 Good day fellow investors. Today we have a guest with us that I think will spice up a little bit things on this channel and it's a guest that has been a financial blogger and a private investor for 25 years. He is the owner of the undervalued shares.com website where he has a weekly newsletter and he sends out a report every two months on a very interesting stock. I'm subscribed to both his free newsletter and investment service so I find his things very interesting. His story is very very nice and he has even lived on the Galapagos Islands for a few years doing pro bono charity work which is something nice, very interesting story, very interesting lifestyle and I'm happy to introduce Sven Lorenz to the channel. Welcome Sven. Good morning. Good morning to Amsterdam. It's great to be on here. Thank you Sven and he is located on the Sark island somewhere in the Channel Islands near to Gorsni and he lives there, pays very little taxes which is also something many of us dream of but if you can do that. It's also a beautiful island. It's not just about the taxes. One day I'll have you here. I don't think we will believe you on that story and the idea we are going to discuss this this day is one of his bi-monthly ideas, a very interesting idea, a Dutch company called TomTom which has had a very very famous notorious past and then it has slowly fallen into, let's say, has been forgotten by the market but Sven thinks, with the W is his name spelled, Sven thinks it's a good investment so Sven introduce yourself, tell us a little bit about this idea and why do you think it's a good investment. Yes, so as you already briefly mentioned it's a very well-known company. I think probably people in our generation, everyone will remember the first ever satellite navigation systems that we had in cars. They were the ones that you put into your your windstream with a suction pad and TomTom is famous for being one of the pioneers in that business. In the 1990s they started in 1991 the first such units were sold and this is still primarily what the company is known for although technically speaking that's not really the right angle to look at which is what my report is about as well. So obviously in the past couple of years the importance of these personal navigation devices as they are called has gone down in importance because people simply have smartphones and they use Google Maps and other systems. However TomTom is actually still doing a very good business selling its map system and its entire software and the technology behind it to car manufacturers and to equipment makers that then deliver to car manufacturers and so what you've when you drill into the accounts of the company what you will see is that the sale of these personal devices is going down but the software services that's been going up and this has been a major change in how the company is positioned and that is one of the aspects what what makes it very interesting it has a very high cash flow and it's actually growing in that business because cars and the car manufacturers they need ever more data and ever better maps and this is one of the specialities of TomTom who are based in Amsterdam your home city so they're up. And how is that evolving now the stock price hasn't performed very well since the boom exuberant times in 2007 why is TomTom now let's say 12 years after the exuberance period why it is a buy now. So what you can see in the chart in the in the chart is that it basically lost 85% of its value after those boom times and then for the last 12 years it's been pretty much a flat curve with some up and down along the way and TomTom seems to have recently made two very key strategic decisions one was to sell its telematics business telematics is fleet management by satellite and it put that business up for sale it was a very good and growing business had positive cash flow and the company decided that maps is the one thing they want to focus on so telematics was put up for sale it took a while but it's now just been sold for 950 million euros and out of that 900 sorry 910 million euros out of that 910 million a special dividend will now be paid of 750 million that dividend will be tax free no matter where you live it's technically a so-called capital return and now the company is focusing on maps and what is happening in the map industry is a new focus on so-called high definition maps so the car industry is developing new ways to for so-called assisted driving assisted driving is when the car automatically makes certain adjustments that you're not even aware of as a driver but which makes driving safer and easier for you and then of course what's appearing on the horizon is autonomous driving where the car just drives itself based on maps and the map material you need for autonomous driving is in a completely different league than the maps that were used in the past and it's in this area that tom tom is one of the top three players in the world you've got google maps a big player obviously but a younger player so to speak but very deep pockets you've got a company called here h e r e which is owned by german car manufacturers and the the chip producer intel and then you've got tom tom so you've really only got three players in that field and that's where tom tom is making major advances right now and this is where this whole story is starting to get very interesting again you are not speaking about a dying business in consumer electronics anymore you are speaking about a growing and very strategic business in an up and coming area that will affect all of our lives everything will be based on high definition maps we can't even imagine what exactly this will entail in the future and how is tom tom hoping of competing in that area with deep pockets as you say from google and the german car manufacturers the company has a huge head start for a number of reasons first of all they already have a database of 69 million kilometers of road system around the world in countries with about five billion people so that covers the vast majority of the world and uh 70 percent of the company's staff they have 4800 staff and all that 70 percent work in research and development this is a very research and development heavy business and you need to know exactly how to take that mapping technology forward and that's something where tom tom has a head start to the competition because that's the only thing the company has done in the past 30 years they're very specialized in that and they have a unique uh sort of secret weapon in that sense currently tom tom technology is installed in 500 million vehicles around the world and tom tom is collecting billions of data points every month from these vehicles that are out there so they're all feeding back into the system and no one else has that here has a much smaller user base uh google has issues with the data they're getting back as nearly as precise what tom tom is getting uh so that's where the company has a competitive advantage and several of the top 10 automakers in the world have just teamed up with tom tom for high definition maps so they're not they haven't gone to google they haven't gone to here they've gone to tom tom the company has definitely got a challenge ahead of itself this is a highly competitive industry and it's up against some very major other operators in that field but it's starting from a very good position okay and let's put this into a market capitalization perspective so you said we have a tax-free capital return of 750 billion euros and what is the market capitalization and what is actually the current price that we have to pay for this high definition mapping business yeah so right now the market cap as we speak is 1.8 billion euros and you have net cash effectively of about a billion euros so what you pay for the actual mapping business is about 800 million and then you have to factor in also as an investor that sometime before the end of june sometime in the next 10 weeks 750 million are going to be returned to you as a tax-free dividend you will then have another 250 million euros in net cash the company is debt-free still staying in the company and then on top of that you have the mapping business so let's say it's it's valued right now at effectively 800 million euros and what would be the real value of such a business how how do we value such a thing so as always and you've written a brilliant book about this in terms of valuations and analyzing investments there is no absolute precise way to measure a company the way I would like to look at it is is as follows I would value the company based on what would a purely financial buyer pay for it not a strategic buyer that is in the industry but someone who just looks at the you know the cash coming out of it the company is producing a free cash flow of 67 to 70 million euros and if you applied a yield to that and you said someone is buying that on the cash flow yield of 5 percent which a private equity buyer would do that gives you a value of 1.4 billion euros then on top of that you have 250 million euros in in net cash and that builds the bottom line for the valuation in my view and the question is if or when a strategic buyer turns up and if it's possibly several bidders for the company what sort of strategic premium do they pay for that and that's not a question that anyone could answer with any form of position that's a matter of it's an auction system and they just have to bid for it I think in the end they will probably pay a strategic premium of probably 50 percent 50 percent but that's just me coming up with a number now but it's not too difficult to come up to evaluation of in excess of 2 billion euros for a business that right now you effectively pay less than a billion for once you take the dividend out so there's considerable upside and what I find the most interesting personally is that this would work purely from the perspective of a private equity buyer coming in so this is just financially driven how much cash is coming out of the company and last year it was reported in the media that the company already received three approaches from private equity companies that wanted to buy it so there has been interest already but apparently what happened was that the management said we want to sell the telematics business first get that transaction dealt with then pay out the money as special dividend and I think they I mean quite logically they realize that it's much easier to sell a very focused clean business where you say this is the one area we're working in you don't have to buy anything else with it not even the cash and that in my view is what what the management and the founders are working towards and has there been any indication that they want to sell because we have four founders that own 44% of the company and the rest is free flow so they have to make the decision are we going to sell or not so the founders have made various statements in the media that indicated that they're very open to be approached and the number one founder so it's four founders and one of whom is actually the CEO as well and he's the leading figure in there he just had his 60th birthday earlier this sorry he's 59th birthday earlier this week so he's approaching 60 and from what I gather in my network in the Netherlands people like this always you know gossiped about it seems like the founders are now looking at how can I how can they secure their lifetimes work if you put yourself into their position you know they're approaching 60 and the question now is do you go all out and you invest everything the company has into this future business of autonomous driving and assisted driving which is also going to require a lot of actual cash being invested or do you say okay you know this is now something for the big guys and we've had a great run in the last 30 years and we now secure our lifetimes work and a very strong indication is the special dividend so instead of keeping that 750 million euros in the company to make acquisitions and to you know do even further investments into research and development they're pulling that out that makes the company also much smaller and more compact to take over and mixed with you know all the media reporting about their open to consider all sorts of options and with what I hear on the gossip mill it seems pretty certain that they're basically waiting for the telephone to ring and if you want to maximize the price and as a founder you only have one opportunity to maximize the price then you don't advertise that you want to sell you sort of give off coded messages and then you wait for people to approach you and that's what I'm what I'm expecting is going to happen in the next in my report I've written 12 to 18 months I think that's conservative and I think it's going to happen faster than that but let's wait and see okay okay so the downside would be that okay what are the risks let's discuss the risks I've read an article from google that tom tom is actually in late in the investing business into those high definition maps and that they simply cannot compete with what google or apple or others are spending into this so what is the risk that the technology is at the end obsolete or then that nobody wants to buy it I would I've looked into that in great detail and if you go online and you google product reviews of tom tom you find great reviews and you find not so great reviews if you check everyone else's map system you get exactly the same and I've looked at for example the very in-depth product analysis that a german public a charitable foundation for product testing has done where tom tom actually came out on top ahead of google in the overall ranking so I think you could argue about that from my perspective the biggest risk would have been and I would have not touched this investment if the founders had taken those 750 million and invested them into some acquisition you know buy another company at a high price and if you buy another company you ultimately always pay a very high price yeah or if the founders had now started to you know triple research and development costs and pursue all sort of pet projects then you would have seen the money burn and you know disappear quite quickly I think with dividend that risk is very much taken care of and it's also been de-risked recently because several of the top 10 automakers as I said have made a commitment to the high definition map system that tom tom has in the pipeline so that's not such a great worry my greatest worry would be nothing happening and the stock price lingering in which case you could you know end up because of general volatility and disappointed shareholders you could end up with the share price going down 20 percent 30 percent that is within the realm of possibility however at the same time I would then point out based on the current market cap you have a cash flow yield in this business of eight percent which is pretty good so there's quite a lot of cash accumulating here they could pay out additional dividends they could turn themselves into a bit of a yield play that would also provide some some some uplift to the share price but all of that I don't see that likely I think it is just extraordinary it has an extraordinary high likelihood of attracting a bit of some kind the question is how fast how long do we have to wait and what is the volatility in the meantime and the volatility usually when a company like that pays out capital cleans out the balance sheet cleans out all the smaller businesses that it has then it's preparing itself for a big sale problem that's the most likely from financial it very much looks like it it is a volatile stock and I mean just the last couple of days it came down 10 percent while the rest of the market was doing pretty okay that volatility needs to be factored in it's either a liquid stock or an illiquid stock depending on how large your portfolio is if you are a hundred billion dollar investment fund then of course it's not a liquid stock for the average investor it has a daily trading volume of anywhere between half a million and a million shares so that's like five to ten million euros in shares traded I'd call that pretty liquid for most people so very very interesting do you want to finish with something as I think many of our viewers will be interested to see how this works I we haven't touched so much on the maps telematics and technology stocks here on the channel but I think this is a refreshing idea so I thank you for sharing that and let's finish with the closing statements takeover situations are something that I think especially investors in Europe should pay a lot of attention to because there are a great number of companies in Europe that could attract a potential bid and quite often you have what I think we both as value investors really love which is that margin of safety or that that asymmetrical distribution between risk and and potential upside I love it when I have relatively little upside but a considerable so when I really really little downside but a considerable upside then you need a catalyst the catalyst is always the key factor if there's no catalyst then you you don't see the upside realized and I see a great number of opportunities in Europe and I'm going to spend the next couple of months digging out more of these opportunities so if your readers love that I'm you know I probably have another idea for you at some stage perfect and I'm sure if they have any questions if they want to dig deep into the team they can just leave the comments in the comment section below on YouTube and Sven and Sven will be happy to answer where we can well thank you Sven for doing this very nice chat with you and I'm sure we'll be seeing much more of you on this channel with such interesting value investing ideas where few value investors would go when you hear a technology stock like Tom Tom oh where's the value there it might be something hyped up like other technology stocks but when you dig deeper especially with those forgotten stocks you might find value so thank you Sven and thank you everyone for watching and we'll see you in the next video take care thanks Sven goodbye to Amsterdam