessarily going anywhere. In terms of their direction, you're 100% right. It's a risk and you've got to think about it. There isn't really a good way to assess that risk other than to listen to what the company tell you and to try to figure out whether you think that they're being straight with you. The line from the company is that we are completely independent, any business that we do. So Stockton does provide about 30%, 25 to 30% of the funding to Avens, which obviously is beneficial to them. But they've said that is all done on an arm's length basis. Everything else is an arm's length basis. We have a completely independent board. We have an independent management team. So the board is quite strongly made up of independent directors.

So you would like to think that there is a vested interest in running this company as a standalone company. Interestingly, it's completely anecdotal. It doesn't really mean anything, but ALD, the form of company, which was sort of 80% owned by SochGen, they had the corporate branding of Sochgen. So they had, that was the same logo just at ALD. So they were kind of quasi-socgen. Now, Avens is a new company. It's got new branding. It's got a new name. It's clearly trying to raise its profile and sell itself as an independent company. So I think the market would be very unhappy if any kind of transaction happened where, you know, as you mentioned, there could be some interference by the parent company.

I think the company have tried to express very clearly that they're an independent company. They've rebranded, they've renamed, they kind of moved away from the Sochgen parent. They still own a big bunch. Could there be some interference? Yes. Do I think that they have shown everything that they could show us to demonstrate that they're going to be an independent company? Also, yes.

So that's kind of where I see it. Speaking of independent companies, Sochgen owns 52%. They used to own 80%. It's coming down over time. Now, that was from a merger that I think they think hope, expect, will give them scale, we'll give them benefits, all that sort of stuff. But, you know, whenever you see a 52% ownership state, you have to wonder, what do you think the end game is for SuckGen?

Because I could imagine, hey, this business has been great, great returns. Let's get it off our balance sheet, you know, the same way GM eventually gets ally, GMCO, whatever it is off their balance sheet. Or you could imagine, hey, we're a big bank. We've got more deposits than we know what to do with. You know what's really fun using 0% cost of capital deposits to fund this, you know, 10, 15, hopefully plus percent ROE business. So how do you kind of look at Sochgen over the long term here?

Yeah, it's a good question. My expectation over the long term is the reason they separated the business is because they are a lower return business. They get a lower multiple. They don't really realize the value of having a great business sitting within them. They want to realize that value, as they say, they did the. So that kind of a lot of it was in in stock. So that diluted them from from 80 to 50. But I think they recognize this is a valuable asset and they'd like the market to recognize the value of that asset. My expectation over time is that they would like to monetize this in the long run. But I think clearly it is currently at 55 percent of book, which for a company that I think they think can earn substantial returns on equity is is way too low in my view. And I think, it's unlikely that they're going to be doing any selling at a price that they think doesn't

reflect the value of the company today. That's kind of my expectation. The question would, the real question, how do you monetize this, right? Because there's not, I, there's not a natural strategic to my mind. It's not really a private equity play because, yeah, I guess they could take, like this is already a Finco, so it's not like there's a leverage play. Yeah. The most natural way might be Sochgen, you know, let's say the ROE's 10% and they've committed to paying 5% out as a dividend, the most likely way it might be take that other 5% and start doing self-tendors at some point, right? And be like, Sochgen's going to tender in for buying back 5% they're going to tender in and then they'll just get cut back and do it over

the course of 15 years. But it's just really hard to see a way because you're not moving a 50% block, but it is very interesting. One more question of risk. You know, I think the other thing that this is not a bank, but these are regulated by the EU. And Maybe it's just my domestic bias coming out. But whenever I hear, hey, Finco regulated by the EU, I'm like, uh-oh. So we just want to talk. Oh, and then on top of that, you've got that. And then you would say, hey, this is a French leasing business regulated by the EU.

And I would have just been like leasing, black box, French, and EU regulations, cool, all past. So just want to ask about that hodgepodge of regulatory risks there. Yeah, 100%. And to be honest, I think it's where you have these situations where you have all these kind of red flags that people just say, okay, I'm not spending any more. time, I'll pass. If you double-click and you spend time, there are opportunities, not always, but sometimes there are. So I think that's kind of a source of the mispricing. I totally agree with you. I think that they're already in a bad place, from my perspective, in terms of regulation. So when you look at, let's say, a mortgage book, you get some relief from the fact that you have

collateral, right? So you have the loans and they have some risk weights, but you have collateral so that kind of reduces your risk weight a little bit. But that's not the case with car leasing. So even know you have a collateralized loan, you kind of get penalized twice. So you get penalized on the risk weight of the assets, but also every time, because there's some volatility involved in the fleet, you get penalized on that as well. And so they've talked about this that actually over time they are pushing the EU. And it's not just them. It's also B&B with Arval and the other operators. And obviously France is a big part of the EU, so pushing the kind of ECB to consider their regulations. They expect over time that they will get additional capital

relief from the review. So I think that it's not a situation, it's not a situation that's going to get worse. If anything, it'll get better. But so that's sort of point number one. Point number two is actually they're applying to Basel 4, which is kind of coming in and is the sort of new updated regulatory regulatory framework for financials is coming in. And they've actually realized some capital relief from that. So they talked about last week that they currently have a CET 1 ratio of 12.6. They target 12. And this is kind of the third aspect I talked about at the beginning of why we think it's interesting, is they've released 70 basis points, sorry, they've added 70 basis points to that ratio by applying some capital relief that

they previously weren't eligible for that's now come in under Basel 4. And what that does is takes their CET 1 from 12.6 to 13.3. But they're happily operating at 12. So they said effectively, and I've spoken to the company since, and they basically said, look, we can grow our risk-wates, risk-weighted assets organically just by being profitable. So we don't need that excess capital to fund our growth, and we are not in the business of holding excess capital. So that additional 1.3%, which on my numbers is about 700 million, they said, you know, maybe 500 to 700 to 700, that is their plan, subject to the board, subject to the ETAB. It's obviously not in writing and it's not definite, but their plan is to return that to shareholders and some form. I presume this year, I don't know, but that is not an insubstantial amount of money for a company that's worth $6 billion. That's like 8 to 12% of the market cap and they might do

a special or they might do a buyback, you know. So that's substantial. I'm laughing because I'm mad because that was my next question. That was kind of where I was. But look, this is what I love. Like, you know, long time listeners will know I've talked about the US thrift banks a lot and a lot of times you'll see them and now they're in a different league, but they'll have 25% set and you'll say, oh, you know, they're, they're kind of trading around book value, but you don't get it. They could return, because they have so much at excess capital, they could return basically their market cap still be overcapitalized. So you'd get the market cap back in a dividend, buyback, whatever you want to call. And then you would still be left with the exact same bank,

but they're just so overcapitalized. And here, like, yeah, I think listeners might think, oh, you know, if they want to be at 12 and they're at 13.3, like, no big deal. That's not, it's like, as you said, on a bank, that's an enormous. mass amount. It's like 10% of their equity cap. So yeah. And if you do a buyback at five times earnings, it's extremely value accretive. That's great. Let's see. We've talked about a lot of the things I wanted to ask here. I guess just the last thing I want to ask is you said it. I love the way you frame it at the beginning. Hey, all Finco's are basically black boxes. So you're kind of shit. What if you and I were sitting here three, five years from now, and we said, hey, this idea

really didn't work. Like, what do you think? I always try to ask, why do you think this didn't work? But here I would be like, what specifically in the black box nature of this leasing business would you point to and say, hey, this went wrong? And it could be anything, right? It could be inflation went to 20% and they didn't have enough inflation protection. Evis took all the ICE vehicles to zero.

What do you think would be the most likely reason outside of, let's just leave like general macro aside, to be honest? Yeah. Yeah, it's a great question. and I think you ask it often on your podcast. I was expecting this one. So I would say it's probably two things. It's one is if they can't get their margin back up to the historical levels that they've talked about. I think that's fairly low risk because they're already basically there.

They've said 530 to 550. They're doing 540. Historically, they've done 600 to 700. I think they can get from between 550 to 600 at least. But if they don't, if the marketplace becomes more competitive than we believe than they believe. and as you say, it's a high return business if a lot of other banks, if a lot of other OEMs really push very hard

to get in particular into the corporate and SME space that they operate in and they push that margin down, that's sort of point number one. Point number two, again, you touched on this, is if the residual values,

which is very blank box, if the residual value reserving is just inadequate and they lose money, hand over fist, particularly on EVs, maybe on ICE as well. But I think ICE

they've got a long track record with EVs, there's a lot more variability. So I'd say those are kind of the two things that if we were sitting here in a year, two years and things are gone wrong, that would be why. And if I remember correctly, the average vehicle that they're kind of leasing and selling, it's like three to four years, right? So, you know, you do worry if you have an asset on your balance sheet, three to four years is a long time and things can really fall apart. But that is a pretty good amount of turn. You're turning over about a third of the book every year versus, I've certainly seen companies, an aircraft lesser, right? You buy an airplane and then you turn it

over every 15 years, 20 years, and airplanes are much stable or demand, but you could imagine worlds where, uh-oh, for some reason, things aren't looking good for aircrafts. It's like, cool, we got rid of 7% of our planes this year. We've got 90, like, with this book, I think it's just nice that the book churns over constantly here. I think that does give you some downside protection there. Yeah, and just jumping in, apologies to throughout on that point, one thing that they've been using as kind of a mitigant for the EV residual value issue is double leasing. So when they get to the end of the sort of four years that they lease them out, they put them out onto the used car lease market. And so they give them another three or four years of lease life, which really kind of

mitigates the residual value risk. And to be able to enable them to do that, they're getting battery guarantees from the OEMs. So they say to the OEMs, this battery and this EV needs to last me at least eight years, and you need to guarantee that. And that way, they can make sure to lease it for another four after the initial four. And that's sort of one way that they try to reduce the churn and stretch the life out and juice a bit more cash

out of their asset, basically. This podcast is sponsored by Delupa. Earning season is hectic. There's no way around it. But what if you could take back the time you spend on manual model updates? With Delupa, you can.

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You've done tons of work here. I think this is a really fascinating idea. Anything you think we should have hit or talked about that you're kind of reminiscent? We didn't? I don't think so. I would say, look at, you know, on all the different places you can look, I think they're very cheap. I think they're cheap based on where they are today.

The book values 13 euros. You know, you include the pandemic, you include them up to today. The average price to book has been about 1.1. So that would give you substantial opportunity. You look on a pre-pandemic basis when life was more normal. They were 1.5 times book. When they bought lease plan, they did that on 1.4. So that alone, from the current earnings base and the current book value, says to me that they're quite cheap.

They've also signaled, as we've talked about, that they're going to grow that earnings asset space, which is going to grow the book value, grow the tangible book. So that adds an element of value as well. And again, I really think they're undershooting the synergies that they're going to do. I think they're undershooting the margins that they can earn here. And so I think there's upside on the earnings as well as that. So that like holistically feels like there are a lot of different ways that this could go either right or really right, but not too far wrong based on the price. To be honest with you, as we've kind of thought about, I asked at the beginning, why do you think the market's missing this?

And the more you've said it, like, I think the real issue here is sock gen owns 52% of this. And it's not that people, I think there is some worried on the corporate governance, but the stock for a company this big and this stable, like if this was America and this was free-flee, It would be in every effing like quality dividend ETF out there. And I think there's a combination of French stock market plus Sochgen owns 52%. And that just, it really limits the buyer base. But I think as you've pointed out, I think it creates a really interesting opportunity to buy what seems to be quite high quality, pretty stable business. I mean, how do they do during the global financial crisis?

Yeah, great question. And we asked them that. So they were part of Sochgen at that time. so they didn't officially report, but we asked them, we were talking, we were asking them specifically about the sort of cost of risk effectively, you know, the provisions they took. Their average cost of risk, I think they talk about is about sort of 27 to 30 basis points. So it's pretty stable, it's pretty low. It's a secure business.

They said at peak in the financial crisis, it was 40 basis points. And they were still profitable. And Tim Albertson, the CEO, said in the CMD, he's been with the business a long time. he said business has been profitable every year for 30 years, and the lease-bound business has also been profitable every year for 30 years. So these are pretty resilient businesses, and they're secure, they're asset-backed. EVs are a risk that is a new thing, but I think they're pretty well equipped to handle that risk. I guess that GFC, and I love that answer, and being profitable through the financial crisis, is, you know, especially with what's happening

to probably residuals during a financial crisis going, I think that's really interesting. I guess the one other risk we didn't mention that we kind of have financing, right? This is a financing business. You need to finance these. I believe, if I remember correctly, they have a really nice mix of like 25 to 35% is from sock and deposits, 25% to 35% of his warehouse. I just let's put, you can talk about that if you want, but what I'm really interested, if things start to get a little hairy in the financial markets, like, do you

worry about that with the financing or do you think they've like got enough visibility, liquidity, that they could survive a decent bit of hairiness there? Yeah, it's a good question. I think a lot of their financing is not that short-dated. So they kind of need the capital markets to a degree if they want to grow, so they can issue more and grow more. But if things got hairy in the financial markets, I'm assuming that they probably wouldn't be leaning in to grow too much.

So from that perspective, there will be some stability. But they have obviously mentioned SOCGEN. So SOCGen in the end of Q4 was about $12 billion of the 48. billion that they have on in terms of financing. And that's pretty stable. They said during the crisis, previously Sochgen had basically said, look, go out and win market share. Here's the money. Go and do it. So I think there'd be a good partner. And there's got to be some upside to having a 52% owner. As we talked about, there's some downside. So they should take that as well. But one thing that's advantageous for them is they acquired, when they acquired lease plan, lease plan has a regulated

is a regulated entity, which means it can take deposits. So it has retail deposits in Germany and the Netherlands. And retail deposits, I think, tend to be reasonably good, stable sources of funding as opposed to the capital markets. And their ratings are actually really strong. They're the strongest of any of the multi-brand fleet companies. So they're rated A1 by Moody's. And actually, that went up when they made the acquisition. Typically, when you make a big acquisition, your ratings are that don't usually go up, but they did go up. And that kind of reflects the quality and the mix of the funding. So I think it's obviously a risk. They're a financial company. They need the financial markets. But I think that would be, you know, probably a source of strength,

if not somewhat benign during that period. And where you generally get in trouble with these businesses is you fund them on very short-term financing or, you know, I hate to bring the rental cars companies back, but you fund them in a way you can get margin called basically, which is kind of funny to think getting margin called on used cars. But I don't think they have any of those risks. So, you know, in a crisis, they've got their own deposits, they've got sock in deposits. They'd have no immediate need for liquidity. As you mentioned, you start, hey, all hands on deck. Well, if you've got an 8% ROE business and you stop growing for a year, you know, you generate capital pretty quickly there. So cool.

So this has been absolutely awesome. We're going to have to have you back on because we don't give enough love to the other side of the pond. And the other side of the pond has some really interesting stuff going on over there as one of my good friends who listens to a lot of these likes to tell me, you know, take a U.S. company, put it in Europe and I'll trade for a four turn discount to the U.S. Co. So. Absolutely. Shelf, remember, this has been absolutely fantastic. Really appreciate coming on and looking forward to the next time.

Thanks for having me, Andrew. Looking forward. A quick disclaimer. Nothing on this podcast should be considered an investment advice. Guests or the hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial advisor. Thanks.