Monthly Archives: January 2012

Kabel Deutschland – How relevant is negative net equity combined with a lot of debt for a “wide moat” business ?

Background: Kabel Deutschland is one of the short positions of the portfolio and currently the only one which didn’t work out yet…

In one of the blog posts, reader Stairway commented with an interesting analysis.

I hope it is fair to summarize the argument as follows:
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Catching the Italian knife again ? – Piquadro SpA (ISIN IT00042405443)

On my hunt for cheap PIIGS or GIPSI stocks, I basically “tripped” over Piquadro SpA. I wanted to share my first impressions while looking at the share:

Company description
The company produces and distributes travel and business luggage. According to the website, the comapny exists since 1987 and sells under the current brand since 1998.

In October 2007 the company went public at a share price of EUR 2,20.

Basic Financials

Piquadro has exactly 50 mn shares outstanding, at the current price of EUR 1,24, the market cap is ~ 62 mn EUR.

Current multiples are:

P/B 2.4
P/S 1.0
EV/EBITDA 7.2
P/E 6.8
Div. Yield 8.1%

So apart from P/E and dividend yield, the company looks expensive. Howver this can easily be explained by the profitability measures (FY 2011):

ROA: 16.2%
ROE: 38,9%
ROC: 25.9%
Pretax Margin 22.7%

So we can clearly see that the business at least up until recently is rather high margin, high return on capital business.

Warning signs:

Despite the recently positive market trend, the stock price still drops like a stone:

Especially compared to example Tod’s it is interesting to see that since last November, the chart “decoupeled” from the market. One thing that one should keep in mind is: In “falling knife” situations, you will always invest too early in the short term !!!!

Shareholding / Management

CEO founder and main shareholder is Marco Palmieri with 67,0% shareholding, other big shareholders are Mediobanca (6%), Fidelity (5%), Cominvest 1.2%. Well known US value shop Royce has a tiny position which was slightly increased in Q3 2011.

According to the last annual report, Palmieri paid himself 407 k EUR, total board compensation incl. Directors was 1 mn EUR. This looks OK, Palmieri receives much more money through the dividend than through the salary, so incentives with shareholders should be aligned to a certain extent.

Cashflow generation and use

What attracted me immeadiately is the fact that free cashflow generation was excellent in the years since the IPO compared with earnings.

EPS FCF Dividend Net debt per share
2008 0.129 0.06 0.06 0.23
2009 0.151 0.12 0.06 0.21
2010 0.145 0.18 0.08 0.11
2011 0.182 0.13 0.11 0.07
         
Total 0.607 0.48 0.31 0.16

We can see that over the last 4 years, Free cashflow was 78% of reported earnings, which is pretty good for a growing company. 2/3 of the free cashflow was paid out as dividends, 1/3 to reduce debt. Net debt at 7 cent per share seems to be easily managable.

The cash generative structure of the business is also emphasised in the latest Investor presentation.

Risks:

So far, everything looks almost to good to be true. One big issue however is obvious: Up until last year 75% of sales came from Italy, the international expansion is just starting. If Italy really goes into a deep recession, sales and profits in Italy could get hit hard. It would then be questionable if the international expansion could offset this.

I just saw that Piquadro issued a sales update for the 3rd quarter (financial year ends in March on January 10th. Sales ytd still show an increase of 5%. Howevr compared to the Q2 numbers this is definitely a pretty sharp contraction.

However I have to keep in mind that I already own Buzzi, EMAK and Austostrada. From a risk managament perspective I will have to think about some hedging against specific Italian risk.

Summary: On a first glance, the company looks extremely attractive: Good grwoth, high margin business, low capital requirements, excellent free cashflow and a conservative balance sheet at bargain prices. Howver the stock is tanking as I write. So I will have to dive deeper into the business model in order to identify potential hidden risks. But for now it looks like a potentially very attractive Core Value investment.

Unicredit rights issue – update

Tomorrow will be the last trade date for the subscriptions rights. So far, the shares are doing really well. the subscription rights recovered from a low of ~0,45 cents to currently around 2,12 EUR.

This is still well below the theoretical value of 2.29 EUR ((3.09-1.943)*2).

Looking at the relative Performance:

Since the rights started trading (January 9th), Unicredit has outperformed the FTSE MIB by +35% and competitor Intesa by +25%, howver since January 1st, Unciredit has underperformed the MFTSE MIB and Intesa by ~-26%

In the last few days, some good news emerged:

– the Abu Dhabi Sovereign Wealth fund had committed to increase its stake
– Zurich Financial Services seems to be interested in buying part of the Turkish JV

So from a investment point of view, a lot of the forced selling seemed to happen in the first 2 days of the subscription right trading period. I had expected that towards the end the price would come down again but it doesn’t look like that at the moment.

Dispite the significant discount of the rights, I will not start a long/short trade, as a lot of the expected outperformance has already occured in the last few days.

Special Situation: DJE Real Estate fund (LU0188853955) in liquidation

EDIT:I have changed some parts of the Post, especially with regard to the summary and the risk section !!!

Preliminary remark: a reader emailed me this idea, thank you very much. But please don’t forget: This is not meant as an investment advise, please do your own homework !!!! I might own already shares of any discussed inevstment personally and many of the invetsments discussed are relatively illiquid.

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