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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.

Some links

The Bank of England (!!) has a new blog and looks at the impact of driverless cars on car insurance. I will follow up on that one…..

The Brooklyin Investor with a deep dive on Brookfield Asset Management

HEICO seems like in interesting player in the aircraft spare parts sector (jnvestor)

Fundooprefessor with a great post on the potential “staying power” of companies

Nate from Oddball with some very good thoughts about FinTech start up Lending Club and if they will make banks obsolete

A very helpful exercise: Think of what can make your portfolio companies going out of business (Gannon)

Some links

Good Bloomberg article on Danaher plus a Danaher slidedeck (via Valuewalk)

Interesting “introperspective” from Quan (Gannon) on writing a monthly newsletter

An interesting presentation by Frank Martin, a very cautious value investor (via Valueinvesting World)

Watch out Warren, “big (packaged) food” might be on a permanent decline.

A good summer reading list frome Cove Street Capital and of course the one from Bill Gates

Great interview with Brunello Cucinelli about how differently he runs his business.

Short cuts: Koc Holding, NN Group, Romgaz

Koc Holding

Koc releaed 2014 earnings already beginning of March. Looking at the presentation (there is no English annual report yet), one can see that despite the troubles, Koc showed a remarkably solid result with overall net income up 1% against 2013, although operating profit was down -6%.

I read the earnings conference call transcript as well. The major story was that Turkey was struggling in the first 6-9 months but following the oil price decline, things seem to have improved in the last 3 months or so. This confirms the general assumption that Turkey as a large oil importer should benefit from lower oil prices.

Management made a point that the largest subsidiary, oil refiner Tupras is expected to increase earnings significantly in 2015 as a 3 bn USD investment program will be finished and the refinery then will run on full capacity. Although Tupras had losses on inventory, Koc stresses that margins are independent of oil prices.

Koc clearly has suffered as well from their USD denominated debt, but other than many EM companies, they do have a “natural” hedge because of their large, foreign currency denominated earnings stream.

Almost exactly 6 months ago, I reduced my Koc stake by 2/3 as I was worried about Turkey in general and my bad experience with Sistema in Russia. Looking back, I have to admit that this might have been a typical “fast thinking” mistake. I actually do think that Koc is  a very good long-term investment if one believes in the Turkish economy. I am therefore inclined to increase the position again to around 2,5% of the portfolio, as I think that Koc with a P/E of ~10-11 is still good value, considering both, the quality of the company as well as the potential growth opportunity. The long-term downside in my opinion is relatively limited.

NN Group

NN Group had issued their annual report some days ago. Overall, earnings etc were unspectacular. However there was on extremely interesting sentence right in the beginning:

NN Group’s Solvency II capital ratio, calculated as the ratio of Own Funds (OF) to the Solvency
Capital Requirement (SCR) based on our current interpretation of the Standard Formula, is estimated to be in a range around 200% as at 31 December 2014. NN Group is considering to apply for the usage of a Partial Internal Model. The Solvency II capital ratio remains subject
to significant uncertainties, including the final specifications of the Solvency II regulations and the regulatory approval process.

This is remarkable in 2 ways. First, the Solvency II standard formula is relatively onerous so having 200% in the standard formulae is a good sign. Secondly, many competitors actually do not comment at all on their Solvency II ratios. Aegon for instance or more recently Talanx didn’t even give an indication. Swiss Life, which is not subject to Solvency II but the Swiss Solvency test (SST) also declined to give numbers.

One can of course interpret this in many ways but in my opinion, not communicating estimated SII ratios is much more a sign of weakness than anything else.

There is also a recent presentation to be found on NN website which clearly shows that their ALM matching in their big life Dutch company looks Ok. Plus they made a 200 mn EUR share repurchase (from ING) in February. Not a bad idea when the stock is valued at 0,43 times book. Overall, I am quite happy with NN despite the big fundamental headwinds for the industry. This is a stock I will invest more into when there is weakness in the stock price.

Romgaz

Romgaz issued preliminary numbers for 2014 as well. In my interpretation, they are incredibly good. Net income increased by +44%  to 3,72 RON, resulting in a P/E of ~9 even before taking into account net cash. Even better, the dividend will increase to 3,15 RON or roughly 9,5% yield at current prices.

As mentioned, Romgaz is pretty independent from market prizes for the time being as they are just starting to adjust to (higher) market prices.

In any other market, this should have had at least some impact on the share price, but for now the market seems to have ignored it completely. For fun, I ran a quick correlation analysis for Romgaz since the IPO. Romgaz has a pretty low correlation to the Romanian stock index with a value of around 0,45. It is however even less correlated to any European index. For the Stoxx 600 it is around 0,21. Interestingly for the Euro Stoxx Oil and Gas it is even lower at around 0,17.  As I do like uncorrelated investments a lot, this is a big plus for me.

Deutsch Bank started to cover Romgaz some days ago with a buy rating, although in my opinion with a pretty strange way of calculating the cost of capital.

Anyway, as a consequence of the great results, I increased my Romgaz position by around two percentage points to 4,2% of the portfolio at around 7,70 EUR per share.

Some links

Barry Ritholtz interviews Cliff Asness (AQR) (audio only)

A good post on success factors for spin-offs

How to make 68,6% p.a. with a French Life Insurance contract

Damodaran with everything you need to know about the “New Tech bubble”

If you are interested in off-shore oil drilling, check out the official report on the Macondo desaster.

Why Ikea from Sweden is so sucessful selling the same furniture all around the world.

John Hempton from Bronte on why he likes Rolls Royce (the engine maker)

Sitting on cash as a market timer can lead to “cash addiction”

Some links

Arte documentation (German) how Amazon disrupts publishing (h/t Blicklog).

Jet.com wants to attack Amazon. The founder has sold diapers.com to Amazon and worked for 2 years “inside”.

Tesla seems to be ready to produce batteries which will power your home

Pat Dorsey abandons somehow moats and is betting on managers instead. With his new German investment Aurelius AG, he might be betting on the wrong guy….(MS Deutschland bond scandal).

Highly recommended: Damodaran on the mess that is Petrobras

Ed Morse, one of the very few who predicted the drop in oil prices, expects much lower prices in the next few months

And finally, based on the “overwhelming demand”, a few pictures from a recent skiing trip (Austria, Warth/Lech):

IMG-20150212-00158

IMG-20150212-00160 (1)

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