Quick update Bilfinger

I looked at Bilfinger for the first time in August 2014, after the price dropped almost 50% from its peak some months before. I resisted again in November 2014.

Again as a reminder my comment from the first post:

– some of the many acquisitions could lead to further write downs, especially if a new CEO comes in and goes for the “kitchen sink” approach
– especially the energy business has some structural problems
– fundamentally the company is cheap but not super cheap
– often, when the bad news start to hit, the really bad news only comes out later like for instance Royal Imtech, which was in a very similar business. I don’t think that we will see actual fraud issues at Bilfinger, but who knows ?

So now the new CEO came in on June 1st. And surprise surprise, the 6th profit warning within a year if I have counted correctly.
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Driverless cars + Uber –> Death of Car Insurance ?

As this became a long post, a quick management summary upfront:

The case for 100% self driving cars without accidents is not so clear for me
1. Based on current facts, the Google car doesn’t seem a lot better than human drivers
2. From other areas (Airplanes, chess) we can learn that a human-machine combination is often better than a “machine” alone
3. Driving cars is also an emotional experience, many people might not fully sacrifice this
4. Some innovations take longer than one thinks, especially if they take away freedom from consumers
5. A gradual decrease of claims could actually be positive for car insurers over an extended period of time

Additionally, I don’t see a combination of driverless cars with a service like Uber replacing private cars anytime soon. There are a lot of practical issues with renting out private cars to complete strangers. However, taxi driver might not be a job with a big future either.

So from my perspective, as shareholder of a car insurer like Admiral there is no reason to panic, however for traditional insurers this might be one more nail in their coffin.

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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)

Update Altamir SA: No “CEO self service vehicle” but still the same fees

A few days ago, I looked briefly at Altamir, the French listed Private Equity vehicle which invests exclusively into APAX funds.

This is what I wrote about the CEO and largest shareholder Maurice Tchenio based on how I understood the fee structure:

So the “privilege” of a shareholder to invest into APX via Altamir is purchased quite expensively. This also puts the CEO investment a little bit in perspective. Yes, he has invested around 100 mn of his own money into Altamir, but in 2014, the management fees and profit share netted him close to 30 mn EUR direct, whereas the proportional profit of his share position was “only” 15 mn EUR.

Last week I got a very friendly Email from Altamir’s IR with the offer to explain the fee schedule in more detail. As a follow up they did send me a nice memo with all the details.

In a Nutshell, Tchenio only receives around 2,5 mn EUR from two sources:

– he is entitled to ~22,5% of the “carry” on the old direct investments

– plus he keeps 5% of the adivisory fee paid to the general partner for the direct investments

As the IR pointed out, Tchenio earns more in dividends on the stock than on those fees, so the alignement between him and shareholders is better then I have assumed before.

Just to recap how the fees and carried interest are structured a short list based on 2014

Fees/costs: 17 mn EUR thereof

– 6,8 mn EUR fund level fees

– 1,9 mn EUR HoldCo cost

– 8,4 mn EUR fees charged by the GP (inlc. 1,4 mn VAT), 95% passed on to APAX

Carried interest: 13 mn EUR thereof

– 4,3 mn APAX fund level

– 8,5 mn direct investments, therof Mr Tchenio as former APAX partner 1,9 mn EUR

Having clarified this, this still leaves the issue that 17 mn cost for a 600 mn portfolio is quite a lot. The almost 3% fee includes ~30% listed stocks (Altran, Albioma, GFI) and cash.

As an investor, I could replicate those stocks much cheaper than what Altamir is offering, or alternatively I could invest in a French based value fund like for instance Amiral. This is a comparison chart between the CAC Small&MidCap index, Altamir and the Amiral Sextant PEA, a smallcap value fund since 2002:

alta3

The lowest line is the index and we can see that Altamir has beaten the index by around +1,5% p.a. However the Amiral fund has beaten Altamir by a large margin despite charging also around 2% fees and a 15% performance fee. Although this is clearly no apples-to-apples comparison it clearly shows that Altamir’s perfomance is not that stellar (after fees).

Summary:

So my assumption that Mr. Tchenio is pocketing a large amount of the fees was clearly wrong. Nevertheless, at least for a “non tax advantaged” investor like me, Altamir doesn’t really offer any value. The fees are much to high and justify a discount. If the right dicount is 30% or less could be discussed but paying 3% + carry on 30% listed stocks is not a real value proposition and will always lead to a discount epsecially on cash and listed companies. Again, if the discount would widen more, it would be maybe worth an investment but for now, I think I can find better investments, especially in France.

Quick check: John Deere (DE) – Great “cannibal” or cyclical trap ?

Looking at Berkshire’s portfolio is clealry a “must” for any value investor. Whenever they disclose a new stake it makes clearly a lot of sense to look at least briefly at what they are buying. Berkshire disclosed the John Deere position in late February this year. I assume this is a “Ted & Todd” stock. Looking at the track record of Berkshire’s public holdings, this is actually a good sign as Ted&Todd have beaten the “master” now several years in a row.

Looking quickly at Deere, it is not difficult to see some of the attractions:

+ relatively cheap (trailing P/E of 12,6, Stated EV/EBITDA of 5,5, EV EBIT 7)
+ organic growth, low Goodwill, good profitability in the past
+ good strategy /incentives in place
+ solid business model, significance of dealer network (quick repairs during harvest season…)
+ “Cannibal”, is massively buying back stocks

Especially the massive share buy backs are clearly a common theme for “Ted&Todd stocks”. Starting in 2014, Deer has reduced the sharecount constantly from around 495 mn shares to now ~344 mn shares.

However we can also see quickly a few “not so nice” things at Deere:

– pension /health liabilities (health – how to value ? 6bn uncovered. Very critical, healthcare sunk GM, not pension (EV multiples need to be adjusted for this)
– they do not cancel shares, held as “treasury”, why ?
– Financing business –> receivables & ROA most likely not “true”..
– lower sales but higher financing receivables ? Channel stuffing ?
– comprehensive income to net income volatility
– cyclical business. current profit margins still above historical average

Financing business

One of the most interesting aspects of John Deere is clearly the financing business. As other companies they offer financing, here mostly to dealers and not to the ultimate clients. A financing business is nothing else than an “in-house bank”, sharing much more characteristics with a financial than a corporate business, for instance requirement of continuous capital market access, default risk etc.

What I found especially interesting is the following: looking at Bloomberg, they already strip out automatically all the debt from the financing business when they show EV multiples. This could be OK if the debt is fully non-recourse however I am not so sure with Deere. Although they not explicitly guarantee the debt, there seems to be some “net worth maintenance” agreement in place which acts as a defacto guarantee for the debt.

An additional important point is the following: Deere shows very good profitability on capital in its “core” business. However, this is partly due to the fact that they show almost no receivables in the core segment. the receivables are indirectly shown in the financing business. To have the “true” ROIC or ROCE, one would need to add back several months of receivables to the core segment in my opinion.

Cyclical aspect: Corn prices

This is a 35 year chart of annual corn prices:

corn annual

We can clearly see that corn prices went up dramatically in around 2006 but are dropping since 2013 back to their historical levels. Demand for farm equipment is pretty easy to explain: If you make a lot of money on your harvest, you have money to spent for a new tractor (with a small time lag).

This is the 17 year history of Deere’s net margins:

Net margin
31.12.1998 7,52%
31.12.1999 2,08%
29.12.2000 3,76%
31.12.2001 -0,49%
31.12.2002 2,32%
31.12.2003 4,17%
31.12.2004 7,04%
30.12.2005 6,89%
29.12.2006 7,82%
31.12.2007 7,68%
31.12.2008 7,32%
31.12.2009 3,78%
31.12.2010 7,17%
30.12.2011 8,75%
31.12.2012 8,48%
31.12.2013 9,36%
31.12.2014 8,77%
Avg total 6,02%
Avg 2006-2014 7,68%
Avg. 1998-2005 4,16%

So it is quite interesting to see, that in the 7 years before the “price explosion” of corn, margins were quite volatile and around 4,2% on average. In the last 9 years however, the average jumped to 7,7% with 2014 being still above that “high price period” average.

Clearly, Deere doesn’t only sell to corn farmers, but many other agricultural prices have faced similar declines.

To be honest: I do not know enough if Deer can maybe keep the high margins they are enjoying currently, but to me at least the risk of margin mean reversion is pretty high for such a cyclical business.
Even if we assume mean reversion only to the overall average of ~6%, this would mean around 6 USD profit per share which seems to be currently also the analyst consensus.

Summary:

For me, despite a lot of positive aspects, John Deere is not an attractive investment at the moment. Despite being well run, the business is cyclical and has profited from high crop prices in the past. The balance sheet is not as clean as I like it and the valuation is not that cheap if we factor in pensions and the financing arm. Clearly the stock looks relatively cheap to other US stocks but the risks are significant. Maybe there is more if one diggs deeper (network moats via dealers etc.) but for the time being I will look at other stuff. At an estimated 2015 P/E of 16-17, there are many opportunities which look relatively speaking more attractive and where I can maybe gain a better “informational advantage” than for such a widely researched stock.

Edit: By the way, if someone has a view on the moat / brand value of John Deere I would be highly interested……

BMPS update & Quick look at Turkey (Koc Holding, Depfa TRY Zero bond)

BMPS

Today I sold my BMPS “special situation” position at 1,80 EUR per share, a small loss compared to my 1,80 EUR entry price when I factor in transaction costs. The subscription rights stopped trading already yesterday. Overall, the case did not work out very well. The stock was volatile only the very first day and didn’t do a lot ever since as the chart shows:

bmps 11 close

It seems to be that the regulator has been quite succesful this time to warn market participants against any kind of option based short squeezes. So no “Italian Job” this time. As I have mentioned in the comments of the last post, I do not consider BMPS as a longer term investment. I do think the risk/reward profile of this special situation was good but it just didn’t work out. For the record, I consider the whole transaction as one trade so I still have one potential transaction open or June ;-)

Quick look at Turkey

The Turkish Lira and the stock market got hit hard this week as the ruling party did not get the majority of votes.

Politically, one might say that this was actually good news because it clearly enforced democracy in Turkey. Or how the linked Reuters article said:

Erdogan loses his chance to become Turkey’s Vladimir Putin

Financial markets in the short-term however seem to prefer potential dictators to democracy. Although I really like the FT guys, this video shows clearly the opinion of many “pundits”. Especially the currency got clobbered and is almost back (in EUR levels) to early last year’s levels:

In the long run I do believe that a functioning democracy is positive, both for the country and business despite “uncertainties” due to elections. Especially as a public shareholder it is very important that the institutions in a country are properly working. With Erdogan gaining more and more power, I did have my doubts. I don’t know that many positive examples that stock markets with dictators in charge do really well.

Koc

My Turkish stock investment Koc Holding is still doing well. In EUR Term, I am still up around +50%. This is mostly due to a quite lucky entry point back in February last year. I still could not motivate myself to increase the position as Q1 results haven been operationally good but net income was lower yoy because of one-offs.

For Koc, a weaker Erdogan/AKP should be clearly positive in the long run as it reduces risk.

Depfa “Kebap bond”

My second “Turkish” investment is the 2020 Depfa TRY Zerobond which I bought almost exactly one year ago. Again I was lucky with the purchase timing. Although I bought at a more expensive exchange rate (2,85 TRY/EUR), I made some money on the bond price so that I am only slightly down.

The interesting thing is the following: Relatively speaking, the bond has become more attractive. This is what I wrote back then:

At a current yield of ~13% p.a., the bond trades around 4% p.a. wider than a 2 year longer EIB Zero bond and around 3% wider than similar Turkish Government (coupon) bonds.

Well, one year later, the bond actually trades 4,2% wider than Turkish Govies and 4,3% wider than the EIB bond. I still believe that there is very little credit risk in a senior Depfa Bond and that at around 50% and a yield of 13,8%, the bond is good value at an Exchange rate of 3,10 TRY/EUR. I might increase the position slightly in the next few days.

Altamir SA (ISIN FR0000053837) – French PE at an attractive discount or CEO “self-service” vehicle ?

Altamir is a French holding company whose main purpose is to invest into private equity funds. Such a structure is called in general “listed private equity”.

To be more specific, this is what they state as the company strategy:

Altamir invests exclusively with Apax Partners, in three ways:

In the funds managed by Apax Partners France:

€200m to €280m committed to Apax France VIII;

In the funds advised by Apax Partners LLP: €60m in Apax VIII LP;

Occasionally, in direct co-investment with the funds managed and/or advised by Apax Partners France and Apax Partners LLP

As investing in only one Private Equity fund company is a quite special arrangement, one asks oneself only one question: Why ? Well, this is explained in the annual report:

Apax Partners was founded in 1972 by Maurice Tchenio in France and Ronald Cohen in the UK. In 1976, they teamed up with Alan Patricof in the United States, bringing the independent entities together under a single banner, Apax Partners, with a single investment strategy and similar corporate cultures, and applying the rigorous standards of international best practices. In 1999, Apax Partners began to merge its various domestic entities into a single structure (Apax Partners LLP), with the exception of the French entity, and reoriented its mid-market investment strategy towards larger transactions (enterprise values between €1bn and €5bn). Apax Partners France opted to remain independent and conserve its mid-market positioning, targeting companies between €100m and €1bn. There are currently no cross-shareholdings or legal relationships between Altamir on the one hand and Apax Partners MidMarket and Apax Partners LLP on the other, nor between Apax Partners Midmarket and Apax Partners LLP

This closes the circle: Maurice Tchenio is the CEO of Altamir and was the founder of Apax Partners in France.

Tchenio retired from Apax only in 2010, so for quite some time he was running Altamir in parallel to being actually part of Apax himself. Maybe to provide stable funding to APAX France ? i don’t know.

So why could this be interesting ?

Looking at Altamir, there were some very positive aspects to be found:

+ CEO owns 26%, is buying (2009: 22%)

+ transparent documentation, reporting. Quarterly NAVs, detailed asset lists

+ French Midcap PE is attractive

+ discount vs. NAV (~30%, 11,20 EUR vs. ~16 EUR NAV). The discount is relatively high compared to other listed P/E stocks (currently on average ~10-15%)

+ no double leverage, net cash

+ paying dividends

+ valuation of unlisted assets relatively conservative, sales prices always higher than last valuation

+ the legal structure seems to be tax efficient for long-term holders (no tax on dividends for French shareholders if one commits to hold > 5 years)

+ track record is pretty OK as we can see in the chart: They did manage to outperform the CAC Mid& Samll cap index since inception based on their stock price, although only at a relatively small margin:

altamir vs cac mid

Actually, those points, especially the “juicy discount” in connection with the large CEO share holding makes this quite interesting

However, the most important thing in looking at such vehicles is the question: How much cost do they add and how much aligned are the interests of management and shareholders ?

And this is where things get a little bit messy. According to the annual report, direct fees are around 17 mn EUR or 2,9% of NAV. This includes in my understanding also the underlying APAX funds. This is not cheap but most likely “in line” with other “fund of fund” PE structures. But the real “fun” starts with the following issue:

The Company has issued Class B shares that entitle their holders to carried interest equal to 18% of adjusted net statutory income, as defined in §25.2 of the Articles of Association. In addition, a sum equal to 2% calculated on the same basis is due to the general partner. Remuneration of the Class B shareholders and the general partner is considered to be payable as soon as an adjusted net income has been earned. Remuneration of these shares and the shares themselves are considered a debt under the analysis criteria of IAS 32.
The remuneration payable to the Class B shareholders and the general partner is calculated taking unrealised capital gains and losses into account and is recognised in the income statement. The debt is recognised as a liability on the balance sheet. Under the Articles of Association, unrealised capital gains are not taken into account in the amounts paid to Class B shareholders and the general partner.

So this is in fact a 18% “carried interest” of the general partner (i.e. the CEO) on any realized profits of the company. So for 2014 for instance, 87 mn EUR of realzed income “shrink” to 57 mn EUR shareholder income as first the management fee gets deducted and then further 18% profit share.

So the “privilege” of a shareholder to invest into APX via Altamir is purchased quite expensively. This also puts the CEO investment a little bit in perspective. Yes, he has invested around 100 mn of his own money into Altamir, but in 2014, the management fees and profit share netted him close to 30 mn EUR direct, whereas the proportional profit of his share position was “only” 15 mn EUR.

Ok, maybe being the Ex Founder of APAX France opens the door to invest into APAX, but charging “3% and 18%” for this privilege (all in) looks quite expensive and explains some of the discount.

Activist angle:

The whole fee issue might also explain why French asset manager Moneta seems to have started in 2012 and “activist campaign” against altamir, see here and here.

They seemed to have pushed for a run-off of the company but so far only succeeded in pressuring to pay a higher dividend than before (increase from 0,10 EUR 2012 to currently 0,50 EUR).

According to Moneta’s homage, they are still active. To me it looks like that the increase in the CEO’s share position has much more to do with control than with actually believing that the shares are undervalued, but of course this could be wrong.

Summary:

In principle, a listed PE vehicle specializing in French mid-market Private Equity could be interesting if the discount is significant. At Altamir however, as I have described above, the structure takes out a lot of money and one needs significant Alpha over time to break even compared to a “do it yourself” portfolio of French small and midcaps.

Tha activist involvement is interesting, but I don’t know enough about French Governance rules to assess the chances of a fundamental change.

So for the time being no investment, however if for some reason (market stress), the discount becomes really large I might be revisiting the case.

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