Monthly Archives: February 2012

Lingotes Especiales SA – comparable European Auto part suppliers

In my first post about Lingotes Especiales, the spanish auto parts producer, Chiru made a very valid comment:

Lingotes Especiales looks like a typical cyclical auto supplier to me. Such cyclical companies trade most of the time below book value. So I wouldn’t say they are extremely cheap. It’s rather a normal valuation given that there is some downside risk in the european auto market.

I tried to collect a sample of “traditional” European auto part suppliers with a market cap between 10-100 mn EUR. If we look at the table, we see that Chiru is right:

Short Name P/B P/E EV/EBITDA Div.Yield
ACE 0.89 17.46 4.0 4.4%
SCANDINAVIAN BRA 0.00 4.53 5.6 0.0%
MGI COUTIER 0.90 4.41 2.3 1.3%
FRAUENTHAL HOLDI 0.92 4.69 5.4 1.1%
MONTUPET 0.42 3.78 3.7 2.1%
LE BELIER 1.01 4.05 2.6 0.0%
GEVELOT SA 0.42 4.75 1.7 2.8%
DELFINGEN INDUST 0.53 142.27 4.6 2.6%
STREIT IND 1.58 3.57 0.9 0.0%
Avg 0.74   3.42 1.6%

One can clearly see thath especially the French companies look really really cheap.

On that basis, Lingotes (P/E 6, EV/EBITDA 3.0, P/B 0.9) looks kind of “average”. Only the current 8% dividend yield stands out.

So we identified one of the reasons why Lingotes is cheap: This is that ALL the smaller traditional autoparts companies are relatively cheap. This is important, as my initial thesis was that Lingotes is cheap because it is a Spanish company.

One could argue that Lingotes might need to trade higher than the Peer Group, as most of the peers had at least 2 loss years over the last 10 years, but at the end of the day one would need to make the industry analysis first. Intuitively I would also agree that there are cyclical risks to th car industry and if the big car producers suffer, the suppliers suffer even more.

As a result, Lingotes and the other cheap autt part suppliers will move some positions to the back of my research pile.

Commerzbank HT1 Tender offer

Good times for my “special Situations” investments.

After Draeger came out with an 210 EUR offer last week, Commerzbank today announced that they will make a tender offer (among others) for the HT1 Bond at 71%..

The exchange offer invitation by the Offeror includes the following hybrid capital instruments, subordinated debt securities and other capital instruments:

Instrument Aggregate Principal ISIN Minimum Theoretical Order of
  Amount outstand-   Nominal Purchase Priority**
  ing   Amount Price  
Commerzbank Capital Funding Trust I EUR 189,550,000 DE000A0GPYR7 50000 31500 1
Commerzbank Capital Funding Trust II GBP 115,600,000 XS0248611047 £ 50,000 £ 30,500 1
UT2 Funding p.l.c. EUR 750,000,000 DE000A0GVS76 1000 825 2
HT1 Funding GmbH EUR 1,000,000,000 DE000A0KAAA7 1000 710 3
Eurohypo Capital Funding Trust I EUR 306,425,000 XS0169058012 1000 690 4
Lower-Tier-2-Anleihe (bearer bond) EUR 502,150,000 DE000CB07899 50000 € 41,000*** 5
Lower-Tier-2-Anleihe (bearer bond) EUR 272,850,000 DE000CB8AUX7 50000 € 42,500*** 5

The only caveat is the point that the inevstors will not get cash but Commerzbank shares.

The Offeror plans to contribute the securities it acquires as a contribution in kind to Commerzbank in exchange for new shares issued from the authorised capital (“genehmigtes Kapital”) of Commerzbank. There will not be a placement of the new shares with investors, as qualified holders of the selected securities will receive the shares directly in exchange for the securities tendered.

To make things more interesting, the amount of shares (and the implicit exchange price for the shares) will be determined in the following way:

The price of these shares will be determined based on the average of the daily volume weighted average price in XETRA during the period starting on February 24 and ending on March 2, 2012.

Th eoffer is limited to the number of new shares created (511 mn shares at 2 EUR would mean around 1 bn EUR), the securites affected have a total volume of 3.1 billion. If more people tender, the acceptance will be on a proportional basis:

In the event that the total volume of securities for which tenders have been submitted to the Offeror exceeds the authorised capital of 511,342,904 shares, the Offeror will accept the tenders on a pro rata basis as set forth in the Exchange Offer Memorandum dated February 23, 2012.

A technical side remark: Commerzbank has announced that the local GAAP result will be a hefty loss of 3.5 bn EUR, however they will use reserves to prevent any writedown on profit participating securites, including HT1.

Summary: The tender offer will boost the price significantly. I am however not sure if I want to sell at that price.

Lingotes Especiales SA – Hidden Spanish Champion ?

On my “quest” for small, obscure but interesting “GIPSI” companies, I stumbled upon Lingotes Especiales SA (ISIN ES0158480311) from Spain.

The company produces cast iron parts mostly for the Automobile industry. Fundamentally, the company looks extremely cheap:

Market cap 29 mn EUR
P/E 6.5 (based on 2010 EPS of 0.46 EUR)
P/S 0.4
P/B 0.9 (no intagibles)
Dividend yield 8.2%

Net debt at 0,66 Cent per share (end of 2010) or 20% of total assets looks managable.

Further checks for the “obscurity” factor of the stock:

– There seems to be no analyst coverage for the stock (positive)
– financial information is only available in spanish (positive)
– shareholders do not include any “famous” names (positive)

A quick glance ar historical figures shows a relatively volatile picture, however the comapny managed to show a profit in each of the last 11 years form 1999-2010:

31.12.1999 0.3413 0.1603 4.4678 7.6385 12.1374
29.12.2000 0.3055 0.1683 5.7244 5.3374 9.4819
31.12.2001 0.234 0.1803 5.9373 3.9405 7.2021
31.12.2002 0.186 0.1803 5.9111 3.1526 6.0903
31.12.2003 0.438 0.1765 7.0747 6.1958 11.029
31.12.2004 0.1853 0.2706 6.9367 2.6716 5.1811
30.12.2005 0.4127 0.1765 7.2769 5.6717 10.0944
29.12.2006 0.1277 0.2706 7.182 1.7785 3.939
31.12.2007 0.349 0.1 7.3892 4.7235 8.3868
31.12.2008 0.3287 0.2439 7.9795 4.1191 7.6808
31.12.2009 0.0715 0.2439 4.745 1.5067 2.309
31.12.2010 0.4602 0.2439 6.7386 6.8286 10.6053

Looking back, the Graham & Dodd P/E (current price / average 10 year earnings) doesn’t look extremely cheap at around 11. However if we check for a “normalized price” calculated as “current sales times avaerage net margin times average P/E” we see a “fair value of around 6,50 EUR.

The current year doesn’t look bad either, based on the Q3 report, Lingotes managed to increase sales significantly, although margins seem to have deteriorated a little. Nevertheless, 9 month profit is already 0.43 EUR a share, 5% more than in 2010.

A very interesting sentence in the Q3 report is the following:

Los riesgos de incremento del precio de la materia prima no son tales, pues los precios de venta del producto terminado están indexados a los de la evolución de aquélla.

Based on my little Spanish and Google translate, this means that increasing costs on the material side are not a problem because sales prices are indexed to this.

Another interesting point from the Q3 report is the fact that 70% of sales are exports outside Spain. I read an interesting post at the highly recommended IBEX salad blog, which showed that Spanish exports aren’t that bad and that they are improving significantly compared to imports.

The stock price chart doesn’t look pretty but one could imply some sort of bottom based on the historic chart:

Summary: A quick and dirty check shows that Lingotes might be one of the cheap overlooked GIPSI equities I have been looking for. A low valuation combined with a high dividend payout might companesate for any missing short term “catalysts”. So I think the stock definitely deserves a closer inspection following the usual methodology.

Efficient markets – Quick check Greece 2012 bond

So we have a new “PSI” package for Greece.

If I understood everything correctly, as a current holder of the March 2012 bond, one will receive the following securities (example: 10.000 EUR nominal):

– 15% or 1.500 EUR in EFSF securities, which should be as good as cash
– 430 EUR or 4.3% of accrued interest in EFSF securities
– 31.5% in 20 different (!!!!) new Greek Government bonds. This means one will get 20 different bonds at a nominal value o EUR 157.50 each !!!
– a currently undefined “warrant” on the Greek GDP developement

At the German stock exchange, the march bond is currently selling around 37%. The August 2012 bond is selling at 26%, the longer bonds around 23%.

It seems that still a lot of people seem to believe that they will be paid in full in march. Because if you calculate the implict expected price of the new bonds at the 35% price tag, you would end up with a value of ~57% for the new bonds which is totally unrealistic.

The implict price for the new bonds priced into the longer bonds is more like 20% of the (new) nominal value.

There is no reason that the new Greek bonds should tarde significantly above the old bonds as the amount of debt will more or less remain constant and since last Friday, every private bondholder is effectively subordinated to the ECB.

So as a relative value trade, one could now short the march 2012 bond against the August 2012 bond if this would be theoretically possible.

For any “small money” gamblers, the transaction costs for having to sell at least 22 different investments after the exchange will further diminish any possible gains.

On the opther hand, this could open up some interesting opportunities AFTER the exchange, I am especially looking forward to the “GDP warrant”.

Spin-off watch – TNT and Cable & Wireless

Following last years oposts about spin-offs (part 1, part 2, part 3), I tried to keep track of some of the more interesting spin off situations.

TNT Express

TNT Express was the express service spin-off from the Dutch Postal company. I had them on my research pile somewhere at position 10 to 15. However on the weekend, UPS made a 9 EUR per share offer for TNT Express, roughly a 50% premium on the previously traded price.

If we look at the chart, until last week, both shares significantly underperformed the index since the spin-off happened, only TNT Express made it above the index after the offer.

The 30% stake of TNT Express which PostNL owns, has almost the same value as PostNL’s market value. So PostNL might be an interesting company to look at.

Cable and Wireless

Cable and Wirless, the UK telephone company spun off the “international” part into Cable and Wireless Worldwide in February year. The international part was supposed to be the sexy part, but due to management and accounting issues, the stock suffered.

Last week, there was the rumour that Vodafone might be interested in hte “boring” part, the UK fixed line operations. However there was no confirmation from Vodafone and so the shares didn’t manage to rise as TNT Express did.

Again, as with TNT/PostNL, both parts underperformed the index significantly, as the chart shows:

So is there something to learn form this ?

Both cases show that spin offs per se are not a sure thing at all. In the case of C&W it rather looks like a desperate measure of a desperate company. In both cases, the performance after the spin-off event was relatively bad, so there is no need to hurry aftger spin offs are executed. As with all other “special situation” investment startegies, patience is required.

Hyundai capital structure arbitrage – final thoughts

Following part 1 and part 2 about my thoughts on a potential Hyundai Motors capital structure arbitrage deal, I wanted to summarize my thoughts and come to a conclusion.

In between, some new information came up:

a) it is possible to trade single stock futures in Korea thorugh Interactive Brokers
b) the mentioned US ADRs are actually ADRs on Hyundai Motor pref shares, so no “cheap” short potential
c) a contact told me that stock borrowing costs for Hyundai Motors common shares in Korea would be about 3-4%

Based on this new information, the relative value trade (short common shares, long pref shares) looks less attractive.

Traditional long-short

In the traditional short with a long position in the pref shares and a short position in the common, the “carry” would be calculated as follows:

Yield long position (3.77%) minus yield short position (0,80%) minus cost stock borrowing (3-4%).

So we would end up in the best case with 0% carry, in the worst case with -1 % carry for the long short position. Negative carry trades are much less attractive because you actually loose if nothing happens. A good carry trades gives you something in case nothing happens (“positive cary”) plus upside to compensate against the potential unlimited risk from the short position.

Long pref / short future

The problem with the long pref and short future strategy is that one has to fully fund the long position as the short future does not provide funding. So the overall potential return on investment is much lower than a fully funded long short trade. Only if you believe that the pref shares could close the valuation gap dramatically you would get an interesting return out of this strategy. However I do not have any view on this.

So to summarize this: based on current dividend yields and and stock borrowing costs, the long-short trade does not look too attractive as it doesn’t provide a positive carry. The long pref / short future trade might not be worth the effort too implement it as the upside potential is relatively limited and now real catalyst is on the horizon.

Draegerwerk Genußschein – some more thoughts on the repurchase offer

Following yesterday’s post about the 210 EUR offer per “Genußschein”, some other interesting aspects should be considered.

Dividend cut

I think this is the only time in history I remember that a 80% suprise dividend cut led to a almost 3% increase in the corresponding share price. The reason could be very simple and I have maybe underestimated the Draeger shareholders:

Many Draeger shareholders were maybe well aware of the effective massive dilution through the Genußscheine. The repurchase offer with 210 EUR is considered to be very advantagous for shareholders and therefore the net effect of the Announcement (Dividend reduction against cheap repurchase price) is a positive for shareholders.

As the announcement alone maybe caused this jump, a high acceptence ratio could possibly move the stock price even higher. So there is a lot of “upside risk” in the stock from a short perspective.

Another reason for the jump in the share price could of cours be some short covering, if I was not the only one who has the relative value trade in place.

Game theory Genußscheine

I am still struggling how to interpret potential acceptance outcomes for the offer. If we have a very low acceptance for instance, we have two potential factors which could influence future Genußschein prices:

1. With a low acceptance ratio, everyone knows that Draeger needs to do more to buy the Genußschein back (positve)

2. In theory, they could try to make life difficult for the Genußscheine either by continuing low dividends for a longer time (negative) or try some other tricks like possible dilution etc. (negative)

With a high acceptance rate we have the following potential issues:

3. The Genußscheine will become illiquid, larger investors will no longer be interested (negative)

4. Draeger will not need to increase the offer (negative)

5. However, Draeger could afford to raise the dividend quite fast back to or above last years levels as it doesn’t hurt shareholders anymore (positive).

So we can see, there are many paths how this could develop.

I think what is also interesting in this case is the fact that as Genußscheinholder the interests are not aligned with Management (and shareholders) but directly opposed. This is something one should keep in mind.

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