Author Archives: memyselfandi007

Value Investing Strategy: Cheap for a reason

Value investing is all about investing into stocks where the current price is “cheaper” than the underlying value.

The problem is clearly that although we know the price of the stock at any point in time, we can never be sure about the “true” value of a company as the future is uncertain.

So quite logically many value investors start searching for undervalued stocks within the group of “optically” cheap stocks. I often get emails like ” What do you think of stock xyz, it’s only trading at a P/E of 3 or P/B of 0,2 – isn’t this a great opportunity ?”. Isn’t it a great BARGAIN ?

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Short cuts: Bilfinger, FBD Insurance, ABN Amro IPO

Bilfinger:

It’s “bloodbath time” at least when it comes to accounting. Bilfinger released 6M 2015 figures a few days ago. As often the case with new CEOs, the new one tried to write down as much as possible, in this case ~423 mn EUR or roughly -9 EUR/share:

Charges of 430 million euros ($476 million), including a 330 million write-down of the Power division and 30 million in restructuring costs for Industrial, pushed Bilfinger to a 423 million euro net loss from a profit of 47 million a year ago.

The CEO has sent a letter to all employees, similar to the “burning platform” letter at Nokia some time ago. In Nokia’s case back then it was already too late, let’s see how it works out for Bilfinger. I do think there is some good substance in the company but the transition will be very difficult. For me personally, Bilfinger is still on the “too hard” pile as I cannot judge the viability of the remaining business.

Overall my impression is that the “accounting blood bath” is less aggressive as for instance at Vossloh. I think this has to do with the motivation of the shareholders. At Vossloh, the biggest shareholder Thiele clearly wants to buy more shares at a price as cheaply as possible. At Bilfinger, Cevian clearly does not want to take over the company but rather exit sooner than later.

FBD

I looked at FBD, the Irish Insurance company in January and decided to not invest as a didn’t like a couple of things (non-alignment of incentives, aggressive reserving, stupid investment strategy).

In the meantime, quite a lot happened:

The CEO left, the CFO took over and the stock lost around -50% since then. On monday, FBD issued its 6M report and things look even worse than back then, as at Bilfinger, they created a nice “blood bath”. The Farmer’s journal interestingly has the best coverage for FBD. Here are the highlights from the 6M report:

– the had to increase past reserves by 88 mn EUR (!!!)
– they will sell their hotel JV at book value, the proceeds at Farmer’s side will be reinvested into FBD
– they will go for a subordinated bond issue (50-100 mn)

Overall, the lost over 1/3 of their equity in the first 6 months (from 275 mn to 180 mn). The current equity position includes a retroactively implemented restatement which boosted equity by 30 mn EUR. I honestly didn’t fully understand the reason for this restatement.

Within the 6M presentation, they give the following interesting statement with regard to Solvency II:

JV sales and pension scheme actions take FBD solvency capital levels to the regulatory minimum (~100%)

Debt raise will bolster the firm’s capital buffer, taking Solvency II capital to within the firms target range of 110-130% by December 2015

This clearly shows that FBD is extremely strained from a capital perspective. The biggest unknown in my opinion is how the proceeds of the sold JV will be reinvested into FBD. They don’t comment on that 45 mn EUR at current prices (5,8 EUR per share) would be more than 20% of the company. I don’t know about Irish company laws, but this normally needs to be done on a subscription rights basis. Or the Farmers provide the subordinated capital ?

Anyway for now I still don’t think that FBD is investible, one really needs to understand how the capital increase will be executed. From a positive side, my analysis in January was actually quite good and saved me a lot of trouble. Still, FBD will go on my “focused watch list” as it could develop into an interesting “turn around” case as the underlying business, if run well, is still attractive. I ususally don’t invest into turn arounds but in this case I would make an exception as I consider this inside my circle of competence.

Funnily enough the price adjusted almost directly to the new “book value”. It seems as this is kind of the “anker” for investors.

ABN Amro IPO

The upcoming ABN Amro IPO could be another chance to invest in a “forced IPO” kind of special situation. However, for the time being it doesn’t seem to be a real bargain according to this Reuters article:

The government has said the bank is currently worth about 15 billion euros, just under its just-reported book value, suggesting a paper loss of about a third on the initial share sale. To break even, the bank would need to fetch a valuation of 1.4 times forward book value – higher than rival ING, which trades at 1.2 times.

For a wholesale/corporate/investment bank like ABN I would not be prepared to pay book value, so for the time being I will watch this from the sidelines, unless they come up with a clear discount to book value.

Peyto Exploration & Development Corp – Canadian Cowboys or “Outsider” company ? (part 1)

A few days ago, I linked to a shareholder letter where the CEO of the Canadian NatGas Fracking company Peyto discussed his opinion on the book “The outsiders”.

As some readers might have noticed, I started to look into the energy sector some time ago. First reading some books (Exxon, The Frackers) and a quick look into Cheniere Energy, the NatGAs liquification play.

As I try to expand my knowledge in the energy sector and a CEO reading and discussing “The Outsiders” made me very curious, I started to read the CEO’s monthly letters (going back to December 2006). They are 2-3 pages reports which cover various topics. Although some things are repeated, the information content was extremely high.

I found myself reading report after report until I had read all 105 (!!) of them (you’ll find notes on the memo at the end of the post).. I found them fascinating for 3 main reasons:

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Some links

Rob from RV capital has released his semi-annual investor report with some very good insights (registration required)

A very interesting “idea watchlist” from ClarkStreetValue

Whenever markets go down, Jim Chanos gets more airtime. Discusses China, EM, Solary City, HP and others.

Another half year report, this time from Zeke Ashton’s Centaur Total return fund

Damodaran vs. China

The ViennaCapitalist has an interesting perspective on commodity traders (Glencore)

Some links

A retired HF guy is shorting Canadian housing

A critical look at “Black Box” quantitative Trading strategies. Hint: they all blow up.

Not every spin-off works out. As a reminder, a list of 25 really bad spin off cases

Greenbackd with an analysis of a deep value stock, watch maker Movado

Good write up on South African furniture retailer Lewis Group from the Bovinebear blog

Ever heard of an “Outsiders” like oil & gas explorer ? Canadian Peyto seems to fit the bill here (H/T valueinvestingworld)

The Brooklyn investor with a look at Mondelez and Bill Ackman

Updates: MAN SE & Sold Trilogiq

MAN SE “Special situation”

In November 2013, I entered a special situation investment with MAN AG, arguing that the proposed compensation payment of Volkswagen might be too low and the court may decide to increase it.

Last week, the Munich court now decided to increase the compensation payment from 80,89 to 90,29 EUR. This is less than some investors hoped for, in the past 100 EUR or more were assumed to be realistic.

In my understanding, together with regulatory required interest and minus the already paid annual amounts, the fair value of the MAN share is around 95 EUR which is where the stock trades at the moment.

At ~95 EUR, this results in a yield of approx. 13,5% over 18 months, not spectacular but with very low risk as we can see in the chart:

I don’t think that there is much further upside although some hedge funds seem to be keen to get even more. I will wait and see but I think I will exit the position rather sooner than later.

Trilogiq

Trilogiq is a stock which I bought 2 years ago as a potential “hidden champion” and based on very good historic profitability.

However, pretty soon after I bought, things turned south. The official explanation was that they introduced a new product made out of graphite instead of the metal tubes they used before which should replace most of the existing installations. Sales went down by around -7% in 2014 against 2013 and profit halfed.

Lats week, Trilogiq released 2015 numbers (Year ends at 31.03.).

At a first glance, things seemd to have picked up sligtly. Sales are up slightly and also profit is up from 0,94 EUR per share to 1,06 EUR per share. Cash and Cash equivalents are at a healthy 23,7 mn EUR or ~6,35 EUR per share.

At currently 15 EUR per share, this results in a P/E ex cash of around 8. Still very cheap.

At a second glance however, things don’t look as good. The operating result (EBIT) actually deteriorated by -17% from 4,9 mn EUR to 4,1 mn EUR. Only a swing of +1,1 mn EUR in the financial result driven by FX gains led to a higher EPS.

What irritated me even more was that in they mention in this document that only 7% of sales in FY 2015 were the new graphite products. They way they presented it before one had the impression that more or less the majoriy of sales would have been switched.

Although the second half year looked better than the first, I do think that they have some fundamental problems in their business. Many of their clients (EADS, German automakers) work at full capacity and many automotive suppliers are doing very well.

At Trilogiq however, this is not the case.The US business for instance shrank if one accounts for FX movements. Wages and Salaries increased significantly, not really a sign of tight cost control.

Overall it is not easy to understand what is going on because they don’t provide a lot of information.

My initial thesis relied on the implicit assumption that if their clients are doing well (EADS, automakers), Trilogiq should do well. It looks however that this is not the case and Trilogiq does have individual issues.

As a consequence, I sold the position in the last few days at an average price of 15 EUR per share, realizing a loss of -17,88% against my purchase price as I do not have any visibility on what’s going on at Trilogiq.

It still could be that Trilogiq could be a good value investment as it is still cheap but now it looks rather like a potential turn around case which is very different from the assumed “hidden champion” I was hoping to invest in.

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