Author Archives: memyselfandi007

Some links

WertArt Capital with a potential German liquidation case UMS AG

Charlie Munger is still in great form at the age of 90 as Jason Zweig’s interview notes clearly show. He doesn’t like Benjamin Graham though……

Great FT Alphaville post why one should be careful with “high dividend paying” securities.

A collection of notes from the recent New York Value Investing congress

Good presentation from Carson Block (Muddy Waters) on activist short selling

Self driving cars: Tesla joins the hype, Google’s real world experience still seems to have room for improvement

Vossloh (DE0007667107) – another potentially interesting “Fallen Angel” with an activist angle ?

Vossloh AG is a mid-sized German company and calls itself “a leader in the rail infrastructure and rail technology”.

Looking at the stock chart we can clearly see that not everything is going well there:

Vossloh lost almost 50% from their peak 3 years ago. If we look at some profitability measures of the past 10 years we see an interesting pattern:

EPS Profit Margin ROE
30.12.2004 3,91 6,2% 18,5%
30.12.2005 3,08 4,8% 13,3%
29.12.2006 2,98 2,0% 5,7%
28.12.2007 4,26 7,0% 18,2%
30.12.2008 6,30 11,5% 31,1%
30.12.2009 6,57 7,5% 18,5%
30.12.2010 7,32 7,2% 19,0%
30.12.2011 4,32 4,7% 11,0%
28.12.2012 4,15 4,8% 12,4%
30.12.2013 1,00 1,1% 3,1%

Vossloh showed only little impact during the financial crisis but then results deteriorated. They showed a small profit for 2013, but for the first half-year 2014, they shocked everyone with an “Accounting Bloodbath”, showing a loss of ~12,20 EUR per share, wiping out all profits for the last 3 years and some more.

So what happened ?

This is a quote from the CEO letter of the 2010 annual report:

For the years ahead, we intend to accelerate our growth while sustaining the rate of profitability. It is especially in the international markets that we will be amplifying our presence and we will be scoring in particular with the new products. For 2011, we are targeting group sales of €1.4 billion and an EBIT above €160 million.

This is from the 2011 CEO letter, where profits already declined:

Dear Stockholders:
Following a series of very successful fiscal years marked by above-average growth rates Vossloh suffered setbacks in 2011. Contrary to our expectations, Group sales and earnings declined. The chief influencing factors were the slowdown in the progress of Chinese rail projects, which only became evident as the year proceeded, the suspension of shipments for a major project in Libya and, from the summer onward, weak demand in key European rail markets. Under these circumstances, the Rail Infrastructure division’s sales, which at around 65 percent of the Group’s continued to contribute the lion’s share of revenue, dropped for the first time in years, by some 13 percent. The sales shortfall at Vossloh Fastening Systems was especially severe at the Chinese location and could not be offset by business elsewhere. The Switch Systems unit also performed below expectations due to the military conflict in Libya, which prevented the planned extensive shipments to that country in 2011. In addition, in several European countries demand slackened and price pressure stepped up.

In 2012, the outlook for 2013 was not that good but still “solid”:

However again, they disappointed, as stated in the 2013 annual report:

There were two significant reasons for the downward development in 2013: For one, we were confronted with extensive non-recurring charges that were due to expenses for the final out-of-court settlement of a dispute in the Transportation division in an amount and extent that was not to be expected. For another, there were additional expenses in this division in connection with the processing of several projects, which entailed additional and unexpected losses of earnings. In contrast, the Rail Infrastructure division performed significantly better than expected, and revenues as well as the result increased significantly. The Fastening Systems business unit primarily contributed to this positive development.

Not too surprisingly, both, the CEO and COO stepped down in February making way for a new management. Normally, CEO hate to step down even after management disasters so what happened ?

The activist angle:

Vossloh had been more or less controlled by the founding Vossloh family for more than 100 years although they only owned around 34%. Since 2011 though, another strong shareholder emerged: Hermann Thiele, the owner of German unlisted company Knorr Bremse who had built up a stake of close to 30 % from 2011 to 2013.

Although Thiele is not widely known and keeps a low profile, he is one of the most succesful German entrepreneurs of the last 30 years. He bought Knorr Bremse in 1985 as one would call it a “leveraged management buyout” and then grew the company by a factor of 15-20 times over the last 30 years. Despite being a non-listed company, Knorr Bremse issues a relatively good annual report where onr can see that the company is spectacularly profitable. Net margins of 8-9% and cash adjusted ROICs of more than 30% are clearly an indicator that this guy seems to know what he is doing. Besides that, depending on how you value Knorr Bremse, he is also one of the richest persons in Germany.

A little side story: World famous BMW AG once was the engine subdivision of Knorr Bremse until 1922 when it was sold to an investor as they didn’t find the engine business interesting enough……

In 2013, he finally succeeded in being elected as boss of the supervisory board against the explicit wish of the founding family. The founding family finally sold most of their shares in late 2013. It was him who kicked out the old management and brought in 2 new guys, among them the new CEO Hans Schabert who used to run the rail operations of Siemens.

In one of Thiele’s rare interviews in 2013 he stated that Vossloh is his private investment. Although he likes the business, he doesn’t want to take full control and leave Vossloh listed.

As a supplier to the rail industry, he knows the sector pretty well. I could imagine that long-term this might help Vossloh to get back on track. However I do not believe that he will remain a minority shareholder for ever. I do think that sooner or later he will try to take control. There would be clearly synergies between Knorr Bremse and Vossloh as both have the same clients and Knorr is even a supplier to Vossloh’s locomotive unit.

The 6 months 2014 “accounting massacre”

If you ever want to see a “how book as many losses as possible” financial report then look at the recent 6 month report from Vossloh. The new management wasted no time and did not even wait until year-end in order to write down everything they could.

Even in the investor presentation, they don’t make the slightest attempt to normalize the result.

Digging deeper into the report, you will find among others:

- goodwill write offs
– inventory write downs
– extra provisions against “risks”
– and even a charge because they did an early retirement of a higher coupon debt facility, which is clearly earnings accretive in the future.

In their outlook the state that one can expect some more losses in 2014 but from 2015 on Vossloh will be profitable again. But they did not specifc how profitable. Operationally they made already some significant changes. So overall this looks a little bit similar to the Van Lanschot story. The new CEO (with the support of the Supervisory Board) has written off whatever he could in order to show increasing profits going forward.

However there could also be a problem here. At some point in time, Thiele could decide that he doesn’t want to share the upside of a turn-around with the other shareholders and try to take Vossloh private as cheaply as possible. Other than Cevian at Bilfinger, Thiel has no track record with capital markets and many “old school” German business tycoons do not care very much about minority shareholders. This is clearly a risk to be considered

What could be a “turned around” Vossloh be worth ?

This is an overview of average margins (10/15 Years) of Vossloh and its 3 listed European “pure play” competitors:

Avg NI Margin  
  10 Y 15 Y
Vossloh 5,67% 5,19%
CAF 5,40% 6,46%
Faiveley 6,50% 5,00%
Ansaldo 5,98% n.a.

Overall, I would say a 5,5% net profit margin on average is not unrealistic. Based on 2013 1.325 mn sales and assuming no growth, this could mean that Vossloh at some point in the future makes ~ 73 mn EUR profit or ~5,5 EUR per share If we assume a 12-15 P/E range, this would mean that a target share price of 66-82 EUR would be realistic.

Based on today’s price of ~49 EUR this would mean a potential upside of 35-68%. However one should assume that this turn-around needs at least 3 years. For a turn around, I personally would require a higher return than for a normal “boring” value stock as there is clearly a risk that the turnaround does not work out as planned.

If I assume a target return of 20% p.a., i would need to be sure that the price of Vossloh is in 3 years at around 85 EUR. This is clearly at the very upper end of my target range. So I would either need to have more aggressive assumptions or I would need a lower entry price. As a value investor, I would not want to bet on growth or on a shorter time frame for the turn around, so the only alternative is to wait for a lower entry price.

Taking the midpoint of my range from above at 74, I would be a buyer at ~42 EUR per share but not before.

How does this compare to the Bilfinger case ?

A few weeks ago, I was looking at a similar case, Bilfinger. Similar to Vossloh, an activist investor (Cevian) managed to get rid of the CEO and tries to turn around the company after mutliple earnings disappointments.

At a high level comparison I like Vossloh’s underlying business better. Bilfinger clearly has some structural issues especially with its power business where the underlying market (electrictiy) is undergoing a big fundamental change whereas the railway business to me seems fundamentally intact. On the other hand, Cevian as “activist” has a very good reputation and is easier to “handicap”. They will most likely treat minority shareholders fairly and do some kind of spin off etc. So the risk of getting screwed by the activist is lower.

In a dirct comparison however I would prefer the “activist risk” at Vossloh against the fundamental issues at Bilfinger. Additionally, the real “accounting bloodbath” at Bilfinger hasn’t happened yet.

Summary:

In general I think Vossloh could be an interesting turn around story, especially considering the involvement of German self-made billionaire Hermann Thiele. I do like the industry better than for instance Bilfinger. It is clearly cyclical but I don’t see any structural issues. On the other hand, the current price is too high with regard what I would expect for such a relatively high risk “turn around” investment. The “Mean reversion potential” at the current price is not high enough, I would need a ~20% lower share price to justify an investment.

Looking at the chart, this might not be unrealistic as the stock price is still in free fall and any “technical” support levels would be somewhere around 39 EUR per share if one would be into chart analysis. In any of those “falling knife” cases, patience is essential anyway.

Vossloh will therefore be “only” on my watch list with a limit of 42 EUR where I would start to buy if no adverse developments arise. Additionally I will need to check Vossloh against Alstom once

Short cuts: KAS Bank & Van Lanschot

Both Dutch Banks in my Portfolio, Van Lanschot and KAS Bank reported 6 month numbers last week.

Van Lanschot

Van Lanschot’s 6 month numbers were relatively solid in my opinion. 6 months EPS were 1,14 EUR per share, however this includes certain one-offs from asset sales. The underlying wealth manangement business seems to have stabilized. Net interest income is slightly going down but this is the result of shrinking their loan portfolios and was expected. The stock price reacted quite positively on those numbers:

What I didn’t like at all was the fact that within the comprehensive income, they burried a large increase in their pension reserves of around -82 mn before tax. This is around 10% of gross pension liabilities and wiped out all the profit of Van Lanschot in the first 6 months (comprehensive income was actually negative). Unfortunately, there is no explanation given. I Have sent an Email to IR in order to understadn this better.

KAS Bank

Similar to Van Lanschot, KAS Bank presented very solid 6M numbers including a big one time effect. They received 20 mn EUR as compensation for letting German dwpbank out of an outsourcing contract. Underlying profit without this one off increased nicely, although mostly due to cost savings than higher revenues.

Compared to Van Lanschot, the stock price did very little:

Maybe this has to to with a somehow muted outlook and the decission to fully reinvest the dwpbank payment. Nevrteheless, for me KAS Bank seems to be on a very good way and is rather a buy on weak days. I still think that KAS Bank should trade at least at book value which is around 14,50 EUR per share.

KAS Bank in my opinion is also a very good and cheap interest rate hedge. If short term rates rise, this will directly benefit KAS Bank’s result within a very short time frame. I do not have an active opinion on interest rates, but it is a nice “add on” to the investment case.

Performance review August 2014 – Comment “Patient enough ?”

Performance August:

In August, the Benchmark (Eurostoxx50 (Perf.Ind) (25%), Eurostoxx small 200 (25), DAX (30%), MDAX (20%)) recovered from last month’s loss to a certain extent and gained +1,1%. The portfolio could not keep up with that and was almost unchanged. YTD, the score is +7,6% for the portfolio against +0,3% for the BM.

Winners were Installux (+6,9%), Van Lanschot (+5,9%) and Cranswick (+5,1%). Losers were Admiral (-8,4%), Sistema (-8,3%) and Kas Bank (-3,2%).

Current Portfolio & transactions:

In August, I added Bouvet ASA as a new position to the portfolio and increased Gronlandsbanken to a half (2,5%) position. This reduced the outright cash level to 9,0%. Together with 3 special situations (Depfa LT2, MAN AG, Sky Deutschland) which I consider “close to cash”, the portfolio is still very conservatively positioned.

The detailed portfolio can be seen as always under the portfolio page.

Comment: “Patient enough ?”

In my blog, I have often written about the virtues of patience for an investor, for example in my January 2013 comment. This is what I wrote some 19 months ago:

However another potentially big mistake should also not be underestimated: Taking profits too early. Most investors (including myself) get nervous if their stocks climb quickly 20-30%. What you then often hear is something like “It never hurts taking a profit” or “No one ever got bankrupt by taking a profit” or something similar.

The truth is: In order to generate above average returns, taking profits too early hurts badly. Statistically, the vast majority of investment ideas will be rather average, some will be bad, but some of them and usually only a small amount will be really really succesful.

So if I look at the January 2013 portfolio, I can already identify a couple of positions which I have sold far too early, among them Total Produce, WMF, Dart Group, Bouygues which I sold far too early despite my smart talks in the comment. So obviously, I am still not patient enough, especially with my winning shares. So how can I trick myself into more patience ?

In my current portfolio overview I added a column called “Holding period”. This is simply the calculated time since I bought the first part of the position. Interestingly, both for the “core value” part as well as for the special situations, the average holding period is around 1,5-1,6 years.

Name Weight Perf. Incl. Div Holding period
CORE VALUE      
Hornbach Baumarkt 4,3% 35,7% 3,7
Miko 3,9% 10,7% 1,0
Tonnellerie Frere Paris 5,7% 117,3% 3,7
Installux 3,5% 82,1% 2,3
Poujoulat 0,8% 26,5% 2,3
Cranswick 5,8% 72,4% 2,2
Gronlandsbanken 2,5% 25,7% 1,8
G. Perrier 4,5% 102,5% 1,5
IGE & XAO 2,2% 57,3% 1,3
Thermador 3,0% 41,3% 1,2
Trilogiq 1,7% -14,5% 0,9
Van Lanschot 2,6% 9,7% 0,8
TGS Nopec 4,9% 12,3% 0,8
Koc Holding 3,6% 46,3% 0,5
Ashmore 2,9% 17,8% 0,5
Sistema 1,1% 4,4% 0,5
Sberbank 1,1% 6,7% 0,3
Admiral 2,7% 3,3% 0,2
Bouvet 2,7% -0,3% 0,0
       
OPPORTUNITY      
KAS Bank NV 4,3% 49,8% 3,7
Drägerwerk Genüsse D 4,8% 143,5% 2,9
DEPFA LT2 2015 5,0% 30,3% 3,7
HT1 Funding 4,3% 86,5% 0,8
MAN AG 2,3% 4,8% 0,5
Energiedienst 2,6% 10,6% 0,3
Depfa 0% 2022 TRY 3,0% 16,5% 0,2
NN Group 2,6% 2,5% 0,1
Sky Deutschland 2,5% -0,8% 0,0
       
Cash 9,0%    
       
Core Value 59,5%   1,6
Opportunity 31,5%   1,5
Short+ Hedges 0,0%    
Cash 9,0%    
  100,0%   100,0%

Most of my “core value” investments are usually meant to take 3-5 years in order to work out as planned. Of course, sometimes events out of my control impact the holding period such as buy- outs (EGIS, AIRE KGAA) or maturities in the case of bonds. But especially for the “core value”, the current 1,6 year holding period looks short on average. Clearly, there is some effect due to the fact that I started the blog 3,7 years ago and in my private portfolio some of the initial positions are there for a much longer time. Nevertheless, in the future I will focus more on the average holding period.

If i would invest consequently along my stated goals I would expect an average holding period of at least 2-3 years for my “core value” part. The “special situation” part is naturally a little bit shorter.

Now the good news: I don’t have to do anything to increase the holding period. I just have to sit around, wait and do nothing and the holding period will increase each day…..

I don’t want to give myself any “hard restrictions” on the average holding period as I strongly believe that most external restrictions on investment portfolios are negative for performance in the long run. One of the biggest advantages of any private investor is that he/she doesn’t need to have any restrictions. If you look at any institutional portfolio, it is crazy how many regulatory and other restrictions exist. Many portfolio managers spend most of their time steering through those restrictions instead of looking for good investments.

For that reason I will not create any artificial minimum but rather look at this as a continuous process and as a “qualitative factor”. In practice for instance I will check any new idea against the alternative to increase an existing position and report the holding period in my monthly updates. Of course this does not prevent too early selling, but I think it helps to implement more patience into my portfolio management process.

AGEAS (ISIN BE0974264930) – Potential litigation play ?

The company:

Ageas is a Belgium based insurance company and formerly known as “Fortis”, one of the biggest Eurpoean casualties of the financial crisis. Fortis, together with RBS and Santander tried to take over ABN Amro but especially Fortis then failed spectacularily and was saved by the Belgian Government and finally sliced and diced into Insurance and Banking, of which the banking part was sold to BNP Paribas.

Ageas itself is an interesting case, similar to NN Group, it is a strange collection of Belgium, UK, and Asian insurance companies plus some weird stuff at corporate level, resulting from the quite ugly split of a combined group into two separate businesses. However, a lot of the ugly stuff has already been cleared over the last few years and Ageas was looking like an almost “Normal” insurance company

The litigation

A few weeks ago, a Dutch court decided that Ageas is liable for misinforming Fortis shareholders in 2008:

The Amsterdam Appeals Court ruled that Fortis is liable for misleading investors by saying the firm was “financially stronger than ever” after a government bailout on Sept. 28, 2008, only to be replaced by a break-up plan five days later.

and further down:

Ageas should be able to meet a worst-case liability of 2.5 billion euros before taxes possibly stemming from the ruling, Matthias De Wit, a Brussels-based analyst at KBC, said in a note today. Still, potential indirect effects shouldn’t be ignored, he said.

Looking at the stockprice, we can estimate that the stock lost ~ 5 EUR per share:

With about 230 mn shares outstanding, the market seems to have implied ~ 1,1 bn EUR loss after tax. Ageas itself has provisioned around 130 mn EUR against this case.

Is this interesting ?

At the moment, it is hard to say. Ageas trades at ~0,62 times book value, which is relatively cheap. They are very active in repurchasing shares (sharecount decreased by -115 since 2011). I do like the insurance sector at the moment because its cheap and the problems (low interest rates etc.) are well known.

Insurance companies do have traditionally very good lawyers on their payroll and litigation is part of their business, so one can assume that they handle this very professionally. On the other hand, other than the CIR Spa case, there is no direct catalyst as the law suit can linger on quite some time.

Valuation wise, Ageas look similar to NN Group, actually, I could easily see those two Groups merging at some point in the future. My guess is that someone is maybe already working on the idea to form a strong Benelux players out of the available mid size companies (Delta lloyd, NN Group, Ageas, SNS).

Nevertheless, I do not think that AGEAS is a “Litigation play” at the moment, as I don’t have a good idea on the time line of the law suit. However it it looks like a pretty cheap insruance company with some upside potential, so I will keep it on my watchlist.

MIFA Bond (ISIN DE000A1X25B5) – Distressed debt & Restructuring “German Style”

I had covered the case of MIFA several times in the last few months (part 1, part 2, update, update 2).

Over the week-end, finally some news emerged with details about the restructuring.

If I understood the filing correctly, the following will happen:

1. Existing shareholders will be diluted 1:100
2. Bondholders will accept a “haircut” of 60% plus the coupon will be reduced to 1% (from 7,5%) and the maturity will be extended to 2021 (from 2018)
3. Hero cycles will inject (up to) 15mn EUR via a capital increase
4. Bondholders will get 10% of the new company for the 15 mn haircut and a subscription right for additional shares

Interestingly, the advisor nominated by the bondholders also made a press release. Some additional info from this release:

- the advisor estimated a recovery rate of only 15% for bondholders in the case of bankruptcy
– technically, bondholders will own 91% of MIFA equity before Hero cycle invests
– bondholders get subscriptions right and could, if they want to invest new money, own up to 30% of MIFA including those shares they get via the debt equity swap

As some details are still missing (price of new shares) etc., it is hard to correctly say how much the bonds are worth and if bondholders were treated fairly compared to Hero. However current prices at ~38% seem to imply most of the upside.

My 5 cents on this

For me, the following aspects of this whole episode are interesting:

- How can be the recovery rate of bond issued twelve months ago only be 15% ? Where did the 21,5 mn EUR disappear ? In my opinion, MIFA was a fraudulent company for quite some time and was already insolvent when they issued the bonds.

- Will there be any law suits by bondholders ? Why did Hero take the risk and didn’t wait for insolvency ? Are there any special provisions for Hero to back out if law suits come up ?

- “Senior bonds” under German law should not be treated and priced as senior bonds. As this example shows, one can “haircut” bond holders under German law (“Schuldverschreibungsgesetz”) without even going into bankruptcy procedures. German Bonds are much more similar to potentially perpetual, deeply subordinated bonds or “Genußschein” than a senior bond under international law. Any covenants written into the prospectus are worth nothing as it is so simple to just restructure the bonds.

- such a restructuring can be decided with only a small percentage of the bondholders. Only 28% of the MIFA bondholders were present when the advisor, who can commit to binding changes, was elected. So in theory, 14% of the bondholders can decide what happens to the remaining 86% of the bondholders with very little chance for any “hold outs”. Maybe Greece and Argentina should issue their future bonds simply under German law. Tha would make life much easier for them.

. why does the MIFA share (1% of the future company) trade at 80 cents or 6 mn EUR market cap ? Do shareholders think that the company is worth 600 mn EUR ? This is a clear “short zo zero” situation if one could actually borrow the shares

- one could argue that the restructuring makes sense because MIFA will be able to continue to operate and now jobs are lost. However I think it would be naive to believe that Hero will operate MIFA they way they worked before. Hero wants the brands and the distribution, not the production. I am pretty sure that they will not guarantee a lot of jobs.

- but at least, the order that existing equity gets wiped out before the senior bonds still holds, even under German law. I had some serious doubts about this.

The most important lesson: As I have written before, new corporate bonds under German law should be avoided at all cost. Especially the “Mittelstandsanleihen” are in principal similar 20 EUR bills issued at 100 EUR with a tiny little option to receive 100 EUR. The “lipstick on this pig” is the high coupon. But German investors seem to buy anything with a high coupon these days anyway. No surprise maybe if you have to pay for holding 2 year treasuries at the time of writing.

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