Monthly Archives: November 2011

EMAK SpA – The paranoia edition

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In the last days I analysed the strange behaviour of the EMAK shares since the subscription rights started to trade (Part 1, Part 2).

Just to remember: On Friday 18th, before the subscription period, the Stock traded at ~ 2,10 EUR. This equals 0,75 EUR after the split of the subscription rights.

Since then, the stock systematically trades down towards the exercise price of the subscription right (0,425 EUR).

Remark: A lot of the available charts do not correctly adjust for the subscription right. The correct historical chart can be found for instance at Borsa Italiana directly.

So what is happening here ? In my opinion one has always to ask: Do I miss something here ? Or to put it another way: Does someone have a strong incentive that the price will go below the subscription price by the end of the subscription period ?

If we go back one step, we should ask addtionally: What was the purpose of the whole exercise anyway?

When I read the announcement that the majority shareholder Yama SpA wants to sell his other holdings to EMAK, my first reaction was: they need cash. However after disclosing that they will take up their share of the capital increase, the cash effect for the shareholder was relatively small.

Another reason could be the following: Maybe Yama’s real intention is to scare away minority shareholders and take over the minority shares as cheap as possible ?

Lets consider the following:

For a squeeze out in Italy , they need according to this document 95% of the company.

Before the rights issue, Yama held 74% or 20.5 mn shares of a total 27.6 mn shares.

After the exercise of the subscription right, we will hav a total amountof 163.9 mn shares (5 new for 1 old minus Treasury shares).

In the past trading days since beginning of the subscription period, a total of 1.05 mn shares have been trades for around 600 Tsd EUR which resulted in a drop from around 0,75 EUR to 0.48 EUR (low intraday today)

So in theory (paranoia scenario), the following could happen:

– Yama is currently selling its own shares to depress the share price below the subscription price of 0.425 EUR (only 4.5 cents to go, they have plenty of material).
– most shareholders then will not exercise the subscription right. Normally the unexercised subscription rigths will be sold for almost nothing in an closing auction at the last day
– Yama buys all the subscription rights and exercises them

This would result in the following change in percentage ownership, assumed that Yama needs to sell another 1 mn shares, to reach this target:

Before:
Yama: 20.5 mn shares, 74%
Minorities 7.1 mn shares, 26%

After: (total 163.9 mn shares)

Minorities 7.1 + 2 mn = 9.1 mn shares or 5.5%
Yama: 20.5 – 2 mn + all new shares (~136 mn) = 154.8 mn shares or 94.5%

So if this works out, YAMA almost reaches the threshold for a squeeze out. If they tehn achieve to hold the shareprice down for a further few months, the might be able to purchase the remainder for a relatively small fee.

Summary: There could be a downside scenario where the majority shareholder has structured this whole exercise to be a clever way of squeezing out minorities at a depressed price level. I am not sure how possible this is, but it should definitely be considered in any investment decision.

IVG capital increase

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IVG is an interesting example for a “distressed” company, where the position as Senior bondholder is much more comfortable than being a shareholder.

After announcing relatively good Q3 numbers on which I commented earlier this month, they announced today the following:

The management board of IVG Immobilien AG, Bonn (ISIN DE0006205701) has, with the consent of the supervisory board, resolved to increase the registered share capital of the company from € 138,599,999 by € 69,283,885 by issuing 69,283,885 new ordinary bearer shares.

The new shares will be offered to existing shareholders by means of indirect subscription rights at a subscription ratio of 2:1, meaning that two existing shares will entitle a shareholder to subscribe for one new share. The subscription price is € 2.10.

A lot of people bought IVG shares because they trade well below book value, howver, issuing such a huge amount of new shares at an ever larger discount to book value is a clear dilution for existing shareholders. The result was a 15% drop in the shareprice.

For the 2014/2017 Convertible bond, this is in contrast good news which shows in a steadily increasing bond price:

From my point of view, there are a few take aways from this situation:

– looking at price to book ratios for distressed companies should always include the possibility of massive dilution
– especially when banks are involved who can use loan covenants as a tool the force capital increases, shareholders will normally suffer
– in such cases buying senior bonds at a large discount looks like a much better position compared to stocks
– stock or subordinated debt of distressed companies will only become intersting, once liabilites are reorganized in a way that no refunding is necessary for an extended amount of time (e.g. through long term bond issuance)

In my opnion, we will see more or less similar actions for Praktiker.

German Corporate High Yield / Distressed Debt Wacthlist

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Almost every day, the “selection” of Germany based companies with bonds trading at distressed levels keeps getting bigger.

At the moment, I have only the IVG Convertible (2014, Price 75.5%, Yield ~15%) in my portfolio.

Other corporate bonds which might be interesting at some point in time could be:

Praktiker (DE000A1H3JZ8)

Heidelberger Druck

Kion (former Linde subsidiary)

Thomas Cook (former Karstadt Sub)

I am not saying that those bonds are “Buys” right now, but at a really dsitressed level the might be worth a closer look as “Net Asset Play”.

Total Produce – Capespan show down

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Blogger Wexboy has a very interesting post about the Capespan bid war.

In a nutshell, it looks like that the two South African investors Zeder and Bidvest are fighting for control over Capespan, where Total Produce now holds a stake of 20% (Value ~ 15 mn EUR).

Based on a link I have posted in the comments at valuetock inquisition it looks like that Total Produce is actually the “overseas partner” of Zeder investment.

Just a couple of hours ago, Capespan reported that something is happening soon:

Capespan Group Ltd., South Africa’s biggest fruit exporter, said its investors are in undisclosed talks that may cause its share price to move.
“There are ongoing talks among shareholders,” Angelo Peterson, Capespan’s spokesman, said by phone from Cape Town today, declining to provide more details.

So it looks like the final show down will happen now any time.

Personally, I hope that Total Produce will not go for full control of the entity, as this would be quite dilutive for the shareholders. My best case scenario would be that Total Produce sells out with a nice profit and keep its cooperation agreement.

Praktiker – Restrukturierungsplan

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Ich hatte in den vergangenen Monaten ja diverse Posts zu Praktiker gschrieben mit dem Resultat, dass aufgrund der hohen Verschuldung und der Mietverbindlichkeiten kein “Margin of Safety” erkennbar war.

Insbesondere die Cashflow Problematik hat die Handlungsfähigkeit der Firma extrem eingeschränkt.

Mein Votum nach den Halbjahreszahlen war:

Zwischenfazit: Insgesamt darf man also mit weiteren „Sondereffekten“ rechnen, sollte ein neuer CEO mal anfangen aufzuräumen und unprofitable Standorte zu schliessen. Auch die Marge dürfte unter dem Lagerverkauf und den dazu notwendigen Sonderaktionen im 3ten Quartal deutlich leiden.

Jetzt ist der neue Chef Thomas Fox mit seinem Sanierungsprogramm an die Öffentlichkeit gegangen. Da ich kein Sanierungsexperte bin, kann ich relativ wenig zum Inhalt sagen,aber generell macht es sicher Sinn, nur eine Zentrale zu haben und unprofitable Standorte zu schliessen.

Interessant ist diese Aussage aus einem FTD Artikel:

Konkret will er in den kommenden Wochen mit Arbeitnehmern, Vermietern und den Kapitalgebern, die eine Praktiker-Anleihe gezeichnet haben, über einen Verzicht verhandeln. Die Höhe des Verzichts wollte er nicht benennen. “Ich habe für jede Gruppe sehr genaue Vorstellungen”, sagte er dazu lediglich. Einigen Vermietern drohte er außerdem mit dauerhaften Einschnitten oder Kündigungen, weil ihre Mieten überhöht seien.

Das ist doch sehr interessant. Ich bin zwar kein Distressed Debt Spezialist, aber solange Praktiker keine Insolvenz anmeldet gibt es keinen Grund für Anleihegläubiger auch nur einen Cent nachzulassen. Insbesondere da die Anleihe ja die durchaus werthaltige “Change of Control” Poison Pill besitzt.

Praktiker will ja 300 Mio investieren, die Aussagen im Conference Call zur Finanzierung waren sehr vage.

Ohne eine klare Vorstellung der Refinanzierung ist meines Erachtens auch die Anleihe nach wie vor “uninvestierbar”. M.E.ist auf jeden Fall eine massive Kapitalerhöhung unvermeidbar, wahrscheinlich dazu noch eine Wandelanleihe o.ä.Auf jedne Fallwerden die Aktionäre nch weiter verwässert werden, insofern ist der Kursrückgang der durchaus gerechtfertigt.

Interessant ist die Tatsache, dass nach der Veröffentlichung des Plans der Kurs zuerst gestiegen ist, um dann nach dem Call wieder stark zu fallen.

Das ist aber m.E. kein Wunder, der CFO macht meines Erachtens keine gute Figur und fasselt nur allgemein daher,man hat nicht das Gefühl dass man das Thema Finanzierung wirklich im Griff hat.

Merke: nicht nur Berichte lesen sondern auch die Calls anhören.

Fazit: Die Aktie ist m.E. nach wie vor für Valueinvestoren nicht investierbar, es dürfte noch eine signifikante Verwässerung durch Kapitalerhöhung bevor stehen. Die Anleihe selbst könnte bei einem wirklich geringen Preis (unter 50%) interessant sein werden.

Wochenrückblick – Lesenswertes

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Interview mit Guy Spiers (Aquamarine). Irgendwie kommt mir der gute Guy immer wie ein “Abzug” von Warren Buffet mit Oxford Akzent und Einstecktuch vor.

Ein paar interessante Aktienanalysen von Bloggern:
– Adam’s Golf bei Oddball
– Telefonaktien bei valuestock inquisition
– Bijou bei Investment Analyse

Interview mit den Fonds “Honchos” Larry Fink und Bill Gross

Tweedy Browne Q3 Bericht. Gekauft wurden u.a. Imperial Tobacco und Total

Schafft Eddie Lampert den Turnaround bei Sears

EMAK SpA – Follow up

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Yesterday’s post to EMAK didn’t really contain a lot of hard numbers. So let’s look at some multpiles.

The acquisition itself is summarized in the most recent investor presentation.

In order to put the complete price tag on the acquisition, one has to make a few calculations. Based on the presentation, I would calculate the total purchase price (equity payment + assumed debt) as follows:

82,7 mn Equity paymnent
10,6 net debt Comet
2,0 net debt Raico
0,3 net debt Sabart
23.4 net debtTecomec

Total 119 mn EUR

EMAK gets the follwoing EBITDA (2010):

7.9 Tecomec
5,3 Comet
3,0 Sabart
0,9 Raico

total 17.1 EBITDA 2010 which would result in a purchase multiple of 7 times EV/EBITDA

After the acquisition, EMAK is targeting 3 mn EBITDA of synergies, sow inlcuding those synergies the purchase would have been priced at 6 x EV/EBITDA for 2010.

For EMAK this would mean after the acquisition ~ 100 mn EUR total debt. At current prices, EMAK’s equity is valued around 90 mn EUR. So total EV is 190 mn.

2011 EBITDA is expected around 40 mn EUR, the Group is targeting 58 mn EUR EBITDA for 2013.

Baes on this, the current share price represents ~ 4.7 EV/EBITDA for 2011 and around 3.3 x EV/EBITDA for 2013.

Historically, EMAK traded around 5-6x EV/EBITDA. The historical numbers show a rock solid steady company which was almost not impacted by any crisis:

TRAIL_12M_EPS EBITDA_PER_SH BOOK_VAL_PER_SH DVD_SH_12M
1999 0.046 0.145 0.518 0.020
2000 0.075 0.182 0.566 0.025
2001 0.097 0.237 0.628 0.034
2002 0.106 0.265 0.691 0.042
2003 0.112 0.276 0.757 0.046
2004 0.104 0.260 0.812 0.047
2005 0.110 0.262 0.880 0.047
2006 0.132 0.296 0.960 0.049
2007 0.179 0.353 1.079 0.057
2008 0.176 0.376 1.178 0.071
2009 0.112 0.258 1.222 0.049
2010 0.138 0.280 1.333 0.049

Finally, after a somehow slower first half year, the 3rd Quarter results acutally were quite good. Lower sales in the Italian home market were more than set off by increasing sales in emerging markets.

So let’s wait and see, but for a relatively defensive company, EMAK looks really cheap.

EMAK SpA (ISIN IT0001237053) – The Italian Job ?

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EMAK is an Italian manufacturer of different gardening tools, motor chainsaws, lawn mowers etc.

I discovered the stock when I was looking for Einhell peers a year ago. (Un)fortunately, the trading volume at that time was much too low to include it in the blog portfolio.

However I held some shares in my personal account, which I sold after this news message.

What happened was the following:
– the 80% shareholder decided to sell his other businesses to EMAK
– the size of the sold businesses is similar to EMAK itself, the valuation was at that time slightly more expensive than EMAK
– the purchase price should mostly be financed through a capital increase equal to 80% of EMAK’s Market cap
– the 80% shareholder guaranteed to take up his share of the capital increase, Mediobanca guaranteed the rest.

In any case, this deal looked “murky” from a corporate governance perspective and I decided to get out of the share and wait for the capital increase. The share price the went down from ~4 EUR to around 2,30 EUR last Friday before the capital increase.

Now this is where things really got strange:

EMAK decided to execute the capital increase in the following way:

– each holder of the old share (at that time price ~2,35 EUR got the right (ISIN0044778046) to purchase 5 new shares at a price of 0,425 EUR.
– So based on the old price, this resulted in theoretical price of the rights of 1,60 EUR, around two times the theoretical price of the shares after splitting the subscription right
– however, both the shares and the subscriptionn rights got y slaughtered starting on Monday.

Rermark: The Yahoo Chart doesn’t reflect the subscription rights since monday, on a like for like basis, the current share price is around ~1,20 EUR.

Currently, the shares trade around 0.58 cents, the subscription rights at 47 cents, after hitting a low of 31 cents.

The subscription right itself is fairly easy to value, the value is (current shareprice – 0.425 cents)*5 or around 75 Cents based on a share price of 0.57 cents.

When we look at the toal valuation of EMAk, at current levels of the shares, EMAK would be valued at ~94 mn EUR.

In my “home forum” Winter has calculated that based on the results of the first half year, the combined entity could earn around 25-30 mn EUR, which would result in an P/E of ~3-4.

If one buys the subscriptions rights now at let’s say 50 cents, one would buy the shares even with a further 10%-15% discount.

At the Milano stock exchange the price for the subscription right is currently oscillating between 0,37 EUR and 0,50 EUR, so this hardly looks like an efficient market to me.

Even taking into account the corporate governance issues surrounding the whole transaction, at the current prices EMAK looks like a compelling special situation.

So for the portfolio I will actually start with buying both, subscription rights + the shares as “special situation” Investment (as ususal, 20% max of daily trading volume).

Vetropack – Business model, Peer Group

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After yesterday’s starting post for Vetropack, I would like to add some additional thoughts.

Business model & possible moat:
Vetrpopack basiscally produces glass bottles for beer, juice and softdrink companies. With all those beverages, usually both, the brewing and botteling part is done locally. Beverages esp. in glass containers are ussually difficult and expensive to ship, so especially the big breweries and soft drink companies produce everything locally.

The same applies for the glass containers themnselves , which are relatively cheap but expensive and difficult to transport. So somehow similar to a cement plant, someone with a local glass bottle production has a local natural cost advantage (“moat”) to competitors from geographically remote regions. The major difference to cement plants being the lower cyclicality of the business.

Peer Companies

I found the following companies which could be considered “peers” i.e. companies manufacturing glass packaging:

Vidrala SpA (Spain, glass bottles, very similar to Vetropack)
Gerresheimer (Germany, glass and plasticv bottles, more focused on pharmaceutical containers)
Zignago Vetro SpA (Italy, glass bottles)

Based on “simple” valuation ratios, the results look interesting:

Tkr & Exch Mkt Cap P/E P/B P/S EV/EBITDA T12M Net D/E LF
             
 
VET SW 650.8 10.40 1.23 0.80 4.46 0.00
VID SM 418.1 10.49 1.84 1.08 6.33 76.20
GXI GR 913.4 17.59 1.81 0.86 6.38 69.45
ZV IM 373.6 11.03 3.51 1.41 6.40 69.86

Although the P/Es are quite similar, all the other peers carry a significant amount of debt. This results in a singificantly lower EV/EBITDA multiple for Vetropack compared to its much more highly levered peers, which interestingly all trade around 6.4x EV/EBITDA.

EV/EBITDA is often used as a “proxy” for a private company valueation (Gabelli). Under this metric, Vertropack would be significantly undervalued compared to its Peers.

For me its not clear why the most solid company of the peer group should have the lowest relative valueation, in my opnion this should actually imply a premium.

Portfolio Management
As mentioned in the first post, Vetropack has currently a weight of 2.9%. As the cash balance in the portfolio is currently at the low end of the target (10%), I will either need to decrease another position or fund the increase through a short position.

My initial idea to create a pair trade between Vetropack and Gerresheimer (short) does not work to well. Correlations between the peer companies are extremely low (Vetropack against Gerresheimer for instance 0,24 for the last 12 months).

So before increasing the Vetropack position I will have to reduce other positions first.

Vetropack (CH0006227612) – Rock Solid Swiss compounder

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Vetropack is one of the “Core Value” shares of my portfolio which I haven’t covered in detail yet.

Vetropack describes itself on its homepage as follows:

Vetropack is one of Europe’s leading manufacturers of packaging glass. With a rich variety of glass packaging products to offer the beverages and food industry, as well as a broad spectrum of services, Vetropack truly delivers “tailor-made glass”.

and:

This end-to-end service is the fundamental reason for Vetropack’s position as market leader in its six home markets, namely Switzerland, Austria, the Czech Republic, Slovakia, Croatia and Ukraine.

Based on “traditional” metrics, the stock looks OK but not “super cheap”:

P/B 1.25
P/E 2010 17.6
P/E 12M Trailing 10.4
P/E Graham (10 years): 13.5
EV/EBITDA 12M Trailing 5.1
Div. Yield 2%
FCF Yield (2010) 9%

No debt (95 CHF net Cash per share)
no intangibles

A quick view on historical earnings shows quite an impressive picture:

EPS BV/share FCF Share
1999 10.96 497.29 25.21
2000 36.58 510.66 92.28
2001 27.22 534.51 30.76
2002 59.78 578.15 -29.87
2003 91.03 681.03 120.04
2004 97.74 768.46 19.42
2005 119.10 909.37 85.48
2006 101.20 933.70 -22.48
2007 236.30 1,180.99 138.17
2008 182.55 1,243.69 105.58
2009 184.84 1,371.71 207.95
2010 91.24 1,283.77 155.84

We can clearly see the incredible rise in Earnings and Book value since 1999 until 2007, however in the last few years the picture has changed to a certain extent.

Looking at the Earnings developement in Swiss franks only shows part of the picture. Only 17% of Vetropacks sales are generated in Switzerland by the Swiss operations, 83% is outside Switzerland. Important: Vetropack does not export anything from Switzerland.

So if we look at peak Earnings in 2007 and compare them to the 2010 earnings, we should take into account that the 87% of Euro denominated Earnings have been reduced by a significant reduction in the value of the EUR against the CHF. Even more interesting is the effect on Free Cashflows:

FCF CHF FCF EUR FX Rate CHF/EUR
2007 138.17 83.56 1.65
2008 105.58 70.69 1.49
2009 207.95 140.16 1.48
2010 155.84 124.51 1.25
CAGR 3.2% 12.3%

Over the last 4 years, Cashflos in CHF have increased by 3%, the underlying EUR Cashflows by 12%, quite a difference. The currency movement also explains the lower book value in 2010 against 2009 despite the profit made.

So how can we value Vetropack ? If we look at the last 5 year free cashflows, we can see that the 2006 number looks quite odd, being negative. A quick glance into the 2006 annual report shows, that actually operating cashflow was strong but the company invested some extra amount in acquisitions and starting productions in contries like Slovakia.

So if we just take the average Free Cash flow of the last 4 years (which would be 150 CHF per share) and capitalise them at 10% we would end up with an intrinsic value of 1.500 or roughly 5% less than the current market price of 1.600 ChF.

Now we enter a difficult area for a contrarian investor: lower discount rates and growth.

If we just look at the following table where I simply discount the avg. Free Cash flow with various growth and discount rates (Discount rate X axis, growth : y axis)

7% 8% 9% 10%
1% 2,516.67 2,157.14 1,887.50 1,677.78
2% 3,020.00 2,516.67 2,157.14 1,887.50
3% 3,775.00 3,020.00 2,516.67 2,157.14
4% 5,033.33 3,775.00 3,020.00 2,516.67
5% 7,550.00 5,033.33 3,775.00 3,020.00

We can clearly see that for a margin of safety of 50% I would need to assume for instance a discount rate of 8% and a growth rate of 3%.

If history is any guide, Vetropack should be easily able to grow by 3%, having achieved much much mor in the past. Additionally, a 8% discount rate for a non-cyclical consumer product related company with net cash and an extreme conservative balance sheet should be reasonable.

Finally a quick check of the stock chart:

In 2008 the stock went down to almost 1.100 CHF, slightly below book value. Currentbook Value is around 1.300 CHF, so in a 2008 scenario we look at a 20% downside from here.

Summary: Vetropack is a stock with extremely strong historical growth, strong free cash flow generation and a rock solid balance sheet. Based on relatively conservative assumptions (3% growth, 8% Cost of capital), the current price would imply amargin of safety of almost 50%. If the stock should show some weekness in the next few days, I would actually be tempted to increase the allocation from the current 2.8% to 5% on acurrency hedged basis.

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