Author Archives: memyselfandi007

Romania update: Electrica (great !!). Romgaz (so so) & new Prime Minister

Romania new Prime Minister

A few days ago, following the fatal fire in a Bucharest nightclub, prime minister Ponta surprisingly resigned following massive protests on the streets.

Interestingly, instead of quick new elections, a “technocrat” Government was nominated, lead by a former EU commission member.

He has nominated young and independent experts for the key portfolios of the economy, justice, foreign office and health.

Ciolos selected Anca Paliu Dragu, an economic analyst at the European Commission, to take over the Finance Ministry and Cristina Guseth, chief of Freedom House Romania, as Justice Minister.

On the other hand, experienced diplomat Lazar Comanescu was proposed as Foreign Affairs Minister, while Mihnea Motoc, Romania’s ambassador to Britain, was nominated as Defence Minister.

The Economy Minister will be businessman Costin Borc, and sociologist Vasile Dancu will have the role of Minister of Regional Development.

Political commentators saw the proposed government as pro-reform.

Up until now there was a political deadlock between the newly elected president Johannes and Socialist Ponta.

It reminds me a little bit of Mario Monti’s technocrat government in Italy which came into power after Berlusconi was forced out in 2011. Most of the Italian reforms were made in that short period of time. Before and after, not much has happened there. So from an outside view I would consider this whole episode as a step into the right direction.

Now to my 2 Romanian holdings:


Romgaz released 9 month numbers already some days ago. The good news was that the presentation looks more professional than before, the bad news is that sales and profits went down by slightly more than -10% against 9M 2014. Additionally they had exceptional write-offs on receivables and exploration assets.

Interestingly, margins remained pretty stable, helped by the underlying price increases that will bring the local prices up to market prices over several years.

They also made a regulatory filing which already contains a detailed projection for the 2015 profits and dividends. Based on that projection, the 2015 profit will be 1.032 mn Lei or ~ 2,67 Lei per share, significantly lower than the ~3,60 lei for 2014.  However in my opinion, this sounds worse than it actually is. It seems to be that current Nat Gas consumption in Romania has declined, I honestly don’t know why. But as the local Nat Gas prices at the moment are still very low and supposed to rise, that means that the gas which has stayed in the ground and not sold is getting more valuable. So I think the issue of the lower sales volume has only a limited effect on the value of the company as those reserves then can be sold higher in the future. So my initial valuation of Romgaz from a year ago is still valid.

The share price clearly has suffered but less than other energy stocks. Interestingly, Fondul Propritatea dumped 4% of Romgaz a few days prior to the release which, looking back now seems to have been “very fortunate” for them.

Anyway, for me Romgaz is still in the early phase of the investment period and for me there is no reason to change anything


Electrica also released Q3 numbers a couple of days ago. In contrast to Romgaz, Electrica’s numbers were excellent. The 9 month profit is already higher than the total 2015 profit I estimated last year in my initial case. The increase came exclusively from the distribution side which is very positive.

Additionally, Fondul Propritatae seems to have reopened negotiations on the minority stakes in the three operating companies. If Electrica could buy them at a valuation close to their own stock, this could create a lot of value for shareholders.

Overall, I think Electrica is one of my “highest conviction” ideas, the stock is extremely cheap and developing much better than I thought. It might take time until this get reflected in the stock price but I don’t have any reason to hurry.

One interesting detail: One of the supervisory board members had to resign because he became the new energy minister. Maybe this helps a little bit for better relationships with the regulator….


Some links

A look back how Buffett invested into special situations back in 1962

Meb Faber compares investing based on Buffett’s disclosures with the Berkshire stock

Driverless cars’ chances halted by tumbleweed (Paywall, Google for title)

Broyhill Capital likes Sea World

The short case for Union Pacific Railroad

Why a Chinese Billionaire paid for a 170 mn USD art purchase with his Amex

Interesting Michael Bloomberg interview from the Robin Hood 2015 conference:

The “Watch Series” (5): Smart Watches vs. mechanical Swiss Watches (and Fitness trackers)

Management summary
In the short term, I don’t think that the Apple Watch is a big danger for Premium Swiss Watch brands. Why ?
– putting some gold on a mass-produced electronic gadget didn’t work for smart phones either
– the smart watch doesn’t have a killer app yet and we don’t see an overall smart watch boom
– the observed decline in Swiss watch exports seems to be mostly caused by overall weakness in Hong kong and Macau
– however lower or medium priced brands could be affected especially in the coming Christmas season

The short-term danger to Premium Watches is much more a further cooling of Chinese and Emerging Market demand. Mid to long-term there could be issues as the market seems to be in the early stages of significant technical changes

Before I jump into more details I have to make a confession: I am myself not an expert on watches. As a matter of fact, I haven’t worn a wrist watch for the last 25 years.
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Buffett & Munger on Cost of Capital: Don’t listen to what they say but look at what they do

After bashing David Einhorn for his Consol Energy WACC assumption last week, by chance I read at the very good 25iq blog an article on how Buffett and Munger publicly speak about those things.

Indirectly, this is clearly a slap in my face because even the headline already says it all:


Why and how do Munger and Buffett “discount the future cash flows” at the 30-year U.S. Treasury Rate?

The post summarizes what Charlie and Warren have said over the years with regard to cost of capital and discounting. I try to summarize it as follows:

  • They seem to use the same discount rate for every investment, the 30 year Treasury rate
  • in a second step they then require a “margin of safety” against the price at offer
  • they estimate cash flows conservatively
  • Somehow Buffet seems to have a 10% hurdle nevertheless
  • Buffett compares potential new investment for instance with adding more to Wells Fargo

So if Buffett doesn’t use more elaborated methods why should any one else ? Was I wrong to beat up David Einhorn because he used a pretty low rate for Consol Energy ? Add to this Mungers famous quote “I’ve never heard an intelligent cost of capital discussion” and we seem to waste a lot of time here, right ?

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Book review: “Mister Swatch -Nicolas Hayek and the secret of his success”


This is basically part 4 and a half of my “watch series”. The founder of Swatch Group, Nicolas Hayek who died in 2010 was such an interesting character so I thought it made sense to read this biography.

The biography is unauthorized, Hayek was against it. The author is one of the most well-known Swiss Journalists. I actually read the German version because it was 10 EUR cheaper as hardcover than the English version.

Hayek was born in Lebanon into the “affluent middle class”. He went to Switzerland because he fell in love with a Swiss Aupair girl. His parents would not let marry him because of”low status” of the girl, so he left and went to Switzerland.
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Dear David Einhorn: Why are your interns doing all the cost of capital estimates (Consol Energy) ?

Just to be clear: I have nothing personally against David Einhorn. I am just wondering how he comes up with his underlying valuation assumptions these days.

I already had issues with funding cost assumptions at AerCap as well as his return assumptions for SunEdison.

Now I came across his latest pitch for Consol Energy this week. This is the slide which explains the value of the coal business:

Without going into the other details, the question here is of course: How the hell did he come up with a WACC (Weighted Average Cost of Capital) of 8,4% ?

The WACC is supposed to be the blended total cost of capital of a company, including both, debt and equity. For Consol Energy however the obvious problem is the following: Their bonds are trading at a level of 12-15% p.a. Even if we us an after-tax figure of maybe 8-10%, even the after-tax cost of debt is higher than the assumed WACC.

As the cost of equity has to be higher than senior debt (it is more risky), there is no way in ending up with a WACC of 8,4%. Maybe some of my readers can help me out if I am missing here something, but I am pretty sure that 8,4% is not the right number for Consol’s cost of capital. He uses the same WACC later for the shale gas part of the company, so it is certainly not a typo:

On his website he then explains how they (or his intern) came up with the WACC (slide “A-1”):

consol wacc

The real joke however is to be found a little bit below:

consol 2

Edit: Now that I know that it was meant as a joke it reads somehow different ;-)


So he somehow believes that his WACC is actually conservative.

Let’s look at some “real world” data. This is the overview of Consol’s currently outstanding bonds:

consol bon ex

The average yield based on outstanding amount of Consol’s bonds is 14,5%, a full 11% (or 1.100 basis points) higher than in Einhorn’s calculation. As I have said above, the cost of equity has to be higher than the cost of debt as thee is no protection to the downside. So if we use Einhorn’s quity risk premium of around 6%, we would get cost of equity of around 20,5%.

Based on Einhorn’s weighting, we would get a WACC of (20,5%*0,75) + (15,5%*0,65*0,25)= 17,73%, roughly speaking double the charge that Einhorn uses. You might say this is conservative but in effect it is just realistic and based on current market prices.

Even at issuance, Consol’s cheapest bond had a 5,875% coupon, far above the assumed 3,5%, so it is not even a question of current market dislocation.

Either Einhorn assumes implicitly that cost of capital goes down dramatically or he has some “secret” that I don’t know. If I look at Einhorn’s last pitches, especially AerCap, SunEdison and Consol, there seems to be a common theme: He is always pitching capital-intensive companies with significant debt where he assumes pretty low cost of capital in order to show upside.

So what he seems to do these days is effectively betting on low funding costs which, at least for SunEdison and Consol didn’t work out at all.

In my opinion, this has nothing to do with value investing. Value investing requires to make really conservative assumptions to make sure that the downside is well protected as first priority. For those leveraged, capital-intensive businesses however, the risk that you will get seriously diluted as shareholder in those cases is significant, there is no margin of safety. On the other hand I somehow admire his Chupza. Standing in front of a lot of people who paid significant fees to hear the “Hedge Fund honchos” speak and pitching such a weak case with unrealistic assumptions is brave.

Of course a stock like Consol can always go up significantly after dropping -75% year to date, but the underlying analysis is really flawed. I would actually like to ask him if he really believes in those assumptions or if he just didn’t pay any attention to the details. This would be really interesting.

Maybe a final word on this: I am always criticising David Einhorn on his assumptions. Which is easy because he actually is very transparent about them. Many other Hedge Fund managers just tell nice stories. I am pretty sure that in many cases the assumptions behind those cases are not much better.

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