value and opportunity

WMF AG is one of the “core value” stocks, I have only mentioned briefly. WMF was founded over 150 years ago (wikipedia). The company is well known for generations in Germany for producing excellent kitchen supplements, especially cooking pots and pans, cuttlery and other “kitchen helpers”. Additionally they started at some time in the sixties to produce coffee makers, especially for the professional area like restaurant, company cafeterias etc.

The company has a dual share structure, 9.3 mn normal shares are issued plus an additional 4.7 mn preference shares.

Total market cap is currently ~400 mn EUR.

Main shareholder (51.8% of the common stock) is the Private Equity Investor Capvis, who bought the stake in 2006 mostly from Munich Re and Deutsche bank (part of the end of the “Germany AG”. They also made an obligatory offer at that time for 19.05 EUR for the common shares and 15.60 EUR for the preference shares. There is an interesting interview 8in German) with someone from Capvis which indicates that they paid 15 EUR per share in 2006.

Interestingly, at the same time, another Investor, FIBA from Austria, aquired ~37% of WMF which is maybe the major reason why WMF is still an independent company.

A quick look at the chart shows, that this activity lead to a peak sahre price of around 35 EUR in 2007:

When we look at the “classical” valuation metrics, the stock doesn’t look super cheap:

P/E: 10.8
P/B: 1.34
P/S: 0.46
P/E 10: 22.2
Div. Yield 4.4%
EV/EBITDA 4.4

The only measure which is really cheap is EV/EBITDA. WMF has tradititionally an ultra-conservative balance sheet with net cash on its books and a very low percentage of goodwill in its NAV (<10%).

If we look at the historical data, we can basically see a tale of two different companies:

Year	sales per share	EPS	Net margin	ROE	ROC
1999	41.0438	1.298	3.16%	7.86%	8.13%
2000	41.6357	1.255	3.01%	7.32%	7.49%
2001	40.8181	0.81	1.97%	4.65%	4.61%
2002	41.2899	0.79	1.90%	4.65%	5.04%
2003	41.5403	0.81	1.96%	4.95%	5.19%
2004	40.0905	0.23	0.57%	1.39%	1.72%

From 1999 until 2004, profit shrank almost every year, proftability deteriorated in parallel to almost zero.

Then suddenly starting in 2005, profits and margins go up substantially, surpassing easily the best year 1999:

Year	sales per share	EPS	Net margin	ROE	ROC
2005	41.2628	0.6	1.46%	3.63%	3.71%
2006	52.2696	1.4	2.68%	8.24%	8.09%
2007	54.3949	2.51	4.61%	13.90%	13.45%
2008	56.8433	1.55	2.73%	8.13%	8.41%
2009	57.1443	1.84	3.22%	9.29%	9.61%
2010	64.3982	2.73	4.24%	12.98%	13.44%

It seems that even before the sale to the PE investor in 2005, the company somehow managed to improve profitability substantially. We will come to that in a minute, but lets move to our standard valuation exercise first:

Asset Replacement Value:

Based on the half year report, we can make the following standard adjustemnts:

30.06.2011	mn EUR	per share
Equity	304.52	21.75
– intang	-16.60	-1.19
+ 50% depr Property	42.50	3.04
– minorities	-1.90	-0.14
– pension deficit	-7.90	-0.56
+ at equity part	5.00	0.36
NAV adj.	325.62	23.26
+ 50% of 5 year advertising	75	5.36
Replacement Value	400.62	28.62

Remarks:
– for a 150 year old company, the adjustment for property and buildings might be much to conservative. A valuation based on real market values could add significant amounts

– the adjustment of “at equity” inverstments is an educated guess. One of the at equity investments (BHS tabletop) has an observable market value which is higher than the whole position, however no split is available for this position

– WMF has spend around 30-35 mn per year on average on advertising and promotions. I have used 50% of this amount as proxy for the brand value. Again this might be too conservative

– plant & equipment has been depreciated to less than 20% of historical cost. The replacement value might be higher but again, under the standard approach I will not adjust for this.

Summary: Based on a relatively simple Asset Replacement Value analysis, WMF seems to be fairly valued. However, both, the property position as well as the brand name could contain much more value. However, from a conservative perspective, WMF doesn’t seem to be an asset play at current market prices.