It trades below 0.4 on the capital, it has been profitable since it raised on the stock market and achieves a return on capital of 15% on average. Its CEO looks at the camera and tells you explicitly – “We will generate a return of 15%-20% per year in each of the following years”. Let’s assume that he exaggerates, that’s the nature of CEOs, let’s assume that there will be glitches along the way and he will manage to generate “only” 10% return.
A return on capital of 10% is expressed in a return on the value of 25% (capital multiplier about 0.4), and in the demonstration – suppose a company earns NIS 1 million and its capital is NIS 10 million – the meaning is that it generates a return on capital of 10%. If its value is NIS 4 million – 0.4 on the capital, then the return on the value is 25%. This is the theory, in practice there are complications – who said the value has to be the capital? And – in the case before us, Generation Capital, like all infrastructure funds, is an instrument with a built-in conflict of interest between the managers and the shareholders.
In a TV interview, Erez Belsha tries to downplay the problematic structure and explains that they are preparing to change the management fee mechanism that will make more sense and share interests with the shareholders. One way or another, investors are not leaving the stock because of the management fees, but because of fear of future dilutions and due to a lack of trust.
Subsequent dilutions mean that the upside, which is expressed in the existing discount in the share price compared to the economic value, is also distributed to new investors and essentially “takes” the “pie” from the existing shareholders. Belsha says that if there are recruitments, they will be less significant and the intention is to introduce investors to the companies held as well as receive dividends.
There are other risks, mainly operational. Generation fell big in investing in Solgreen, which invested in operations in the US, which quickly became clear that it was a pit of huge losses. So how do you avoid such blunders in the future? And why should investors believe him? Belsha explains in the conversation.
I will try here, but mainly the attached video, to analyze the situation of Generation without “prejudices” – in the past we criticized the mechanism of the infrastructure fund and in particular Generation Capital, big mistakes were made in the fund, dilutions, and a tremendous loss of value. But investors need to know how to look from here on. From then on, Generation, which operates in the fields of renewable energy, garbage and waste treatment, power plants, public infrastructure, is a fund with interesting, relatively stable investments in such a period (as much as possible). The fund’s stock trades at a pricing that seems attractive – a value of NIS 700 million on a capital of NIS 1.8 billion, with the return on capital estimated by the head of the company to be 15-20%, this is a bargain, given that the forecast will come true. This is good pricing, even if the forecast is partially realized.
The problems may be in the dilutions, but watch the video and hear Belsha on the matter, the problems could be in the management fees, but this is already included in the price and beyond that Belsha is talking about a mechanism that will be more convenient for the institutional bodies and investors in general.
Additional problems can be – a discount that will continue. After all, a infrastructure fund is a type of infrastructure holding company and if so, why wouldn’t there be a built-in discount. But, even if so, it should not be a 60% discount on the capital. Another problem is debt recycling in the fund itself and in the held companies. Generchain has a debt taken out in recent years, the question is how it will recycle it and at what interest rate. This is of tremendous importance, but given that no significant fundraising is planned for the coming year, given that Belsha estimates that there will be dividends and there will be private fundraising; And given that the Bank of Israel and the economists estimate that in another year we will already be after the peak of interest rates, it seems that at this point in time – the turnover and the raising of additional capital, do not oppress the fund. But this is a point that requires follow-up.
And even if we look ahead and predict a recession and slowdown alongside high interest rates for a prolonged period of more than a year, then it’s all a matter of price. At the current price, a scenario that seems very pessimistic is implied. Given the equation of risks and chances, pros and cons, there is more in favor here.
Belsha explains and details the main holdings of the fund, including Bon Tor, Rafak Energy, the railway sector, GES, the potential, the failure of Solgreen, the internal return on assets, future issuances, and synergy between the companies held. He emphasizes the wide diversification of the fund, the stability of returns in the field and its true value in his estimation, pleasant viewing: