Redwheel 的 Shaul Rosten 拆解法国租赁公司 Ayvens $AYV.PA 的投资逻辑

Hello, and welcome to Yet Another Value Podcast. I'm your host, Andrew Walker. With me today, I'm happy to have on for the first time—though I believe he told me before the podcast that it's his first time, long time—Shaul Rosten from Redwheel. How's it going?

Before we get started, a quick disclaimer, the same way I start every podcast: Nothing on this podcast is investment advice. Consult a financial adviser and do your own diligence. That's always true, but we're going to be talking about a French FinCo, so everybody should remember that comes with hidden risks and hidden issues. There's a big owner here that owns about 52% of the company, if I'm reading the filings correctly, and I believe you guys are a top-20 shareholder here. You guys are pretty large in this thing, too, but all of that comes with extra work and extra tax considerations. We're not tax advisers, and there are all those sorts of issues.

The company we want to talk about today is relatively new. It came out of a merger about 2 or 3 years ago. The company is Ayvens, listed in France, with the ticker AYV. I'll pause there and turn it over to you: What is Ayvens, and why is it so interesting?

Sure. Before we get into it, just to add, for my own compliance purposes, we're not recommending any investments. This is not investment advice; we're just talking about the company.

Ayvens is a French-listed fleet-leasing company. Basically, they buy cars and lease them to customers. Typically, those customers are not individuals like you and me; they're corporates and small businesses. Large corporates, such as multinational companies, make up about 65% of the customer base. Small and medium-sized businesses make up roughly 25% to 30%, with the balance being individuals around the margins.

That's perfect. I thought I was going to be kind of bored when I was researching this, to be honest. Again, it's a FinCo that leases cars, but I was actually pretty interested in them. We'll hit all of that.

I'll give listeners a teaser: The stock is trading at about 80% of tangible book, ROE is brushing right up against double digits, and they think they can get it to 13% to 15%. They pay a 5% to 6% dividend yield because they pay out half of earnings. It's a nice little teaser: This is a cheap company that thinks it can improve.

I want to ask you the same question I start every podcast with. The market is a competitive place. What are you seeing that you think the market is missing that's presenting this opportunity in Ayvens?

I think, as you say, the numbers look attractive, and we'll talk about the attractive upside in a minute. But it's a company where you can understand why there's a lot of pessimism and not much attention.

They've talked about the fact that they're not an OEM and they're not a pure finance company. In terms of the buckets of who looks at them and who covers them, it's split between people who look at car companies and people who look at finance companies. They don't fit into a perfect bucket. That's point number 1.

Point number 2 is that this company used to be called ALD. It used to be a subsidiary of Société Générale, as you mentioned, and Société Générale still owns 52% of the company. They did a big acquisition in 2022 of their number-two rival, a company called LeasePlan, based in the Netherlands.

It's a new business in terms of what the go-forward earnings look like, and that's difficult to unpack. It's difficult to unpack in general because LeasePlan was private, so the historical financial information is a little trickier. Since they did the acquisition, there have also been a number of issues that have affected them. Some were their own issues, and some were external issues that they had to face.

Presenting the pro forma picture—this is the company today and these are the go-forward earnings—has been quite difficult to unpack. But effectively, I think there's a lot of noise around the company and a lot of potential credibility issues. If you take a step back and look long term at the business, the ALD business, and the general fleet-leasing market, we think 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 high-quality business. You talked about the return on tangible equity touching double digits. If you look historically, pre-pandemic—and obviously, the car market has been a mess since the pandemic, both from a demand perspective and in terms of used-car pricing—this was a business that earned, on average, about a 20% return on equity, not just tangible equity.

It was also a market with substantial growth. The revenue line grew about 11% annualized pre-pandemic on a 10-year view. It's a growth business with a high return on equity, which is not something you associate with a French finance company. That's also an overhang. But we think it's a high-quality business that can get back to a much more normal, historical level of profitability.

I'm happy to go through the issues if that makes sense, now that people have an understanding of why it's been tricky.

Why don't we save the red flags for a second? I'd love to start at a high level so listeners can understand the business a little bit more.

It's a French leasing company. My first thought when you sent it to me was, "I've looked at Hertz and Avis." That's leasing to individuals. This is leasing to corporates. The 2 major things that jumped out to me were that their big competitors are subsidiaries of large companies. Toyota is a big competitor, or someone like that, right? A Toyota captive finance company.

A lot of people know that car manufacturers had captive finance companies in the early 1920s to try to spur demand, because cars are expensive. My first question is: How do they compete? How do they earn ROEs of 20% when they're competing against captive finance companies? I would think Toyota would say, "To encourage sales of Toyota vehicles, we run this business at our absolute cost of capital, or maybe slightly lower." How do they compete against captive finance companies, and who are their largest and biggest competitors?

It's a really good question. One differentiator is that they're multibrand. They're not a captive, so they buy across brands. The 3 biggest companies in the business are Volkswagen, Toyota, and Renault. There are others further down the spectrum, but Ayvens offers customers any car brand they want. They're not tied to a particular brand, which affects both customer preference and resale value. They don't take a risk on a particular brand.

That also feeds into the business. When you talked about Volkswagen and Toyota stimulating demand, that applies very much to the individual market, which 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. Volkswagen and Renault don't touch that market anywhere near the same scale as Ayvens.

The reason is that it's not just, "Here's a car and 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 large German pharmaceutical company with a bunch of sales representatives, and you need to make sure that they all have cars. Or you're a utility company with a bunch of commercial vehicles, and you need to make sure that they're on the road.

You don't just need the cars. You need advice about which cars to get and the total cost of ownership. You need the services that go along with them: maintenance, spare parts, replacement vehicles if something goes wrong, and insurance. Ayvens provides all of that.

It's basically a complete turnkey solution for a large corporate, and that's a very difficult skill set to build. Given the scale they have in that market, they're the number-one multibrand provider by a long way. The number-two competitor, Arval, has 1.7 million cars, while Ayvens has 3.3 million.

The gap is big. First, it means Ayvens can buy more cheaply, which means it can pass on a lower cost to customers that competitors can't match. It also means it can offer scale. If you're that German pharmaceutical company and you need cars across Europe or across the world, Ayvens can provide that in a way the other companies can't. It can provide the servicing around it as well.

Let me ask about the servicing. One of the things with a servicing business like this—and again, it isn't the same—is the rental-car companies in the United States. They've obviously been terrible businesses and very difficult, but theoretically they should have some moat because they're entrenched across the entire United States. They need servicing everywhere, different drop-off locations, and so on.

If you and I said, "Let's start Andrew and Shaul's competing rental-car company," it would be difficult. We wouldn't get the same prices, and spinning up that network and being able to service cars across the country would be difficult. They're across, if I remember correctly, 42 countries, with partnerships in another 16 or something. It makes sense when you say Ayvens has scale, so it gets better service and can cover more markets. That makes sense on a national level.

Once you start talking about the international level, though, does that scale really matter? If you're a German multinational, do you really need to go to Ayvens to lease across the business, or wouldn't it be simpler to use the number-one player in Germany, the number-one player in England, and the number-one player in Peru, wherever you're going?

Absolutely. To be clear, Ayvens is the number-one player in all of those markets. In 29 countries, including all the major European countries—France, the UK, Germany, Spain, Italy, and the Netherlands—they're number 1.

I would argue that it's easier if you're a corporation with your head office in Germany to contract with 1 counterparty and deal with 1 person. If you have any issues, you deal with that same counterparty, and because you're dealing in volume, you get the benefits of doing so.

That insulates competition. If somebody wants to compete for that German customer, they're going to have to sell the customer on switching to them even though they don't have the scale to offer something in the UK, France, or the Netherlands. Ayvens has all of that covered.

They also have partnerships around the world. North America is a different market because it's more finance leasing than operating leasing, but they have a partnership with a company called Wheels. If you want fleet solutions in the North American market, they can take care of that as well. They can cover Australia, China, Japan, and Asia.

We just talked about the services and the potential service margins, which is a really interesting aspect of this. If I firmly believe that these guys have scale nobody can compete with—something that's difficult to replicate and difficult to compete with—there's a reason for them to earn well-above-average ROEs.

When I look at their reported fourth-quarter earnings from last week, I'm looking at slide 9. Gross operating income in the fourth quarter of 2024 was €713 million. €675 million of that is from leasing and service margins, and then they've got a little bit from used cars.

How much of that is from the service business versus the leasing business, or is it too hard to pull that out?

They break it out really nicely. One of the things I think is really commendable about the company is that they break out as much as possible. It's a complex business, so they have to do that to try to simplify the story, but they really do break things out.

It's roughly 50/50 historically. In any given year it varies, but if you look back historically and take an average, it's about 50/50.

Would the right way to think about this be that if I believe they're going to get to a 15% ROE, you have a leasing business that's roughly at cost of capital, and then you have a servicing business that's quite high margin, quite stable, and has really strong ROIC? Then you have them stapled together because there are some overhead synergies and other benefits. Is that the right framework, or am I making things up?

I think it makes sense. If you look historically, when they've talked about the different parts of the business, they say they earn a spread in the leasing-margin business as well. Similar to a bank, they don't necessarily talk about just interest income. They talk about net interest income, and you can think about that as a margin product.

They talk about leasing margin. The key number to focus on is how much they bring in from the lease itself, not the servicing, and then the costs underneath that: the cost of financing and the depreciation, which offset the revenue. The leasing margin is always a positive number, so they would argue that it's a profitable part of the business as well.

It also depends on how you split the equity. If you say the equity is evenly split, then the returns are roughly even across the 2 businesses. But as you allude to, in reality, probably all the capital is going into the leasing business, while servicing is very capital-light. The returns might look different, but given that they aggregate the equity and try to make net income from both lines, rather than just breaking even, I would say they're fairly evenly profitable.

Let's go to some of those red flags. They announced a big merger back in 2022, and I'd love to talk about that merger. I think that will be a good transition to the red flags.

I look at this big merger and say, "Ayvens has good returns to scale." They do a big merger, the stock is down probably 35% since they announced it, and ROE is obviously around 9%. You were talking about 20% previously, while they're guiding to 13% to 15% in the future.

It seems like they did this big merger that they said would give them scale, but their projected returns going forward are lower than what they had pre-pandemic and pre-merger, and they're much lower right now. Shouldn't this be scaling up?

Exactly. That's the key question. You look at the business and the historicals, and they don't look anything like what the company is doing today or what it's saying it will do going forward.

I would split it into 2 parts: the things that were relatively within their control, and the things that happened to them in the marketplace.

When they bought LeasePlan, ALD, which was the former Ayvens, did the acquisition. ALD had one of the best cost-to-income ratios in the industry, at about 51%. LeasePlan was about 60%. Part of the acquisition was the acknowledgment that costs would go up, but they would bring them down and realize significant synergies.

This is a business where scale really matters, and those synergies are fairly mechanical. The argument was that they would get cost synergies, bring the cost-to-income ratio down to 47% by 2026, and realize significant benefits.

What ended up happening was that they announced the deal in 2022, and to get regulatory approval they basically had to be hands-off, with no visibility into LeasePlan, which was technically still a competitor until the deal closed in May 2023.

When they closed the deal, they discovered that LeasePlan had a large IT-project spend that had massively overrun its budget, which ALD hadn't been aware of.

Point number 2 was that there had been cost inflation. It was a very inflationary period, and that hadn't been factored into LeasePlan. According to Ayvens' current management, LeasePlan also hadn't been particularly proactive about inflation-protecting its contracts.

When you have a services contract, you say, "This is going to be the cost of maintaining the vehicle, and this is the cost of the insurance." If you don't protect yourself and there's significant inflation—and European motor insurance experienced huge inflation—you suffer from that. LeasePlan suffered on both the top line and the cost line.

Ayvens had to come to the market and say, "We thought the cost-to-income ratio would be 47%, but we're raising our 2026 target to 52%." A lot of those costs would take longer to digest, and the synergies would take longer to realize. That burned them quite badly.

On the day they made that announcement, in September 2023, the stock was down 8%. It continued to fall, from about €10 a share to around €6 by October. Since then, there's been a credibility issue.

All FinCos are black boxes at the end of the day. You have to feel that you understand what management is telling you, that management has a good handle on the business, and that you can believe what it says. That was an issue for them.

I think it also fed into the guidance. They sounded disappointed that they had to guide that number down. Since then, I and a couple of other investors have felt that they're undershooting what they think they can achieve in 2026 and beyond.

They've talked about a 13% to 15% return on tangible equity by 2026. If they can do that, we think this is wildly undervalued. But I actually think they're going to do a lot more than that.

If you look at their guidance, they said they would have a cost-to-income ratio of 65% to 67% in 2024, and they delivered 63%. In the fourth quarter, it was 60%, so the run rate at the end of the year was significantly below guidance.

For next year, they've said 57% to 59%. Bear in mind that they're saying 57% to 59% for 2025, while for 2026 they're targeting 52%. That's a big gap. What I'm reading from that is that they're likely to undershoot that cost-to-income number this year. They also have a lot of P&L synergies coming through, particularly in 2025 and 2026.

I think there's been a lot of concern about the company, the guidance was muddled, and they've retrenched in terms of the expectations they're setting.

The second issue was the general market. There was a lot of inflation, which hurt costs and the servicing margin, but used-car pricing also went crazy. That actually benefited them because they made more money from it, but it really hurt the visibility of earnings.

We talked about how the pro forma earnings are tricky to analyze because it's a larger business. Used-car prices changed the depreciation assumptions for all the cars on the balance sheet. On a cash basis, they were making more money because they were selling cars for more than they assumed they would. But it added significant volatility to the income statement, boosted margins, massively inflated the used-car sales results, and created an overhang of depreciation assumptions that they have to wind down through the used-car sales figures.

If I can jump in with one quick comment, you mentioned used cars. One of my first thoughts when we started this podcast was, "The obvious question I've got to hit him with is used-car results."

I was pleasantly surprised. I looked at the rental-car companies pretty in-depth last year, and they all got slaughtered last year. One reason was that the used-car market in the United States sold out, and all these companies went from reporting huge gains to pretty big losses, especially once the depreciation hit.

Looking at the fourth quarter, they had €200 million of used-car sales against €160 million of depreciation. Even though the gains have come way down from the peak, they're still out-earning their depreciation in what was a pretty soft used-car market.

I think that gives a lot of credibility to what you're saying and to what management would say: "We're really good at pricing these cars, and we're conservative." You shouldn't build the 2022 peak used-car profitability into your models forever, but this isn't going to be a Hertz situation where they're writing off hundreds of millions of dollars of cars because they're massively underwater. I don't know if you want to comment on that or talk about their culture around it. You can also just say you agree.

I think it's a really good point. Looking at the rental-car companies has been an interesting ride.

One of the biggest risks for this business is that they keep the cars on the balance sheet, so the residual-value risk sits with them. That was one of the key things we thought about when we were looking at the company: How have they managed that risk over time?

All you can effectively do is look back over the period of time they've reported publicly and ask whether they've recorded gains on sale, even if they're small, when they sell the cars. They typically have, by a reasonable margin. It's about 5% of the average value of the car that they've been able to record as a gain on sale.

We think they've been really conservative in those figures over time.

Europe is also seeing Chinese EVs flood the market, to my knowledge, and Europe is the core market here. These guys delivered about 40% EVs or hybrids in 2024, if I remember correctly. That's different from the stock, though. In the United States, you could say 10% of sales were EVs in 2024, but EVs represent only 2% of the car parc.

Is there residual-value risk here? Could electric-vehicle sales go to 75% of European Union sales over the next 18 months, and then Ayvens is stuck saying, "85% of our book is ICE vehicles, and there's no demand or value for them"? Is there that kind of tail risk?

It's interesting. I thought you were going to go the other way because what they're saying is that there's very strong sales growth of EVs in Europe, but there's also really strong demand for ICE vehicles. Because of the shortfall of new cars, used-car pricing for ICE vehicles is really strong, and they're still making much more than they typically would in the ICE segment.

What I thought you were going to ask—and it's the question I would come back to—is about losses on used EVs. The used-EV market, particularly in Europe, has been really challenging, so they have struggled with that.

They've said 2 things. First, the outsized gains they're making on used ICE vehicles are currently offsetting the losses on used EVs. Second, they've been much more careful going forward when buying those cars, and the stock and the flow are different.

The 40% is the number of EVs and hybrids being delivered. That 40% is made up of 27% battery-electric vehicles and 13% plug-in hybrids. But the book today is only about 11% to 12% EVs.

They're being much more conservative with their residual-value assumptions when buying EVs. They're also demanding guarantees from the OEMs. Depending on the OEM, they're getting a 6- to 12-month guarantee that says if the manufacturer cuts the price of its EVs because it's having trouble shifting them, it will reimburse Ayvens for the difference.

We all saw Tesla slash its prices by 20%—I don't remember which year it was—and presumably Ayvens was irritated by that. So they've negotiated those protections.

It's really crazy. I could be wrong, and I've never heard of that with an ICE vehicle. Maybe it happened in the 1950s or when cars were first sold, but I've never heard of a company saying, "The Ford F-150 was €45,000 yesterday, and today the MSRP is €37,000, so you owe us the difference."

It's interesting that with ICE vehicles, companies say, "We're really worried that the €20,000 vehicle we buy today will be sold by the manufacturer for €15,000 tomorrow." I don't have any particular insight there; I just find that fascinating.

It's a fascinating market. There's obviously an element of demand, but in Europe there's also a lot of demand being controlled, especially in terms of policy implementation. You have to consider how much natural demand there is and how much is stimulated demand. Obviously, you also have the Elon Musk factor because he was a major factor in slashing those prices.

The other thing I'd say is that, because of Ayvens' scale, it has a used-car platform where it sells a lot of its stock. About 60% of the cars it sells go through that platform, through dealers all over Europe.

Ayvens can manage that process so it puts cars into the markets where prices are strongest. In the Nordic regions, for example, EV penetration is actually really strong, which means used-EV values are fairly strong. What Ayvens typically does is funnel many of its used EVs from France, Italy, and the UK, where residual values are lower, into the Nordic countries or other countries where values are strongest.

About 50% of its resales are cross-border, which is another advantage of being a large-scale player with that kind of leverage.

I hear you, but I start to worry. If I were the largest player in the French market and operated only in France, and there were a global player operating in every market, I don't know that it would be an advantage for the global player to take its EVs to Norway. I could just sell them in Norway and transport them myself.

I don't know if that's as big an edge, but the point is certainly taken.

Let's talk about growth. They want to grow in 2025. They said on their call that they're resuming growth. Their ROEs are 8% to 9%, which I would call roughly cost-of-capital territory. They think they can get to 13% to 15%, and you think they can go higher. Their historical returns certainly suggest that.

I was surprised that they said, "We're going to resume growth," when their ROEs aren't screaming that they have the right to grow. Your biggest worry with FinCos is the black-box nature, as you mentioned. You wake up the next day and they've taken €10 billion of equity and it's actually €3 billion. That's your biggest risk.

Your second biggest risk is that they have a 9% ROE but keep growing at 9% every year. You worry that they just keep growing, and the ROE goes from 9% to 7% to 6%. They can pay themselves more, but shareholder returns decline. I wanted to ask about that. Do they have the right to grow right now?

Absolutely. It's a great question. I'd amplify it first.

They put out a target in 2023 to compound their earning assets—which obviously drives revenue—at 6% from 2023 through the end of 2026. They've undershot that in 2023 and 2024, but they still reiterated that target last week.

That means the growth rate for 2025 and 2026 will have to be higher, more like 7.5% annually. So you're right to ask whether they're being overaggressive about growth.

They do have a really long track record of growing profitably. As we've discussed, their returns were consistently strong pre-pandemic even though they grew the fleet substantially.

One thing that's been affecting them, apart from all the issues we've discussed, is a major rival called Arval, owned wholly by BNP Paribas. It's the cross-town rival to Ayvens, and it has been very aggressive on growth and pricing.

Ayvens has talked about how, in its key markets, particularly France, it has had to be very cost-competitive. That has affected margins because Arval has been so aggressive.

A couple of things have changed. First, Arval has now become a consolidated subsidiary. Before, it was equity-accounted, but now it's consolidated. That means it's officially regulated by the European Central Bank, whereas it wasn't before. The capital and risk weighting of its asset book now sit on BNP Paribas' balance sheet.

If Arval grows aggressively and is very aggressive on pricing, that will affect BNP Paribas negatively. Ayvens says that Arval is already acting much more rationally on price.

That makes Ayvens feel very confident about its target leasing margin of 530 to 550 basis points. I think it can be higher. Historically, it's been closer to 600 to 700 basis points, and it's even been 800 basis points in the past.

I think it can be higher, but what management has said is that it feels very confident it can achieve that level while still growing. Could it earn a higher margin if it stayed where it is? Yes. Can it redeploy some of the better pricing in the market to be more aggressive about growth while still earning 530 to 550 basis points? Yes, and that's what it's going to do.

Do you know what Arval's ROE is? I'm guessing it doesn't publish that.

It doesn't publish it because it's consolidated within BNP Paribas, so we don't know.

It would be interesting. One of the things I love is when a price-insensitive competitor gets removed from the market. Silicon Valley Bank goes bankrupt and its competitors benefit. At the time, a lot of people said those competitors were taking crazy risks, pricing aggressively, and beating everyone on every piece of business because they were completely price-insensitive.

If you had a bank competing with Silicon Valley Bank, and every piece of business was between the 2 of you, and Silicon Valley Bank disappeared, you could imagine that if you had been earning a 12% ROE while it was taking crazy risks and beating you on everything, you could go to a 20%, 25%, or 30% ROE. It doesn't work quite like that in banking, but I love situations where you have a price-insensitive competitor that gets removed from the market.

Let's go to the other red flags. The first is ownership. Société Générale owns 52%, so I'm guessing it has to consolidate Ayvens, which is great. But whenever you have a FinCo with a controlling shareholder that might not be 100% aligned with you, you worry.

I could imagine a scenario where a German pharmaceutical company—one Ayvens is about to lease vehicles to—is about to IPO, and it's a multinational company. Société Générale could say, "We'll give you a deal on the leasing, because the IPO business is where the real money is going to be made."

I wanted to ask about Société Générale's ownership and the red flags you think of there.

It's a great point. Société Générale is locked up until 2026, so the other question is whether there's going to be a huge overhang as it sells down its stake. I don't think that's necessarily an issue at the moment. It's also been a long-term owner; it has owned the business since 2001. I don't think it's necessarily going anywhere in terms of its direction.

You're 100% right that it's a risk, and there's not really a good way to assess it other than listening to what the company tells you and trying to determine whether management is being straight with you.

The company's position is that it's completely independent. Société Générale does provide about 25% to 30% of Ayvens' funding, which is obviously beneficial, but management says that's all done on an arm's-length basis. Everything else is also at arm's length. The company has a completely independent board and an independent management team.

The board is strongly made up of independent directors, so you would like to think there's a vested interest in running the company as a standalone business.

Interestingly—and this is completely anecdotal and doesn't really mean anything—ALD, the former company, was about 80% owned by Société Générale and had Société Générale's corporate branding. It used the same logo, just with ALD, so it was quasi-Société Générale.

Ayvens is a new company with new branding and a new name. It's clearly trying to raise its profile and present itself as an independent company. I think the market would be very unhappy if there were a transaction involving interference by the parent company.

Management has tried to make it clear that Ayvens is independent. It has rebranded, renamed the company, and moved away from the Société Générale parent, even though Société Générale still owns a large stake. Could there be interference? Yes. But I think the company has shown everything it can to demonstrate that it intends to operate independently.

Speaking of independent companies, Société Générale owns 52%, and it used to own 80%. The merger was supposed to give Ayvens scale and other benefits, but whenever you see a 52% ownership stake, you have to wonder about the end game.

I could imagine Société Générale saying, "This business has generated great returns. Let's get it off our balance sheet," in the same way General Motors eventually got Ally, or GMAC, off its balance sheet. Or you could imagine that Société Générale is a large bank with more deposits than it knows what to do with, so it's attractive to use 0% cost-of-capital deposits to fund a business that earns a 10% to 15%-plus ROE.

How do you look at Société Générale's ownership over the long term?

My expectation over the long term is that Société Générale separated the business because it's a lower-return business that gets a lower multiple. Société Générale doesn't really realize the value of having a great business sitting within it. It wants to realize that value.

The acquisition was done largely with stock, which diluted Société Générale from 80% to about 52%. I think it recognizes that this is a valuable asset and would like the market to recognize that value.

My expectation is that, over time, Société Générale would like to monetize the stake. But Ayvens is currently at about 55% of book value, and for a company that management thinks can earn substantial returns on equity, that's far too low. I think it's unlikely that Société Générale will sell at a price that doesn't reflect the value of the company.

The real question is how you monetize it. There isn't an obvious strategic buyer, in my mind. It's not really a private-equity play because Ayvens is already a FinCo, so it's not like there's a leverage play.

The most natural way might be for Société Générale to take the other 5% of earnings—assuming ROE is 10% and management has committed to paying out 50% as a dividend—and start doing self-tenders at some point. It could tender in to buy back 5% of the company, get cut back, and do that over 15 years.

It's hard to see because you're not moving a 50% block, but it is interesting.

One more question on risk: This isn't a bank, but it's regulated by the European Union. Maybe it's just my domestic bias, but whenever I hear "FinCo regulated by the EU," I think, "Uh-oh." You have a French leasing company regulated by the EU, and I think, "Leasing black box, French, EU regulations—I'll pass."

I wanted to ask about that hodgepodge of regulatory risks.

I agree. Often, you have a situation with so many red flags that people say, "I'm not spending any more time on this; I'll pass." If you double-click and spend time on it, there are opportunities—not always, but sometimes. I think that's a source of the mispricing.

I agree that they're already in a bad place from a regulatory perspective. When you look at a mortgage book, you get some relief from the fact that there's collateral. The loans have risk weights, but the collateral reduces the risk weight a little.

That's not the case with car leasing. Even though you have a collateralized loan, you get penalized twice: You get penalized on the risk weight of the assets, and every time there's volatility in the fleet, you get penalized on that as well.

They've talked about this. Over time, they're pushing the EU, along with BNP Paribas and Arval and the other operators, to consider the regulations. France is a major part of the EU, and they expect to get additional capital relief from the regulatory review.

I don't think this is a situation that's going to get worse. If anything, it should get better.

The second point is that they're applying Basel 4, the updated regulatory framework for financial companies. They've realized some capital relief from that. Last week, they said they currently have a CET1 ratio of 12.6% and target 12%. They added 70 basis points to the ratio by applying capital relief they previously weren't eligible for under Basel 4.

That takes the CET1 ratio from 12.6% to 13.3%. They're happy operating at 12%, so they said they can grow their risk-weighted assets organically just by being profitable. They don't need that excess capital to fund growth, and they're not in the business of holding excess capital.

That additional 1.3% is about €500 million to €700 million, by my numbers. They said, subject to the board and the ECB, that their plan is to return it to shareholders in some form. I presume that would happen this year, although I don't know. It's not an insubstantial amount of money for a company with a €6 billion market capitalization. That's roughly 8% to 12% of the market cap. They might do a special dividend or a buyback.

I'm laughing because I'm a little mad. That was my next question; that was where I was building.

This is what I love. Long-time listeners know I've talked about U.S. thrift banks a lot. They're in a different league, but often you'll see one with 25% excess capital and someone will say, "They're trading around book value." You say, "You don't understand. They could return basically their market cap through a dividend or buyback and still be overcapitalized."

You'd get the market cap back, and you'd still be left with the exact same bank, just less overcapitalized. Here, someone might think that going from 12% to 13.3% is no big deal, but as you said, on a bank, that's an enormous amount. It's about 10% of their equity market capitalization.

Exactly. If you do a buyback at five times earnings, it's extremely value-creative.

Let's see. We've talked about a lot of the things I wanted to ask. I guess the last thing is that you said it well at the beginning: All FinCos are black boxes.

If you and I were sitting here 3 or 5 years from now and said, "This idea really didn't work," what do you think happened? I always try to ask why an idea didn't work, but here I'd ask specifically: What in the black-box nature of this leasing business would you point to and say, "This went wrong"?

It could be anything. Inflation could go to 20% and they might not have enough inflation protection. EVs could take all the value out of the ICE vehicles. What do you think would be the most likely reason, outside of general macroeconomic conditions?

It's a great question, and I think you ask it often on your podcast. I was expecting it.

I'd say there are 2 things. First, if they can't get their margin back up to the historical levels they've discussed, that would be a problem. I think that's relatively low risk because they're basically there already. They've said 530 to 550 basis points, and they're currently doing about 540. Historically, they've done 600 to 700. I think they can get to at least 550 to 600.

If the market becomes more competitive than we believe—if other banks or OEMs push very hard to enter the corporate fleet space and drive margins down—that would be the first risk.

The second is what you touched on: residual-value reserving. If their residual-value reserves are inadequate and they lose money hand over fist, particularly on EVs, that would be a problem. It could happen with ICE vehicles as well, but they've got a long track record with ICE vehicles. With EVs, there's a lot more variability.

If we were sitting here in 1 or 2 years and things had gone wrong, those would be the 2 reasons why.

If I remember correctly, the average vehicle they're leasing and selling is held for about 3 to 4 years. You do worry when you have an asset on the balance sheet for 3 to 4 years, because that's a long time and things can fall apart.

But that's a pretty good amount of turnover. They're turning over about a third of the book every year, versus an aircraft lessor, where you buy an airplane and turn it over every 15 or 20 years. Airplane demand is much more stable, but you could imagine a world where things aren't looking good for aircraft and you say, "We got rid of 7% of our planes this year, but we still have 93%."

With this book, it's nice that it turns over constantly. I think that gives you some downside protection.

Just on that point, one thing they've been using to mitigate the EV residual-value issue is what they call double leasing. When they get to the end of the initial 4-year lease, they put the vehicles into the used-car leasing market. That gives them another 3 or 4 years of lease life, which mitigates the residual-value risk.

To enable that, they're getting battery guarantees from the OEMs. They're saying, "This battery and this EV need to last at least 8 years, and you need to guarantee that." That way, they can lease the vehicle for another 4 years after the initial 4 and make sure they get more cash out of the asset.

We actually hit most of my notes at this point. I want to give you the last word. You had a great write-up on this—maybe it's internal—but you've done a ton of work here, and I think this is a fascinating idea. Is there anything you think we should have discussed that we haven't?

I don't think so. I would say that, wherever you look, they're very cheap.

The book value is €13. If you include the pandemic and look at the period through today, the average price-to-book ratio has been about 1.1 times. That would give you substantial opportunity. On a pre-pandemic basis, when life was more normal, they traded at 1.5 times book. When they bought LeasePlan, they did that at 1.4 times book.

That alone, based on the current earnings and current book value, says to me that they're quite cheap. They've also signaled, as we've discussed, that they're going to grow their earning-asset base, which will grow book value and tangible book value. That adds another element of value.

I really think they're undershooting the synergies they're going to realize, and I think they're undershooting the margins they can earn. So there's upside on the earnings as well.

Holistically, there are a lot of different ways this could go right, or really right, but the downside based on the price doesn't look too severe.

To be honest, as we've talked, I think the real issue is that Société Générale owns 52% of this. It's not that people aren't worried about corporate governance, but for a company this large and stable, if this were in the United States and had a large free float, it would be in every quality dividend ETF out there.

I think it's a combination of the French stock market and Société Générale owning 52%. That really limits the buyer base, but as you've pointed out, it creates an interesting opportunity to buy what seems to be a high-quality, relatively stable business.

How did they do during the global financial crisis?

They were part of Société Générale at the time, so they didn't officially report separately. We asked them specifically about cost of risk—the provisions they took.

Their average cost of risk is about 27 to 30 basis points, so it's stable and low. It's a secure business. At the peak of the financial crisis, it was 40 basis points, and they were still profitable.

Tim Albertsen, the CEO, has been with the business for a long time. He said at the capital-markets day that the business has been profitable every year for 30 years. The LeasePlan business has also been profitable every year for 30 years.

These are fairly resilient businesses, and they're asset-backed. EVs are a new risk, but I think they're well-equipped to handle it.

I guess the other risk we didn't mention is financing. This is a financing business, and they need to finance these vehicles. If I remember correctly, they have a nice mix: 25% to 35% is from Société Générale deposits, and 25% to 35% is warehouse funding.

Let's say things start to get hairy in the financial markets. Do you worry about the financing, or do they have enough visibility and liquidity to survive a decent amount of market stress?

It's a good question. A lot of their financing isn't that short-dated. They need the capital markets to a degree if they want to grow, because they can issue more and grow more. But if things got hairy in the financial markets, they probably wouldn't be leaning into growth too much.

Société Générale provided about €12 billion of the €48 billion in financing at the end of the fourth quarter. That's pretty stable. During the previous crisis, Société Générale essentially said, "Go out and win market share. Here's the money; go and do it." I think it would be a good partner.

There has to be some upside to having a 52% owner, just as there's some downside. They should take advantage of that as well.

One advantageous factor is that LeasePlan is a regulated entity that can take deposits. It has retail deposits in Germany and the Netherlands, and retail deposits tend to be reasonably good, stable sources of funding compared with the capital markets.

Their ratings are also strong—the strongest of any multibrand fleet company. They're rated A1 by Moody's, and that rating actually went up when they made the acquisition. Typically, when you make a big acquisition, your rating doesn't go up, but theirs did. That reflects the quality and mix of the funding.

It's obviously a risk. They're a financial company, so they need the financial markets. But that would probably be a source of strength, or at least fairly benign, during a period of stress.

Where you generally get into trouble with these businesses is when you fund them with very short-term financing or in a way that lets you get margin-called. It's funny to think about being margin-called on used cars, but I don't think Ayvens has any of those risks.

In a crisis, they have their own deposits and Société Générale deposits, and they wouldn't have an immediate need for liquidity. As you mentioned, if they have an 8% ROE business and stop growing for a year, they generate capital pretty quickly.

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 Atlantic, and there are some really interesting things going on over there. As one of my good friends who listens to these podcasts likes to tell me, take a U.S. company, put it in Europe, and it will trade at a 4-times discount to the U.S. company.

Shaul, this has been fantastic. I really appreciate you coming on, and I look forward to the next time.

Thanks for having me, Andrew. I'm looking forward to it.

A quick disclaimer: Nothing on this podcast should be considered investment advice. Guests or hosts may have positions in any of the stocks mentioned during this podcast. Please do your own work and consult a financial adviser.