Some Links

Highly recommended: First Quarterly report of the new “Profitlich-Schmidlin” fund with short summaries of all positions (in German). Interesting portfolio and interesting strategy. Good luck !!

Short write up on Aggreko, an interesting UK company

Great story how stock picking legend Julian Robertson seemed to have lost it in 1996

Old School Value with a short thesis on Weight Watchers, a favourite among many value blogger. For a long thesis for instance look here.

Mebane Faber has developed a new ETF which invests into the 10 cheapest countries globally

Conference notes from the 2014 Value Investing congress in Las Vegas can be found here. As always, Zeke Ashton’s case looks interesting, although his BMW pitch looks pretty similar to that one from RV Capital a few months ago.

For all those who are desperately waiting for the next crash: A short overview of 240 years of financial crisis

Some links

The Graham Holding deal – another example why only Warren BuffetT can invest like Warren BuffetT.

The Emerging Market slowdown hits many “rich world” companies

HIGHLY RECOMENDED: I never knew that John Hempton from Bronte is actually publishing monthly letters and performance (Hat tip to Al Sting). Read all of them, for instance September 2013 on why they are short Swedish quality companies or how they got squeezed out from a crowded short.

The Aleph blog has a great series on how Berkshire Hathaway is actually structured. Part 2 with the somehow dodgy trust structure has been extremely interesting.

Wexboy on how to come up with investment ideas (Spoiler: read a lot and then some more…)

Finally, the always great Brooklyn investor with a nice analysis of DirecTV, the largest “non-BuffetT” position at Berkshire.

Short cuts: Gronlandsbanken, SIAS SpA, Thermador, April


Already some weeks age, Gronlandsbanken reported 2013 numbers and published their 2013 annual report, which is again a must read for anyone interested in Greenland. The bank seems to be a little bit more optimistic than last year.

Profit was around 10% lower than in 2012, which is not bad for a stagnant economy. The dividend has been kept stable which means the dividend yield of around 7,8% at current prices. Overall, Gronlandsbanken in my opinion still offers a lot of positive optimality, although it might need a few more years to really see an impact of potential large-scale mining projects. Better than with a “classical” option, I get paid for waiting.


Sias released 2013 results last week (in Italian only). Traffic was again down compared to 2012, but revenues increased due to the purchases out of the South America proceeds. They earned 0,61 EUR per share resulting in a trailing P/E of 13.8. For a “average” company like SIAS, this is already relatively expensive in my opinion, so I will sell down half of my current position (5,3%) at current prices, which would result in a profit of close to 100% for this part.


Finally, Thermador released 2013 numbers and its English language annual report. Sales declined in a tough market by -2%, profit slightly more from 4.96 EUR per share to 4,68 EUR. Cash flow however was very strong due to a significant release of working capital, net cash is now around 32 mn EUR or ~ 7,4 EUR per share. The cash adjusted P/E of around 14 for a high quality firm like Thermador is in my opinion still adequate.

April SA

Already a few day<s ago, April presented preliminary 2013 results. Overall profits were a little bit lower than in 2012 resulting in 1.22 EUR Earnings per share against 1,38 EUR in 2012. Although this is the 5th decline in a row, this time the reason seems to be almost exclusively in the lower interest rates. I think one can expect that from a operational point of view, the bottom should be near.

Interestingly, they still earn very nice ROCEs even at those depressed levels. Adjusted for cash, they trade at single digit P/E which implies in my opinion still a good risk/return relationship.

Some links

Must Read: Sequoia fund 2013 annual letter. They had a good year but didn’t make a single new investment in 2013

Wintergreen fund 2013 letter. Not a good year for them.

A very good lecture on value investing by Vito Maida, the boss of Canadian firm Patient Capital (nice name for a value investing company by the way…)

A “sober view” on the crisis in Ukraine and the success story of another “divorce victim” Slovakia

Finally a “new” blog which I found interesting:

Strictly Financial, a blog of two financial professionals with some interesting post for instance on Korean Preferred shares or the Whatasapp transaction

Follow up: East Asiatic Company (DK0010006329) – Sale of Venezuelan Business

East Asiatic was part of my “strange stocks” series almost a year ago.

The stock looked extremely cheap, but the issue was that for their Venezuelan, they had to use the official Bolivar exchange rate. That was my final assessment:

All in all, EAC is not only a “strange” stock but also an interesting stock. Although both subsidiaries are struggling, I see some “real option” value here. The Santa Fe business, if the execute as planned, is worth more or less the whole market cap at the moment. Therefore, Plumrose, the Venezuelan pork producer is like a “free” option betting on a better future for Venezuela. This future is highly uncertain, but some positive signs are also visible.

Now something interesting happened: EAC announced last week that they sold its Venezuelan Business for DKK 390 mn and plan to pay a special dividend of 16 DKK:

• EAC divests Plumrose for a total consideration of approx. DKK 390m
• Due to the requirement under IFRS accounting standards to use the official VEF/USD exchange
rate, the transaction entails a significant accounting loss. However, when measured at the parallel
market VEF/USD exchange rate, the price represents a gain over book value.
• EAC’s Board of Directors considers the price attractive and intends to distribute DKK 200m to
EAC’s shareholders as an interim dividend (DKK 16 per share) once the consideration has been
received in full.

The shareholder friendly approach of the company can be seen via the video they produced, where they are explaining why they sold (very funny, Danish with English subtitles).

With a current market cap of ~1.100 mn DKK, receiving 390 mn DKK in cash is not insignificant. What remains is the Santa Fe subsidiary. That’s what i Wrote back then:

Simple valuation of Santa Fe:

Plan: 5% CAGR until 2016, 300 mn EBITDA. EV/EBITDA of 6-8x realistic ?

Current borrowings 500 mn, growth by 5% in line with sales –> 600 mn debt in 2016

EV of 1.800 -2.400 –> equity value of 1.200 -1.800 in 2016. Discount by 15% for 3 years: NPV of Santa Fee according to this: 790 – 1.180 mn DKK

The problem with that projection is: Santa Fee is not doing well at the moment. Based on the latest Q3 report, Sales for the first 9 months declined by 2% and EBITDA declined even more from 121 mn DKK 9M 2012 to 93 mn DKK 9M 2013. So achieving 300 mn EBITDA in 2016 looks somehow optimistic.

Interestingly, the stock price spiked quickly after the announcement but is now already on the way back down:

If we assume EBITDA for Santa Fe of around 130 mn DKK this year, this business is now implictly valued around 8-9 times EV/EBITDA. Maybe on a depressed level but as I am not a turnaround investor, I will pass on East Asiatic for the time being. Nvertheless, at some point in time, EAC could be a buy if the price stays low and they manage to turn around their remaining operations.

Some links

If you read only one piece this weekend, then read RV Capital’s 2013 investor letter with some really deep thoughts from a great investor.

WertArt Capital has a great post on Dundee Capital.

A good overview on Korean Preferred stocks can be found here

Cassandra on an epic short squeeze in the Japanese market

The “joyful investor” with a great analysis of Standard Chartered Bank. Standard Chartered is on my list for the Emerging Markets series …..(Great blog by the way).

Finally a link to a very interesting blog which has a lot of good stuff, among others a series on the UK alternative market AIM: Investing Sidekick. Check it out !!!

By the way, I am happy to link to any good investment blog out there. Just send me an Email.

AND of course do I wait for Warren BuffetT‘s 2013 letter which is supposed to come out this week-end……


Distressed debt: Quick update IVG convertible – insolvency plan released

As a former IVG convertible investor, I still follow what is happening there in order to learn how this “new” German bankruptcy process works.

Yesterday, IVG came out with their “insolvency plan”. Some of the detail sare:

- not surprisingly, shareholders and Hybrids get fully wiped out
- they actually plan to delist the stock
- part of the secured loans (Syn loan II) experience no hair cut at all and receive even interest
- the other part (Syn loan I, LBBW loan) AND the convertible get shares in the “NEwCo”
- The convertible holders will get 20% of NewCo which, without giving details is calculated as a 68% recovery

What I find especially interesting is the fact that the convertible still trades at around 75%:

What that means is that convertible holders think that the stock they will receive is worth a lot more than 68% even if it comes in a non-listed form and will be hard to sell.

This in fact means that in theory, under a completely “fair” insolvency proceeding, something could have been left for the Hybrid holders. Under the current insolvency regime, however it seems to be really possible to kick out subordinated holders even if the asset value would imply some recovery as the hybrid holders are not a creditor group.

For me, this doesn’t look fair. It is a clear invitation to distressed debt funds to look at German companies with significant hybrid debt, force them into bankruptcy and kick out the hybrid holders at zero.

Maybe this is also the reason why they want to delist the stock, so that the “True” recovery does not become public directly after the debt/equity swap.

Some links

Steve Romick’s FPA Q4 comment including some very good remarks about the overall valuation levels

Rare interview with Paul Singer (Elliott Capital) on EM and other global topics

Interesting article about someof the “secret sauce” of US retailer Costco

Jim Chanos is shorting companies which buy back stocks

Companies going to the WEF in Davos are loosers

Finally, Prokon, the issuer of the Genußscheine I looked at 2 years ago went bankrupt. Not really a surprise, it is always the same sad story.

How to value IFRS 19 pension liabilities – Part 1: Introduction & Discount Rates

I have written already a few times about pension liabilities,for instance here and here.

With IFRS 1, pension liabilities have become a bigger topic, as now pension liabilities are “on balance sheet” and changes are recorded in the comprehensive income statement. As I have already written, for some companies this had quite drastic effects, like Lufthansa and ThyssenKrupp which saw large parts of their equity disappear.

As I had a lot discussions about pension liabilities lately, I think it is a good idea trying to summarize some important issues for analyzing pension liabilities.

However one cautious remark: I am not a pension actuary. There might be incorrect or too simplified statements later on and I will not dive into the details of pension modelling. I will try to come up with simplified approaches in order to better understand and value pension liabilities.

How are these pension liabilities created ?

Most companies have some sort of pension program for their employees. Fundamentally, there are 2 different ways to offer pension benefits:

1) Defined contribution plans
Here, the company only promises to invest (directly or indirectly) a certain amount on behalf of the employee on a regular basis. The employee retains the risk of the investment outcome. In those cases, there is no pension liability recorded.

2) Defined benefit plans / obligations (DBO)
In these cases, the employer promises the employee a certain payment per month after he has retired, depending on certain factors such as length of employment, salary, inflation etc. The risk of not being able to pay this is retained by the employer, the company has therefore to book a liability for the estimated (and discounted) potential cash outflows in the future. One might ask, why any employer is choosing this model anyway. There are two reasons. First, for instance in Germany, only DBO plans are tax-deductible. Secondly, DBO plan allows the company two retain the money in the company. Defined contribution plans have to be invested into “external” assets.

Funded vs. unfunded DBOs

In many jurisdictions, the employer can either set up a dedicated fund and invest into financial assets which hopefully cover future obligations, or he can keep the money in the company and fund operational assets.

Accounting wise, the liabilities are in both cases the same, but for funded plans, only the net amount (liabilities – fair value of assets) has to be shown on the balance sheet. Fro more “gory” accounting details, KPMG has a comprehensive guide here.

What are pensions liabilities economically ?

I have written about that before: Pension liabilities are economically senior debt. Why ? Not paying out due amounts for pensions will cause a bankruptcy filing in many jurisdiction. There is no legal way to delay or lower payments, a lesson which was learned the hard way for instance at General Motors. In many jurisdictions, unfunded pension liabilities do not have priority on assets, so one should assume that they are “pari passu” to senior debt, adding them to Enterprise Value.

In jurisdictions like the UK, where pension trustees can claim payments if there is a deficit, one could argue that pension liabilities are “more senior” than senior debt which is quite important as we see later.

So where is the problem ?

If a company issues a senior bond, we know exactly how much money the company has to pay both, in interest and principal. With pension, it is very different. We can only estimate future payments, as the amount paid out depends on a couple of assumptions such as:

- how will salaries develop for active employees (pension contributions are usually a percentage of monthly salaries)
- how long will active employees work for the company ?
- how long will pensioners actually live ?
- what inflation will we experience (in most plans, payouts are linked to inflation) ?

So in a first step, a clever actuary has to estimate those parameters and then, in a second step he/she will generate a future cashflow pattern. Finally, in a third step, the actuary or accountant will then discount those payments using a certain rate to come up with the net present value which is the required value.

Despite that there is no clear rule how to set many of the parameters, there is one big issue with those liabilities: The are really long term. Depending on the plan and the participants, payments will have to be made 50 years or more into the future. So slight changes in parameters, especially for inflation and discount rates will have a large effect on the value of the liability.

Discount rates – technical aspects & Yield curves

IFRS requires to discount the projected outflows with a single “high-grade corporate bond rate”. In practice, most companies use the yields of available, long term AA rated corporate bonds.

Discounting with a single yield however is only a proxy and works best for “bullet maturity” cash flows. Pension liabilities do not have a bullet maturity, but look much more like an amortizing loan. For such cash flows, the correct way is to use appropriate zero yields from a full yield curve. In practice one would bootstrap zero yields from the yield curve on an annual basis and the discount the annual cash flows with the respective rate.

If the interest rate curve is flat, there is not a big difference in this approach. If the yield curve however is steep, there can be a BIG DIFFERENCE.

Lets look at the following example, extracted from the 2012/2103 ThyssenKrupp annual report. I took the projected cash outflows of Thyssenkrupp for the first 10 years and discounted them with both, the official discount rate and an assumed zero curve (year 5-10 were anonly given as a total):

Cashout IFRS rate Zero rates AA NPV stated NPV zero
2013/2014 -546 3.5% 0.25% -527.54 -544.64
2014/2015 -526 3.5% 0.45% -491.03 -521.30
2015/2016 -528 3.5% 0.69% -476.23 -517.22
2016/2017 -520 3.5% 1.03% -453.15 -499.12
2017/2018 -517 3.5% 1.24% -435.30 -486.10
2018/2019 -498 3.5% 1.6% -405.45 -453.12
2019/2020 -498 3.5% 1.8% -391.74 -439.89
2020/2021 -498 3.5% 2.01% -378.49 -425.05
2022/2023 -498 3.5% 2.21% -365.69 -409.39
2023/2024 -498 3.5% 2.43% -353.33 -392.02
Total -5129     -4,278 -4,688
Difference:         -409.91
in%         9.58%

So for those first 10 years, the NPV based on the simple approach is -9.5% lower (and the liability underestimated) than using the correct approach with zero yields. This is clearly a necessary adjustment to be made. The adjustment is of course subject to yield curve steepness and cash flow profile, but as a rule of thumb, a general 10% upwards adjustment might not be unreasonable in any case.

Key take away: If the yield curve is steep as it is now, with a 0% floor on the short end, one should adjust pension liabilities upward no matter what one assumes as the final discount rate. Currently, a 10% general upwards adjustment for the yield curve effect looks like an appropriate adjustment. If interest rise on the long end but stay at 0% in the short, even larger adjustments are justified.

In the next post I will take a deeper look on which discount rates to use anyway and inflation.

Some links

Must read: Howard Marks on skill, luck and inefficient markets

Deep value investing: Buying a house in Detrait for 500 USD

Great interview on Japanese economic myths

Technical but interesting story, how a 95% market share software program (Quark XPress) was killed by the competing product.

Interestingly, packaging seems to be as important as branding. Another argument that Brand does not equal Moat.

Finally a new and promising value investment blog: Odd lot Investing. Great post about compound and decay rates for instance.