Short cuts: KAS Bank & Van Lanschot

Both Dutch Banks in my Portfolio, Van Lanschot and KAS Bank reported 6 month numbers last week.

Van Lanschot

Van Lanschot’s 6 month numbers were relatively solid in my opinion. 6 months EPS were 1,14 EUR per share, however this includes certain one-offs from asset sales. The underlying wealth manangement business seems to have stabilized. Net interest income is slightly going down but this is the result of shrinking their loan portfolios and was expected. The stock price reacted quite positively on those numbers:

What I didn’t like at all was the fact that within the comprehensive income, they burried a large increase in their pension reserves of around -82 mn before tax. This is around 10% of gross pension liabilities and wiped out all the profit of Van Lanschot in the first 6 months (comprehensive income was actually negative). Unfortunately, there is no explanation given. I Have sent an Email to IR in order to understadn this better.

KAS Bank

Similar to Van Lanschot, KAS Bank presented very solid 6M numbers including a big one time effect. They received 20 mn EUR as compensation for letting German dwpbank out of an outsourcing contract. Underlying profit without this one off increased nicely, although mostly due to cost savings than higher revenues.

Compared to Van Lanschot, the stock price did very little:

Maybe this has to to with a somehow muted outlook and the decission to fully reinvest the dwpbank payment. Nevrteheless, for me KAS Bank seems to be on a very good way and is rather a buy on weak days. I still think that KAS Bank should trade at least at book value which is around 14,50 EUR per share.

KAS Bank in my opinion is also a very good and cheap interest rate hedge. If short term rates rise, this will directly benefit KAS Bank’s result within a very short time frame. I do not have an active opinion on interest rates, but it is a nice “add on” to the investment case.

Performance review August 2014 – Comment “Patient enough ?”

Performance August:

In August, the Benchmark (Eurostoxx50 (Perf.Ind) (25%), Eurostoxx small 200 (25), DAX (30%), MDAX (20%)) recovered from last month’s loss to a certain extent and gained +1,1%. The portfolio could not keep up with that and was almost unchanged. YTD, the score is +7,6% for the portfolio against +0,3% for the BM.

Winners were Installux (+6,9%), Van Lanschot (+5,9%) and Cranswick (+5,1%). Losers were Admiral (-8,4%), Sistema (-8,3%) and Kas Bank (-3,2%).

Current Portfolio & transactions:

In August, I added Bouvet ASA as a new position to the portfolio and increased Gronlandsbanken to a half (2,5%) position. This reduced the outright cash level to 9,0%. Together with 3 special situations (Depfa LT2, MAN AG, Sky Deutschland) which I consider “close to cash”, the portfolio is still very conservatively positioned.

The detailed portfolio can be seen as always under the portfolio page.

Comment: “Patient enough ?”

In my blog, I have often written about the virtues of patience for an investor, for example in my January 2013 comment. This is what I wrote some 19 months ago:

However another potentially big mistake should also not be underestimated: Taking profits too early. Most investors (including myself) get nervous if their stocks climb quickly 20-30%. What you then often hear is something like “It never hurts taking a profit” or “No one ever got bankrupt by taking a profit” or something similar.

The truth is: In order to generate above average returns, taking profits too early hurts badly. Statistically, the vast majority of investment ideas will be rather average, some will be bad, but some of them and usually only a small amount will be really really succesful.

So if I look at the January 2013 portfolio, I can already identify a couple of positions which I have sold far too early, among them Total Produce, WMF, Dart Group, Bouygues which I sold far too early despite my smart talks in the comment. So obviously, I am still not patient enough, especially with my winning shares. So how can I trick myself into more patience ?

In my current portfolio overview I added a column called “Holding period”. This is simply the calculated time since I bought the first part of the position. Interestingly, both for the “core value” part as well as for the special situations, the average holding period is around 1,5-1,6 years.

Name Weight Perf. Incl. Div Holding period
CORE VALUE      
Hornbach Baumarkt 4,3% 35,7% 3,7
Miko 3,9% 10,7% 1,0
Tonnellerie Frere Paris 5,7% 117,3% 3,7
Installux 3,5% 82,1% 2,3
Poujoulat 0,8% 26,5% 2,3
Cranswick 5,8% 72,4% 2,2
Gronlandsbanken 2,5% 25,7% 1,8
G. Perrier 4,5% 102,5% 1,5
IGE & XAO 2,2% 57,3% 1,3
Thermador 3,0% 41,3% 1,2
Trilogiq 1,7% -14,5% 0,9
Van Lanschot 2,6% 9,7% 0,8
TGS Nopec 4,9% 12,3% 0,8
Koc Holding 3,6% 46,3% 0,5
Ashmore 2,9% 17,8% 0,5
Sistema 1,1% 4,4% 0,5
Sberbank 1,1% 6,7% 0,3
Admiral 2,7% 3,3% 0,2
Bouvet 2,7% -0,3% 0,0
       
OPPORTUNITY      
KAS Bank NV 4,3% 49,8% 3,7
Drägerwerk Genüsse D 4,8% 143,5% 2,9
DEPFA LT2 2015 5,0% 30,3% 3,7
HT1 Funding 4,3% 86,5% 0,8
MAN AG 2,3% 4,8% 0,5
Energiedienst 2,6% 10,6% 0,3
Depfa 0% 2022 TRY 3,0% 16,5% 0,2
NN Group 2,6% 2,5% 0,1
Sky Deutschland 2,5% -0,8% 0,0
       
Cash 9,0%    
       
Core Value 59,5%   1,6
Opportunity 31,5%   1,5
Short+ Hedges 0,0%    
Cash 9,0%    
  100,0%   100,0%

Most of my “core value” investments are usually meant to take 3-5 years in order to work out as planned. Of course, sometimes events out of my control impact the holding period such as buy- outs (EGIS, AIRE KGAA) or maturities in the case of bonds. But especially for the “core value”, the current 1,6 year holding period looks short on average. Clearly, there is some effect due to the fact that I started the blog 3,7 years ago and in my private portfolio some of the initial positions are there for a much longer time. Nevertheless, in the future I will focus more on the average holding period.

If i would invest consequently along my stated goals I would expect an average holding period of at least 2-3 years for my “core value” part. The “special situation” part is naturally a little bit shorter.

Now the good news: I don’t have to do anything to increase the holding period. I just have to sit around, wait and do nothing and the holding period will increase each day…..

I don’t want to give myself any “hard restrictions” on the average holding period as I strongly believe that most external restrictions on investment portfolios are negative for performance in the long run. One of the biggest advantages of any private investor is that he/she doesn’t need to have any restrictions. If you look at any institutional portfolio, it is crazy how many regulatory and other restrictions exist. Many portfolio managers spend most of their time steering through those restrictions instead of looking for good investments.

For that reason I will not create any artificial minimum but rather look at this as a continuous process and as a “qualitative factor”. In practice for instance I will check any new idea against the alternative to increase an existing position and report the holding period in my monthly updates. Of course this does not prevent too early selling, but I think it helps to implement more patience into my portfolio management process.

AGEAS (ISIN BE0974264930) – Potential litigation play ?

The company:

Ageas is a Belgium based insurance company and formerly known as “Fortis”, one of the biggest Eurpoean casualties of the financial crisis. Fortis, together with RBS and Santander tried to take over ABN Amro but especially Fortis then failed spectacularily and was saved by the Belgian Government and finally sliced and diced into Insurance and Banking, of which the banking part was sold to BNP Paribas.

Ageas itself is an interesting case, similar to NN Group, it is a strange collection of Belgium, UK, and Asian insurance companies plus some weird stuff at corporate level, resulting from the quite ugly split of a combined group into two separate businesses. However, a lot of the ugly stuff has already been cleared over the last few years and Ageas was looking like an almost “Normal” insurance company

The litigation

A few weeks ago, a Dutch court decided that Ageas is liable for misinforming Fortis shareholders in 2008:

The Amsterdam Appeals Court ruled that Fortis is liable for misleading investors by saying the firm was “financially stronger than ever” after a government bailout on Sept. 28, 2008, only to be replaced by a break-up plan five days later.

and further down:

Ageas should be able to meet a worst-case liability of 2.5 billion euros before taxes possibly stemming from the ruling, Matthias De Wit, a Brussels-based analyst at KBC, said in a note today. Still, potential indirect effects shouldn’t be ignored, he said.

Looking at the stockprice, we can estimate that the stock lost ~ 5 EUR per share:

With about 230 mn shares outstanding, the market seems to have implied ~ 1,1 bn EUR loss after tax. Ageas itself has provisioned around 130 mn EUR against this case.

Is this interesting ?

At the moment, it is hard to say. Ageas trades at ~0,62 times book value, which is relatively cheap. They are very active in repurchasing shares (sharecount decreased by -115 since 2011). I do like the insurance sector at the moment because its cheap and the problems (low interest rates etc.) are well known.

Insurance companies do have traditionally very good lawyers on their payroll and litigation is part of their business, so one can assume that they handle this very professionally. On the other hand, other than the CIR Spa case, there is no direct catalyst as the law suit can linger on quite some time.

Valuation wise, Ageas look similar to NN Group, actually, I could easily see those two Groups merging at some point in the future. My guess is that someone is maybe already working on the idea to form a strong Benelux players out of the available mid size companies (Delta lloyd, NN Group, Ageas, SNS).

Nevertheless, I do not think that AGEAS is a “Litigation play” at the moment, as I don’t have a good idea on the time line of the law suit. However it it looks like a pretty cheap insruance company with some upside potential, so I will keep it on my watchlist.

MIFA Bond (ISIN DE000A1X25B5) – Distressed debt & Restructuring “German Style”

I had covered the case of MIFA several times in the last few months (part 1, part 2, update, update 2).

Over the week-end, finally some news emerged with details about the restructuring.

If I understood the filing correctly, the following will happen:

1. Existing shareholders will be diluted 1:100
2. Bondholders will accept a “haircut” of 60% plus the coupon will be reduced to 1% (from 7,5%) and the maturity will be extended to 2021 (from 2018)
3. Hero cycles will inject (up to) 15mn EUR via a capital increase
4. Bondholders will get 10% of the new company for the 15 mn haircut and a subscription right for additional shares

Interestingly, the advisor nominated by the bondholders also made a press release. Some additional info from this release:

- the advisor estimated a recovery rate of only 15% for bondholders in the case of bankruptcy
– technically, bondholders will own 91% of MIFA equity before Hero cycle invests
– bondholders get subscriptions right and could, if they want to invest new money, own up to 30% of MIFA including those shares they get via the debt equity swap

As some details are still missing (price of new shares) etc., it is hard to correctly say how much the bonds are worth and if bondholders were treated fairly compared to Hero. However current prices at ~38% seem to imply most of the upside.

My 5 cents on this

For me, the following aspects of this whole episode are interesting:

- How can be the recovery rate of bond issued twelve months ago only be 15% ? Where did the 21,5 mn EUR disappear ? In my opinion, MIFA was a fraudulent company for quite some time and was already insolvent when they issued the bonds.

- Will there be any law suits by bondholders ? Why did Hero take the risk and didn’t wait for insolvency ? Are there any special provisions for Hero to back out if law suits come up ?

- “Senior bonds” under German law should not be treated and priced as senior bonds. As this example shows, one can “haircut” bond holders under German law (“Schuldverschreibungsgesetz”) without even going into bankruptcy procedures. German Bonds are much more similar to potentially perpetual, deeply subordinated bonds or “Genußschein” than a senior bond under international law. Any covenants written into the prospectus are worth nothing as it is so simple to just restructure the bonds.

- such a restructuring can be decided with only a small percentage of the bondholders. Only 28% of the MIFA bondholders were present when the advisor, who can commit to binding changes, was elected. So in theory, 14% of the bondholders can decide what happens to the remaining 86% of the bondholders with very little chance for any “hold outs”. Maybe Greece and Argentina should issue their future bonds simply under German law. Tha would make life much easier for them.

. why does the MIFA share (1% of the future company) trade at 80 cents or 6 mn EUR market cap ? Do shareholders think that the company is worth 600 mn EUR ? This is a clear “short zo zero” situation if one could actually borrow the shares

- one could argue that the restructuring makes sense because MIFA will be able to continue to operate and now jobs are lost. However I think it would be naive to believe that Hero will operate MIFA they way they worked before. Hero wants the brands and the distribution, not the production. I am pretty sure that they will not guarantee a lot of jobs.

- but at least, the order that existing equity gets wiped out before the senior bonds still holds, even under German law. I had some serious doubts about this.

The most important lesson: As I have written before, new corporate bonds under German law should be avoided at all cost. Especially the “Mittelstandsanleihen” are in principal similar 20 EUR bills issued at 100 EUR with a tiny little option to receive 100 EUR. The “lipstick on this pig” is the high coupon. But German investors seem to buy anything with a high coupon these days anyway. No surprise maybe if you have to pay for holding 2 year treasuries at the time of writing.

Short cuts: Installux, Gronlandsbanken, Admiral

Installux

Compared to Poujoulat and other French company, Installux released almost sensationally good 6M results. Sales went up +3% which is quite impressive for a domestic, France focused company and net result went up almost +14%.

According to the half year report, cash is now around ~86 EUR per share. Only with the 15,80 EUR 6M Earnings per share, Installux would trade at a single digit p/E ex cash even if they make no profit at all in the second 6 months. With a realistic 25-30 EUR per share for the whole year, we are at an cash adjusted P/E of somewhere between 5-6. In my opinion, despite the illiquidity, Installux still offers a great return/risk profile.

Gronlandsbanken

Grondlandsbanken delivered very strong 6 month numbers. 6 month profits of 30 DKK per share were almost 20% higher than in 2013, althhough there were significant positive one time effects included (valuation and disposal gains). Nevertheless, operating results also increased yoy despite overall still muted economic activity. What I found most interesting in the report was this statement from the outlook:

After a weak socio-economic growth and negative GDP in 2012 and 2013, no or a weak growth in the Greenland economy is expected in 2014, however, still with much uncertainty. In the expectation that the prices and
quantities of fish hold steady, that no raw material projects are initiated, but that large construction activities will start in the second half of 2014, the bank expects an increase in activity in 2014. It is, however, si gnificant that the activity in Nuuk remains low, while there is in creased activity in a number of coastal towns. A noticeable activity increase is thus essentially not expected until 2015.

So it seems to be that finally the big projects will be realized with a delay. As Gronlandsbanken has shown that they can increase earnings even without economic growth, I think the stock is “worth” to be upgraded to a “half position”. I will therefore increase the position from 1,9% to around 2,5% at current prices.

Admiral

Already a few days ago, Admiral released H1 2014 numbers. Looking at the stock price, many investors seem to have been dissapointed:

Analysts have mostly lowered their ratings and/or price targets:

Firm Analyst Recommendation Tgt Px Date↑ 1 Yr Rtn BARR Rank
Credit Suisse Chris Esson neutral 1350 08/18/14
Canaccord Genuity Corp Ben Cohen sell 1220 08/15/14 4th
Berenberg Sami Taipalus sell 1168 08/14/14
Nomura Fahad Changazi buy 1493 08/14/14 10.64% 4th 5th
Exane BNP Paribas Andy Hughes underperform 1070 08/14/14
Deutsche Bank Oliver Steel hold 1260 08/13/14 2nd
Keefe, Bruyette & Woods Greig N Paterson market perform 1227 08/13/14
Oriel Securities Ltd Marcus Barnard sell 900 08/13/14 6th
Numis Securities Ltd Nicholas Johnson add 1720 08/12/14 10.97% 3rd
Barclays Andrew Broadfield equalweight 1428 08/12/14 3rd

Tha analyst “consensus” rating in Blommberg is 2,57 which is pretty bad and one of the worst for all European insurers.

Actually, Admiral posted higher profits than the comparable 6 months in 2013, however the released above average reserves. On the other hand, they still invest a lot, especially in US price comparison and the international business. For me, the results were pretty inline with what management has been saying all along. UK car insurance is in a tough spot and will remain so for some time. Interestingly, the all important “auxiliary” income remained constant despite lower premiums which in my opinion is a very good sign.

International premium has increased by 10%, however the loss has increased as well. Allthough I usually don’t like investor presentations that much, but the Admiral presentation is extremely good. There is also a lot to learn about insurance in general, such as the claim inflation example on page 20 or the detailed reinsurance terms on page 48. Also their view on the US market is quite interesting, especially slide 35 with the acquisition cost per insurance contract. For me, this is showing that the Admiral guys know what they are doing which is unfortunately not the general rule in insurance.

The only disappointing part in my opinion is the Italian subsidiary. Admiral says that they didn’t undwrite more as prices were un attractive. Other than that the international business seems to expand nicely.

Reader Musti forwarded me a link why Morgan Stanley sold out Admiral in one of their funds.

The team became more wary of Admiral (LSE:ADM) after the 2011 turbulence in the stock price, after a scare about the potential for large personal injury claims. While the 2011 claims ratio eventually turned out to be fine, it caused a revision in our view of the quality of the name. The combination of the stock’s recovery, and long-term concerns about the effect of autonomous driving on the motor insurance industry, caused us to reduce and then exit the position.

I think this is quite interesting and revealing. They became nervous because the stock price was volatile and that caused a revision of the “qualitiy of the name”. Self driving cars is definitely something to look at but I think no one can say now how quickly this will come and what impact this will have. A self driving car will still need insurance, so much should be clear.

Overall, for me nothing has changed with regard to Admiral. If you want to see smoothly increasing earnings then you have to go somewhere else. If you want a truly great business at a fair price then you should hold or buy more which I might do if the price falls further. I plan to make this a “full” position until the end of the year.

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