Category Archives: Opportunities

Deutsche Pfandbriefbank AG “forced IPO” – “Superbad” or interesting special situation ?

Management summary:

Oh my god, a bank again…. But Deutsche Pfandbriefbank is actually a pretty simple case: As a “forced IPO” of the good part of Hypo Real Estate, the bank is comparable cheap (P/B ~0,61) against its main peer Aareal bank (P/B 1,0). In my opinion, the risk is limited despite the recent HETA losses as the German Government has absorbed all of the really bad stuff in the bad bank. Similar to cases like Citizen’s, NN Group and Lloyd’s, PBB offers an interesting and mostly uncorrelated risk/return profile for patient investors provided that valuation multiples normalize at some point in time. Positive surprises like M&A are potentially on the table as well.

DISCLOSURE: THIS IS NOT INVESTMENT ADVISE. Do your own research. The author might have bought shares already.

Read more

Special situation: Gagfah (ISIN LU0269583422)–> From take-over to potential Squeeze-out via Delisting

Management summary:

In my opinion, the stock of Gagfah offers an interesting risk/return profile as special situation investment:

– the current price at 12,35 EUR is ~1/3 lower than the expired take-over offer from Deutsche Annington 6 weeks ago
– although the share will be delisted by the end of the year, I do believe that a squeeze-out under Luxembourg law is very likely within the next 12-18 months close to the initial offer price (~ 50% upside from current price)
– the downside is that following November, the stock will be unlisted and hard to sell and that for some reason the Acquirer Deutsche Annington will not squeeze out the remaining minorities

Health warning / Disclosure: This is no free lunch, there are plenty of risks involved among others getting stuck with an unlisted stock. This is not investment advice, DO YOUR OWN RESEARCH. They author might have bought the stock already before posting this.

Read more

New position: Lloyd’s Banking Group (GBGB0008706128) as special situation investment

Interestingly, while looking at AerCap, I always almost automatically compared them to Llyods Banking Group. In the old days I might have bought both shares but as I limit myself to 1 new position (or one complete sale) per month I had to make a decision and it went to Lloyds. My previous analyses can be found here: part 1 & part 2
Read more

Lloyds Banking Group Special Situation investment – Management & Valuation

This is the follow up post to the first post on Lloyds Banking group 2 weeks ago.

By chance, I just saw this research note from Investec which perfectly sums up all the reasons why Lloyds is not a favourite of investors at the moment:

Bloomberg) — Lloyds cut from buy on concern about outcome of U.K. election, probability of a “raft of negative one-offs in 2015” and on U.K. govt plans to exit its 22% stake, Investec says in note.
Says Lloyds has “sensibly’’ signalled it will call all remaining Enhanced Capital Notes
That should speed-up negative fair value unwind of GBP0.7b
There could also be extra charge if Lloyds pays any premium
January PPI redress costs for bank industry rose to 14-month high of GBP424.5m
Planned sale of TSB to Sabadell means deconsolidation in 1Q, that could mean charge of GBP0.6b
Sees U.K. govt stake reduced to ~20% by end June, with sale of govt shares accelerated after that, acting as drag on stock
U.K. May 7 election poses risks to banks with uncertainties over macro economy, another bank levy increase, restrictions on use of residual tax losses
Lloyds less vulnerable than peers over regulatory/conduct issues and less exposed to bank levy than other FTSE 100 banks

For me, this is actually a good sign that a lot of the short-term bad news is on the table. But let#s look at the company now.

Just as a refresher, the quote from Warren Buffett which I used already when I looked at Handelsbanken:

The banking business is no favorite of ours. When assets are twenty times equity – a common ratio in this industry – mistakes that involve only a small portion of assets can destroy a major portion of equity. And mistakes have been the rule rather than the exception at many major banks. Most have resulted from a managerial failing that we described last year when discussing the “institutional imperative:” the tendency of executives to mindlessly imitate the behavior of their peers, no matter how foolish it may be to do so. In their lending, many bankers played follow-the-leader with lemming-like zeal; now they are experiencing a lemming-like fate.

Because leverage of 20:1 magnifies the effects of managerial strengths and weaknesses, we have no interest in purchasing shares of a poorly managed bank at a “cheap” price. Instead, our only interest is in buying into well-managed banks at fair prices.

Lloyd’s Management

So let’s look at Lloyds Management. The CEO, Portuguese António Horta Osório is considered to be one of the “best bankers” in the business. He was appointed in 2010 and lured away from Santander, where he build up Santander’s quite succesful UK subsidiary.

He became CEO in March 2011 but then something strange happened: He “disappeared” for around 6 weeks due to a “burn-out”. He cam eback however and actually did not take his bonus for that year.

But how can one determine if he is really a good manager? Well, a first step would be to look at videos and interviews. As an INSEAD alumni for instance a quite interesting inerview with him can be found when he still was in charge of Santander UK. There are a lot of speeches and interviews found on Youtube from him, for instance here or here. Despite his “slick” look, he comes across as a rather thoughtful person trying to restore some kind of trust into the banking industry.

But public appearance only is a part of management assessment. The more important aspect in my opinion is a very simple question: What does a CEO actually do and achieve compared to what he is promising. In Lloyd’s case, a few months after he started, the CEO presented a strategic plan which covered the years 2012-2014. The main features were:

– reducing cost by 1.5bn GBP with a target cost income ratio of 42-44%
– Statutory ROE of 12.5%-14,5%
– Core tier 1 equity ratio > 10%

If we look at the latest presentation from March, we can see the following “score card”:

– cost was reduced by 1.4bn, but cost income ratio was 50%.
– Tier 1 ratio 12,8% —> fully met
– Statutory ROE: not met, it wasn’t even mentioned

Overall, Orosio delivered on the cost side but failed to increase the “other income”. Additionally, he clearly underestimated all the PPI, Libor scandal fines etc. but this is outside of his control. One thing which annoys me a little bit that they basically dropped the ROE measure from their reporting. The are now reporting non-sensical numbers like “return on risk weighted assets” which IMO is a “BS number”. For a financial company, ROE in my opinion is “THE” measure of success in the long run and nothing else.

So overall, I would give “good” marks to Horosia. I do think he is a great “operator” and maybe one of the bank “cost cutters” in the industry, but maybe not the one to create a lot of new business opportunities.

If we compare Lloyds for with RBS which was more or less in the same situation, financial markets seem to think that Lloyds has done better:

Valuation

As always, one has to make assumptions for any kind of valuation exercises. For banks, I like to keep it simple:

I Estimate a target P/B multiple, target ROE and target retention ratio to come up with a potential return calculation. In Lloyds case, I assume that 12% ROE is a reasonable target to be achieved within the next 4 years. Other than for Handelsbanken, I think that Lloyds can only reinvest 25% at those rates and will pay out 75% of earnings.

  1 2 3 4 5 6 7 8 9 10
Book Value 65 66,3 6791% 6961% 71,5 73,7 75,9 78,2 80,5 82,9 85,4
ROE 8,0% 9% 10% 11% 12% 12% 12% 12% 12% 12% 12%
EPS 5,2 6,46 6,79 7,66 8,58 8,84 9,11 9,38 9,66 9,95 10,25
Implicit P/E 80,76923077 13,0 11,7 10,6 12,5 12,5 12,5 12,5 12,5 12,5 12,5
Retention ratio 25% 0,25 0,25 0,25 0,25 0,25 0,25 0,25 0,25 0,25 0,25 0,25
Dividend   4,8 5,1 5,7 6,4 6,6 6,8 7,0 7,2 7,5 7,7
Target Price   84,0 79,5 81,4 107,3 110,5 113,8 117,2 120,8 124,4 128,1
                       
NPV CFs 10 Y -79 4,8 5,1 5,7 6,4 6,6 6,8 7,0 7,2 7,5 135,8
NPV -79 4,8 5,1 5,7 113,7            
                       
IRR 10 year 11,5%                    
IRR 4 year 14,1%                    
                       
                       
Div. Yield   5,77% 6,41% 7,05% 6,00% 6,00% 6,00% 6,00% 6,00% 6,00% 6,00%

If my assumptions would turn out to be correct, over a 10 year period, Lloyds would return around 11% p.a. Not bad but worse than Handelsbanken. Selling after 4 years however would lead to a return of 14% which I find quite Ok. The difference comes from teh fact that I assume relatively low “compounding” which I think is realistic.

Other considerations

What I do like about the risk/return profile is the fact that there is a kind of “soft put” at 0,736 GBP. This seems to be the break-even of the UK Government. I assume that if the price would move below that, they will lower their sales volume or stop sales altogether as they want to show a “profit”, which should support the stock price at that level.

I think there could also be an interesting effect with regard to index weights. I am not sure how often index providers refresh their weights for instance for the Footsie, but there is most likely a time lag between the UK government selling and the index providers adjusting the weight. I know that for instance the DAX is only reweighted once a year which would then, in the caso of LLoyds would suddenly increase the amount to be bought by the index funds.

Summary:

Summing up the two posts, I would look at Lloyds the following way:

+ Lloyds look like solid UK bank which has cleaned up its portfolio and will return respectable returns going forward
+ The bank is run by a good operator which will decrease costs further
+ The UK Governemnet selling down and overall negative sentiment towards UK banking could explain an undervalutation of the stock
+ fundamentally I find UK banking attractive as there is significant concentration and interest rates are still high enough to make money
+ profits and dividends will improve significantly over the next 2-3 years
+ Threat of new entrants lower than for the other large peers due to low costs
– there is not a lot of growth potential in the stock as the market share is so high already
– short term nagative surprises/charges possible

In its current form, Lloyds is clearly not a growth/compounding story but rather a 3-4 year “special situation”. It similar to my 2 other “forced IPO” or “forced sales” investments Citizen’s and NN Group.

So overall, I find it a quite attractive special situation. Banks in general are one of the last truly “cheap” sectors and I do think that Lloyds has most of its problems behind it, especially compared to its large UK peers. So despite the relatively high valuation, I do think Lloyds is one of the most interesting situations with large UK and European banks at the moment.

Due to my position limitation however, this will get on the “queue” for the time being and decide by the end of the month if to buy, unless the price woul ddrop significantly. My buying limit would be around 79-80 pence/share.

Updates: Energiedienst (CH0039651184) & Vossloh (DE0007667107) voluntary tender offer

Energiedienst

My first transaction this year was to sell my shares in Energiedienst.

Looking at the Swiss Francs chart, where Energiedienst has its primary listing, this looks like genius timing:

However in Euro, it looks pretty stupid:

In Euro, the shares jumped from around 25,20 EUR to around 27 EUR at the time of writing, a upmove of around 7% against a loss in Swiss Francs of around -10%.

So what happened ? Well in case you were not on a Moon mission last week you might have heard about that Swiss Franc “thing”. The Swiss Franc increased around 17% against the Euro within a very short time frame. What we can see above is relatively easy: The stock price in Swiss Franc fell, but not enough to off set the CHF/EUR movement. This is very strange, especially in the case of Energiedienst.

Energiedienst operates (based on sales) around 85% of its business in Germany and only 15% in Switzerland. So even if we assume that the business in Switzerland is not negatively affected, the increase in EUR should have been theoretically only 0,15*17%= 2,6% in EUR and not +7%.

If we look at Swiss Power prices however, we see something interesting: With the exception of the one day, they directly adjusted in EUR terms as we can see here for instance in the Swiss 1 year forward electricity prices:

swiss power EUR

So in this case, electricity prices seem to be more efficient than stock prices, as there seems to be a very quick and liquid market to arbitrage away those currency differences quickly. Nevertheless I lost money by selling to early but in this case it was not my fault.

Vossloh

Back in September, I presented Vossloh as a potential fallen angel with activist involvement. This is what I wrote back then:

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.

On November 7th, Vossloh actually hit the 42 EUR threshold but somehow I was not quick enough and passed to buy some shares. Since then the shares recovered nicely to around 54 EUR when yesterday, the following news hit the wires:

On 20 January 2015, KB Holding GmbH decided to make a voluntary public takeover offer to the shareholders of Vossloh Aktiengesellschaft, Vosslohstraße 4, 58791 Werdohl, Germany, for the acquisition of all ordinary bearer shares with no par value, each share representing a proportionate amount of EUR 2.84 in the share capital (the ‘Vossloh-Shares’).

KB Holding GmbH intends to offer the payment of a cash consideration per Vossloh-Share in the amount of the weighted average domestic stock exchange price during the last three months before the publication of this
announcement according to Sec. 10 para. 1 sent. 1 WpÜG pursuant to Sec. 5 para. 1 and 3 of the Regulation on the Content of the Offer Document, Consideration for Takeover Offers and Mandatory Offers and the Release from
the Obligation to Publish and Issue an Offer (WpÜG-Angebotsverordnung), as determined by the German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht, BaFin). This consideration is expected to be in a range between EUR 48 and 49 per Vossloh-Share and will be published immediately after being notified by BaFin.

KB Holding GmbH currently holds 29.99 percent of the shares in Vossloh Aktiengesellschaft.

The stock managed to gain some more and closed at around 56 EUR per share:

So the first question is: Why does he offer 49 EUR per share if the shares are trading already at 55 EUR ?

This one is pretty easy: Thiele was already owning 29,99%. In Germany, once you cross 30%, you have to make a mandatory offer at the trailing 90 “VWAP” stock price. My guess is that Thiele clearly wants to take control, but maybe not now and not at 55 EUR. So he used the occasion to come out with this lowball offer, because this releases him from any further mandatory offers and he is not forced to take more shares than he actually wants.

After the offer has expired and Thiele has crossed 30%, he only needs to disclose purchase once he crosses 50% and even then he does not need to make a mandatory offer as the voluntary offer releases him from making any subsequent offers.

Is the stock still attractive at that level ?

Well, we know now that Thiele clearly wants to take control. But we also know that he is a very shrewed operator with little interest in minority share holders. He controls the management of the company already (he actually hired the new CEO) as he ist already the strongest shareholder.

For anyone who followed the blog and the German Corporate law discussion, the biggest issue is the following: Under current law, Thiele could decide (or his CEO) to delist from the stock exchange. This is now possible in Germany without even getting any kind of shareholder approval. This would force many funds out of the stock as normally unlisted stocks are not permitted under most fund regulations. Even for hardcore hold outs this would mean low or no transparency etc. etc.

I have seen a recent study (Solventis, “Endspiele”) that since the change in law (or the change in interpretation), on average stocks lost around -25% following the announcement of a delisting.

Overall, at the current price the risk/reward ratio is in my opinion neutral. There is some room left with regard to a fair value and mean reversion, on the other hand one should be careful with regard to any minority unfriendly actions from Thiele & Co.

As a learning experience, I should maybe watch my watchlist a little bit closer in order not to miss such opportunities as in November.

Short Cuts: Flughafen Wien, Alstom, Trilogiq, Sberbank

Flughafen Wien

A quick update on my “Christmas-special situation” investment Flughafen Wien:

82,2% of the tendered shares have been accepted at the offer price of 82 EUR. With the current share price of ~ 77,5 EUR, the overall return results (pre costs and taxes) are :

(0,822*(82-79,25) + 0,178*(77,50-79,25))/79,25= +2,46% For the portfolio I assume that I would be able to close the position (sell the rest) at 77,50 EUR. Privately my broker DAB was not yet able to “release” the tendered shares.

Alstom

Back in August this year, I looked at Alstom as a potential “sum of parts” play following the GE deal announcement. One open point was the issue of pending corruption charges. I had written the following:

A second big issue is that at the moment no one knows exactly how much of the liabilities will get transferred to GE. Especially with regard to operating leases (nominal ~830 mn EUR), litigation liabilities (528 mn EUR) and pension liabilites (gross 5,2 bn) there is no definitive answer how much will be transferred to GE and what remains at Alstom. In a sum of part calculation, any of those remaining liabilities will have to be deducted from the extra assets as they are economically equivalent to debt.

I had some discussion and the consensus was that litigation liabilities would be transferred to GE, although I was sceptical. It turned out that I was right in this case. Alstom pleaded guilty and agreed to pay 772 mn USD fine. For the valuation, the most important sentence is this one:

In June, Alstom agreed to sell most of its energy business to General Electric. The French company said it would not be able to transfer its fine over bribery allegations to G.E.

Due to the strong dollar, in EUR the fine is actually 100 mn USD higher han the reserves. Overall, for anyone assuming GE taking over those liabilities, this reduced the value of Alstom by 2 EUR per share.. It will be interesting to see how the transport business is actually doing once Alstom publishes annual results. So far, I do not see any reason to buy the stock from a fundamental point of view.

Trilogiq

A few days before Christmas, Trilogiq reported 6m figures (30.09.2014). For some reason, the report is not on Trilogiq’s homepage, so one has to look at secondary sources like this one. Sales were slightly lower, gross margins more or less equal to last year. Net income was significantly lower but still positive.

They attribute the lower result to special marketing expenses and new hires:

la hausse de 13% des autres achats et charges externes, notamment du fait de la multiplication des actions marketing destinées à faire connaitre la nouvelle gamme GRAPHiT à travers le monde, l’augmentation de 12% des charges de personnel qui ont été grevées par d’importantes indemnités de départ et par de nouveaux recrutements

Cash is till around 22 mn EUR or 6 EUR per share. If Trilogiq manages to return at leat to 2/3 of the old profitability, (earnings were between 1,45 EUR per share and 1,75 EUR from 2008 to 2013), the stock would be priced at 6-8 times earnings. It remains to be seen if the temporary effects are in fact temporary. A friend forwarded me this equity research piece on Trilogiq where they expect 1 EUR EPS in 2016/2017 which to me looks quite conservative. Nevertheless, I think the further fundemental downside for Trilogiq at the current stock price is rather limited.

Sberbank

Over the holidays, I decided that I will exit my Sberbank position still within the old year at today’s prices. In the private account this also leads to “tax loss harvesting”. For the portfolio it became clear to me that my investment decision now has been invalidated 2 times. First, I estimated that the Ukraine conflict would be over quickly which was clearly wrong. Secondly, I did not account for the drop in oil prices and the ruble. I have honestly no idea how exposed Sberbank is directly or indirectly to oil and the ruble, but the prudent decision is to sell now and look at the stock (and the Russian market) again next year.

It might look very pro-cyclical selling near the low, on the other hand, if an investment case has deteriorated as much as in this case one should better exit before “behavioural biasis” such as “breaking even” etc. kick in.

Special situation “Quickie”: Flughafen Wien AG (ISIN AT0000911805) partial Tender offer

Just by chance I looked at Flughafen Wien these days where since a few weeks an interesting situation is playing out.

Although Flughafen Wien is owned 50% by the Government and cannot be taken over, an Australian based Infrastructure fund called IFM made a partial tender offer for up to 29,9% of the shares.

Initially, IFM offered 80 EUR per share with a minimum threshold of 20% acceptance.

A few days ago, after pressure from soem shareholders, IFM increased the offer to 82 EUR and waived the 20% minimum threshold.

If I understood correctly, the new final date to tender the shares is December 18th. The money then is being paid within 3 working days, so before year end according to the official offer.

IFM seems to have secured around 12% from 2 funds already (Silchester, Kairos).

IFM seems to be a “reputable” investor, there seems to be no relevant operational risks for the offer from a technical point of view as far as I can tell.

However, the stock doesn’t trade at 82 EUR but rather at around 79,20 EUR per share:

This implies that investors expect 2 things

a) that more than 29,9% will be offered
b) and that the share price will fall after the offer below the offer price

Now we can play around a little bit to see if this is something worth betting on. We could start for instance assuming that the stock directly drops to 70 EUR after the offer expires.

Then we can calculate at the current price of 79,2 EUR an implicit or “break even” acceptance ratio:

79,20 = X*82 + (1-x)*70 = 76,67%.

So if 76,67% of the offers get accepted, the remaining not accepted stocks can drop to 70 EUR before one is making a loss on the transaction.

If all tendered shares are accepted, the max. profit would be 2,8 EUR per share or +3,54% for a period of 2 weeks.

Worst case: All minority shareholders tender (The Austrian government will definitely not tender…), then the lowest possible acceptance rate is 29,9/50 = 59,8% and the price falls directly to the value before the ofer (~61,50 EUR). Then the maximum loss per share would be -5,44 EUR or -7,4%.. At a more realistic drop to 70 EUR, the downside would be 2,02 EUR or -2,6%. This would be a positive expected value if the assumption of 70 EUR as a post tender price is correct.

I do think that this is a nice liltle side bet, so I will invest 2,5% of the portfolio at 79,25% into this little “special situation” with a time horizon of 2 weeks

One important note here: There is clearly a downside here and I would not recommend this to anyone who doesn’t regularily do such things, as the “single bet” might be not super attractive. However if one runs such bets on a continous basis (as I do, like MAN, Sky etc.), over time one will make money even with a few loosing trades.

« Older Entries