Monthly Archives: March 2012

Efficient markets – WestLB Genußschein edition

As a quick follow up to the previous post, a quick reminder how innefficient the markets in those securities can be:

WestLB came out with their press release at 11 am CET yesterday. As discussed in the last post, the release started with a very small loss on a consolidated level. If the consolidated loss would have been mirrored in the local GAAP accounts, this would have meant a payout for the Genußscheine of around 95%.

However further down in the release they mentioned “casually” that the nominal repayment will only be 85.1% due to a higher local GAAP loss.

Interstingly, between 11:02 and 11:11 yesterday, aroudn 380 k of the Genußscheine were traded at 91%, which was clearly an inefficient price if one would have read the whole press release.

Unfortunately, I did not have the time to react on this, but some lucky guy found some lazy guy who didn’t fully read the release.

This is something which can be observed with a lot of these bonds. Information only gets priced in after a certain time lag. Something to look out for.

Quick news: WestLB results 2011 are out

Yesterday, West LB released its consolidated 2011 results.

On a Group level, the show a slightly negative result after tax. As discussed in the post about the Genußscheine, the relevant result for the finalpayout is however the “AG result”, which is the single company result of the holding company.

They don’t explicitly state the local GAAP result of the holding company, but they tell us the following:

Die Kapitalquoten im Konzern wurden durch das negative Jahresergebnis der WestLB AG auf HGB-Basis belastet. Die Kernkapitalquote betrug am Jahresende 8,8% (i. V. 11,4%), die Eigenmittelquote 13,8% (i. V. 15,9%). Die stillen Einlagen und das Genussrechtskapital der Bank nehmen gemäß den Emissionsbedingungen am handelsrechtlichen Bilanzverlust teil. Der Rückzahlungsanspruch beträgt nunmehr 85,1% für die Genussscheine und 82,9% für die Hybrid Tier 1 Anleihen aus dem Jahr 2005. Zudem unterbleibt für diese Instrumente vertragsgemäß die Zinszahlung für das Jahr 2011.

That means the payout for the Genußschein will be 85.1% plus the 2012 interest of around 2.9% or a total of 88%. This is a little less than in my base scenario, but still a relatively nice gain of around +42% for 10 months with a relativ small amount of risk involved..

Unfortunately, i don’t see too many similar opportunities at the moment.

James Montier on record profit margins

James Montier has issued a very interesting reasearch piece on why profit margins are so high.

This is something which is also bugging me all the time. The Chart on page 2 is especially interesting:

He then continues deriving the sources of profit margins and comes to an interesting conclusion: That the increase in Government spending is the major source of current margins !!!

This is quite interesting. In practice, I think his theory has some minor issues, for instance he implies that US corporate profits are only produced within the US, which for many big companies (Apple, McDonalds) is clearly an oversimplification.

If I look at companies like Volkswagen for instance, a lot of the high margins come from the booming BRIC countries, however also those times will end.

I also find it intersting to think about how his theory works in practice. If one looks at Apple for example, one could clearly see that one part of the high margins are also low production costs in Asia which means lost jobs and higher unemployment (and lower wages) in the US.

However, as the unemployed (and other US citizens) get direct and indirect paymants from the government, in theory this enables them to buy Iphones without having a job. So indirectly the US Government pays for Iphones.

Another point which is missing in Montier’s model are the current low interst rates. Based on average debt ratios, this might add a point or two in corporate profit margins as well.

As always, one has to be careful not to fall into the “confirmation bias” trap, but I find it highly likely that current record profit margins are driven by a unique combination of high Government spending, low interest rates and booming BRIC countries which most likely will not last.

Apple and the value of paying a dividend

Yesterday, the most important news was the fact that Apple announced to start paying a dividend and additionallyto buy back shares in an amount of up to 10 bn USD.

Contrary to many news stories, the announced dividend plus the share repurchase program will not lower the 100 bn USD cash pile as the free cash flow of Apple is currently way above the amounts they plan to distribute.

Nevertheless the Apple shares gained above the market gains yesterday, so the news was received positive by investors (good collection of stories here at Abormal Returns)

Let’s have a quick look at the theory of how to value such annoncements in general.

Efficient market

In a truly efficient market, a decision to distribute a dividend would not matter at all. Every investor would value the company purely based on free cashflows at company level, adjust correctly for any retained cash on the balance sheet and being indifferent if the money is distributed or not.

Potential positive impacts:

In many articles about the Apple price move, commentators mentioned the following reasons why paying (or increasing) a dividend should be positive for shareholders

a) Management shows more confidence in future cash flow generation
b) Management has less money to spend on (stupid) acquisitions, especially for former high growth companies (see e.g. HP)
c) Investors have a preference for current income
d) Unadjusted P/Es go down for cash rich companies, which then leads to a further increase in stock prices

Negative impacts

e) Dividends get taxed at the level of the shareholder
f) management has run out of growth options, paying a dividend signals “peak growth”

In the conference call, Tim Cook started the call with emphasizing the potential growth opportunities of Apple, clearly targeting point f) in the list above.

Personally, I think with especially with Apple c) and d) does not apply either. No one is buying Apple now because of the dividend and everyone knows the amount of the cash pile. I think argument b) could have some merit, especially when you look at HP when Leo Apotheker took over and directly overspent on an acquisition.

However, as I do not own Apple and don’t want to buy or short it for the time being either, I wanted to focus on some general aspects of dividend payouts.

Well managed companies (Compounders, steady growers)

For a well managed company with significant growth opportunities which is managed on a long term basis, I couldn’t care less about dividend payouts. Soo in my opnion, for really well managed companies with growth potential, the “efficient market” thesis holds

Indebted companies

Companies, which are for some reasons relatively heavily indebted but have a solid business model, should in most cases not start to pay dividends before they have significantly reduced their debt burden. Paying back debt and reducing cost of capital can be in many cases much more value enhancing than starting to pay dividends too early. So in suchh cases, an increase in dividend could be a bad sign.

Badly managed but cheap companies

Here the case is clear: As long as the cash stays on the balance sheet of a badly managed company, there is always the risk that the cash could dissapear any time, either through stupid acquisitions, over-investment or even fraud (Chinese RTOs anyone ?). In such cases, the announcement to pay significant dividends out of retained cash would definitely be value enhancing by reducing implicit risk.

Declining companies

The best documented example of a declining company is WB’s very own Berkshire Hathaway. This was the classic case of a company which would have kept investing in its declining business until they would have been bankrupt. In such cases, the commitment of paying out or maintaining large dividends instead of reinvesting is definitely a plus.

Announcement of Dividends vs. buy backs

In my very simple view, the announcement of a dividend and a stock buy back are very different. Whereas for the dividends, any non-payment would be highly difficult, buy backs often get announced but only partially executed. Additionally, a buy back is always a one time item whereas a dividend implcitly assumes a certain continuity in payments. So I would put much more weight on dividend announcements than stock buy back announcements.

In some case, one will really have to look deeply into companies to judge if a dividend announcement is positive or not. For instance if a higly indebted shrinking company increases its divdends, is this good or bad ? Or if a highly indebted company shrinking stops paying dividends to pay off debt, what is the net result of this ?

Nevertheless I want to summarize the impact of dividend and stock buy back announcements as follows:

Announcements of increased dividends and/or stock buy backys are most value enhancing for

+ badly managed companies with high a cash pile
+ shrinking companies with high free cash flows and a relatively low debt burden

For well managed and growing company, such announcements should not impact the value significantly.

Especially if analyzing “cheap” and “contrarian” companies, one could use the payout ratio also as an indicator for the required return on capital. A higher payout ratio should lead to a lower required ROC and vice versa.

Total Produce, EMAK, Austostrada

Total Produce

For some reason, the stock price of Total Produce climbed significantly over the last few days. Now a part of this increase seem to be explained: Total Prduce joins the ISEQ 20, the main Irish stock index:

Total Produce plc, Europe’s leading fresh produce company, is pleased to announce that it has been advised by the Irish Stock Exchange that following the quarterly ISEQ 20 review, Total Produce will be joining the ISEQ 20 Indices, (ISEQ 20, ISEQ 20 Capped and ISEQ 20 Leveraged), with effect from close of business on Friday, 16th March 2012.

I don’t know how many index trackers exist and the weight is only 0.29%, but maybe it helps a little bit to attract some new investors.


EMAK released preliminary 2011 results last week.

“Pro forma” results of the combined EMAK would have been 13 mn EUR, a P/E of ~ 7.5. Results of “old” EMAK were surprisingly weak, whereas the “new” EMAK companies were doing a lot better. SO maybe the deal wasn’t such a rip off at all ? Let’s wait and see, but EMAK still looks very cheap at this levels despite the problems in the home market.


What a shame, Autostrada reported really solid numbers for 2011. Interestingly the Impregilo share price rose already above the level of 3 EUR which Autostrada paid for the share from it’s parent. I tios still below the 3.65 for the Fondiaria package, but the “loss” is definitely smaller.

Spass mit dem Griechischen Schuldenschnitt – Bernd Niquet Edition

Eigentlich soll man sich ja nicht über “Kollegen” lustig machen, aber hier kann man nicht anders.

“Erfolgsautor” Bernd Niquet feiert sich bei wallstreet:online selber:

Das Wichtigste ist jedoch: Für 1.000 Euro nominal alt besitzt man jetzt 315 Euro EFSF-Papiere zzgl. für den Betrag der aufgelaufenen Zinsen.

Wer also, wie ich vorgeschlagen habe, zu 30 gekauft hat, besitzt jetzt 31,5 (EFSF-Papiere allererster Bonität, die zu pari notieren) plus ein ganzes Sammelsurium aus kleinen Wundertüten und Schokoladentäfelchen, die einen süß, die anderen hingegen zartbitter.

Das ist kein Super-Profit, aber sehr ansehnlich. Und wer tatsächlich noch kurz vor Schluss zu 20 oder gar 16 gekauft hat, hat sein Geld jetzt bereits mehr als verdoppelt. Man sollte also nicht immer nur herumjammern.

FALSCH Herr Niquet. Wer Ihrem Tipp gefolgt ist besitzt jetzt 15% EFSF Anleihen dazu noch 31,5% “neue Anleihen” die ungefähr 6-7% vom alten NominalWert sind. Dazu noch der Warrant zu aktuell 0,8%, dann ist man bei 22% ohne Stückzinsen.

Macht also einen Verlust von -25% gegenüber Ihrem Empfehlungskurs. Mal schauen wie lange der Artikel stehen bleibt. Peinlich peinlich.

Exotic securities: “Detachable GDP linked Greek warrant” – Valuation approach

In the first post i quickly looked at the features of the “Detachable GDP linked Greek warrant” (ISIN GRR000000010)

With securities like this, there are usually many ways to try to value this. You could eiher lock up a handfull of rocket scientists into an office and only let them out if they produce a model which is mind boggingly difficult, including at least features like “Monte Carlo simulation, path dependend barrier option etc.” or you can try a “common sense” approach to get a feeling about the risks and value drivers of such a complex structure. As anon-rocket scientist, I prefer the second one.

In order to get a rough idea how to evaluate this, we have to make sure to understand the following issues and risk factors:

Default risk

If Greece defaults, we don’t have to worry about GDP growth anymore. We should assume zero value (no recovery) in this scenario.

Maximum pay out

As discussed, the bond pays out a maximum of 1% on outstanding notional starting 2015. Based on the amortisation schedule (by the way: here is the Reg_S_Invitation_Memorandum1 GDP warrant starts at page 52) we can compute the best case cashflows:

Nominal Coupon max Payment in % of original amount
2012 100.0%    
2013 100.0%    
2014 100.0%    
2015 100.0% 1% 1.00%
2016 100.0% 1% 1.00%
2017 100.0% 1% 1.00%
2018 100.0% 1% 1.00%
2019 100.0% 1% 1.00%
2020 100.0% 1% 1.00%
2021 100.0% 1% 1.00%
2022 100.0% 1% 1.00%
2023 100.0% 1% 1.00%
2024 95.2% 1% 0.95%
2025 90.5% 1% 0.90%
2026 85.7% 1% 0.86%
2027 81.0% 1% 0.81%
2028 76.2% 1% 0.76%
2029 71.1% 1% 0.71%
2030 66.0% 1% 0.66%
2031 61.0% 1% 0.61%
2032 55.9% 1% 0.56%
2033 50.8% 1% 0.51%
2034 45.7% 1% 0.46%
2035 40.6% 1% 0.41%
2036 35.6% 1% 0.36%
2037 30.5% 1% 0.30%
2038 25.4% 1% 0.25%
2039 20.3% 1% 0.20%
2040 15.2% 1% 0.15%
2041 10.2% 1% 0.10%
2042 5.1% 1% 0.05%
2043 0.0% 1% 0.00%
Total     18.62%

So in the “perfect recovery case” and ignoring the option of the Government, the bond will pay out a maximum total of 18,62% of nominal value over its life.

Bond equivalent

If we then forget for a moment about the GDP triggers, we could calculate a market value for a bond with a fixed payement schedule resembling the best case of the GDP linker. For this we can use the current traded yield of the new greek Bonds, which is around 16% p.a.

Nominal Coupon max Payment in % of original amount NPV at 16%
2012 100.0%      
2013 100.0%      
2014 100.0%      
2015 100.0% 1% 1.00% 0.6%
2016 100.0% 1% 1.00% 0.6%
2017 100.0% 1% 1.00% 0.5%
2018 100.0% 1% 1.00% 0.4%
2019 100.0% 1% 1.00% 0.4%
2020 100.0% 1% 1.00% 0.3%
2021 100.0% 1% 1.00% 0.3%
2022 100.0% 1% 1.00% 0.2%
2023 100.0% 1% 1.00% 0.2%
2024 95.2% 1% 0.95% 0.2%
2025 90.5% 1% 0.90% 0.1%
2026 85.7% 1% 0.86% 0.1%
2027 81.0% 1% 0.81% 0.1%
2028 76.2% 1% 0.76% 0.1%
2029 71.1% 1% 0.71% 0.1%
2030 66.0% 1% 0.66% 0.0%
2031 61.0% 1% 0.61% 0.0%
2032 55.9% 1% 0.56% 0.0%
2033 50.8% 1% 0.51% 0.0%
2034 45.7% 1% 0.46% 0.0%
2035 40.6% 1% 0.41% 0.0%
2036 35.6% 1% 0.36% 0.0%
2037 30.5% 1% 0.30% 0.0%
2038 25.4% 1% 0.25% 0.0%
2039 20.3% 1% 0.20% 0.0%
2040 15.2% 1% 0.15% 0.0%
2041 10.2% 1% 0.10% 0.0%
2042 5.1% 1% 0.05% 0.0%
2043 0.0% 1% 0.00% 0.0%
Total     18.62% 4.23%

This table shows us, that the value of such a bond would be currently 4.23% based on the yields of the traded Greek Goevernment bonds

So let’s summarize this:

If the GDP linker would be a bond with a fixed payout amounting to the maximum payout of the discussed mechanism, its current value would be 4.23% of nominal value.

Next step: Assuming a “binary” option

Now just for fun, we could assume that the bond would only contain one option: If the first threshold is reached (2014 GDP 210 bn EUR, real 2014 yoy GDP growth of >= 2.34%) we could approx. work out the implied probabilityin current market prices.

So very simplistic (and mathematically not correct), with a curent price of the GDP warrant of ~0.80 % of nominal, the implied probability would be 0.80 EUR / 4.23 = 18.93% of achieving the required GDP scenario

Next step: More options !!!!!

As each years coupon payment of the bond depends independently on each years YoY real GDP growth, in theory each coupon would have to be valued as a seperate option. So theoretically, ignoring the nominal GDP hurdle, we have 29 single options packed into this security !!!

However, as we have seen in the second table, the options in the later year are worth almost nothing due to the high discount rate.

They payout itself is defined as the difference of the actual yoy GDP growth rate times 1.5 minus a reference GDP growth rate.

The reference rates are the following rates,the second colum shows the required rates for max.payout:

ref GDP yoy required for max
201400.00% 2.35% 2.23%
201500.00% 2.90% 2.60%
201600.00% 2.85% 2.56%
201700.00% 2.77% 2.51%
201800.00% 2.60% 2.40%
201900.00% 2.50% 2.33%
202000.00% 2.25% 2.16%
202100.00% 2.00% 2.00%

If we look at the Eurostat page, which publishes the relevant rate we can see that from 1996 until 2007, Greece had growth rates usually north of 3.5% with few exceptions. Interestingly they offer projections for 2012 and 2013 as well.

GDP hurdle: more fun

Maybe late at night during those negotiations an advisor thought: “hmm 29 different options with a non traded underlying is not difficult enough, so lets add some funky stuff !!!”.

As I described in the first post, no matter what the actual yoy growth rate looks like, the security only pays if certain nominal GDP thresholds are reached.

The thresholds are as follows:

year nominal GDP yoy
2014 210.1  
2015 217.9 3.71%
2016 226.4 3.90%
2017 235.7 4.11%
2018 245.5 4.16%
2019 255.9 4.24%
2020 266.47 4.13%
therafter 266.47 0.00%

To compare this with current data, I downloaded the GDP numbers directly from the official Greek statistical service, ELSTAT.

YEAR 2001 2002 2003 2004 2005 2006* 2007* 2008* 2009* 2010* 2011*
gdp 142 151 166 180 189 204 215 222 225 223 212

Interestingly, all numbers since 2006 are “provisional” whatever that means.

So in order to hit the nominal trigger, Greek GDP hast to reach 2011 levels in 2014.

Purchase Option

According to the prospectus, Greece has the “option” to purchase the warrants back. Howver this “option” isnot based on a fixed strike price but atrailing 30 day market price. Theoretically, an option at market price does not have any theoretical option value. However it introduces some “moral hazard” into the scheme. Greece could give a very bad outlook and then buy the Warrants back cheaply beforethen revising the outlook upwards.

So before this gets boring, let’s apply some common sense instead indulging in further quant dreams. In my opion one could think about the two main features as two “bets”:

A) Nominal GDP “bet”

This is basically a bet that Greece doesn’t fall in a deflationary trap and regains Nominal GDP around 2014.

B) Back to historical growth “bet”

This is the second bet that Greece goes back to historical growth and we get the full payout

In order to win this “game” one has to win both bets, winning only one is not enough.

If we further assume that the possibility of a Greek bankruptcy is independently reflected in our calculated discounted cash flows, we can value the security in the following way:

Probability of “Nominal GDP bet” times probability of “Historical growth bet” times NPV of max payout

With this assumption one can calculate a very simple valuation grid based on the NPV of 4.23% for the maximum payout:

Nominal bet        
Back to Growth 10% 20% 30% 40% 50%
10% 0.04% 0.08% 0.13% 0.17% 0.21%
20% 0.08% 0.17% 0.25% 0.34% 0.42%
30% 0.13% 0.25% 0.38% 0.51% 0.63%
40% 0.17% 0.34% 0.51% 0.68% 0.85%
50% 0.21% 0.42% 0.63% 0.85% 1.06%

So the picture is relatively clear: Only if one asumes for both, the non-deflation scenario and the return to historical growth bets a chance of 40-50% EACH, then the current market prices of around 80 cents might makes sense.

Personally, I don’t see the returns to historical growth rates any time soon, although I might accept a chance of maybe 50% that they can reach the nominal target.

At the moment, I would not buy this at any price. I think this is one of the securities which will “sleep” for a long time eventually die or maybe become interesting in 5 years when everyone has forgotten about them and Greece for some reason avoided bankruptcy again and one can get this for virtually nothing.

Edit:Some changes made with regard to the GDP growth formula and the repurchase option.Thanks to Dante for reminding me.

Exotic securities: “Detachable GDP linked Greek warant” (ISIN GRR000000010)

Yiiihaaa, this Monday was the first day this “beauty” is trading. As mentioned before, this is a security which is part of the “PSI package”.

As one could expect, this security is mind boggingly complex. As far as I understand, the features are as follows:

1. The max payout is 1% per year based on the nominal value
2. the first potential payment date will be 15th October 2015
4. The nominal Value will amortise after year 2022 to zero in year 2043
3. In order to trigger the payout, two principle conditions have to apply (apart from Greece not being not bankrupt)
a) the greek GDP has to be abvove a certain specified nominal amount
b) the growth rate of the real Greek GDP has to be aboev a certain specified rate
4. The Greek Government can “call” the warrants anytime from 2020 on based on a 30 day trailing market price

The specified nominal GDP hurdle for 2014 is 210 billion and increases to 260 bn EUR in 2020. Through Google I found an estimated GDP number for 2011 of 310 bn USD or ~ 238 mn EUr for 2011, so they could shrink further to a certain extent and still be above the trigger. Currently, GDP shrinks at -5.5 nominal rate. Two years with this rate would bring as very close to the trigger level.

The required real growth rates are in the area of ~2.35 to 2.8% in the first few years and then 2% thereafter.

I haven’t built a model yet, but from a theoretical point of view it will be a really fun exercise.

Market prices:

On monday the first trades on the German Exchange were ~1.25 % of nominal value, at the moment small lots are traded at 0.95 EUR. The lowest trades were executed at 0.85 EUR. The broker quotes I see are something like 0.75/1.00 so the banks don’t seem to be keen to make a market.

So let’s wait and see how this develoipes. In any case I always find it big fun to look at such “exotics”…. – Screener & Newsletter

Thanks to a good friend, I had the opportunity to test the screening tool from the guys of

Founder Tim du Toit (by the way: intersting interview with Tim here) and his colleague developed a screening tool which offers different screens based on a pretty large database of around 22k international stocks. The different strategies for which they offer a screen each is described here on their website.

In general, they are big fans of “quantitive value investing”, meaning that they don’t really dig too deep into companies and business models but try to build portfolio’s based on certain quantitative “formulas” based on well known fundamental ratios liek P/V, P/E etc.

The screener itself is relatively easy to use. I do not have a comparison to other available screeners for private individuals, but I think especially for the European stock market the tool is really competitve. They charge 299 EUR per year for the screener which seems to be a fair deal.

The only disadvantage was the fact that one cannot easily customize the queries. In theory, they could offer a little bit more user friendly flexibility to create customized queries, but maybe I was just to dumb to understand the customization possibilities.

I didn’t deeply check the data quality, but you can check the underlying data usually with a mouse click.

Additionally, they offer a monthly newsletter with 2 stock tips a month or so and reasearch, either for 209 EUR without the screener or 399 EUR a year as a bundle. If you only want to try out their offers for a shorter period, they offer cheaper 3 month packages as well (99 EUR for the screener).

I quickly scanned the newsletter, but I was not overly impressed. I compared for example their view on Creston Plc with my own analysis and found it a little bit “shallow”.

I think “quantitative value investing” works well in a portfolio with a larger number of shares, but it shouldn’t be overemphasized for stock picking.

However they issue really interesting additional research. Especially their current research from March, where they back test all their strategies plus some interesting “cross factor” models including pricing momentum is really interesting.

Summary: I think the screener seems to be really “good value” for people either interested in “quanitative value investing” or investors trying to identify interesting stock ideas. I am a little bit unsure to recommend the newsletter, at least for me it doesn’t really create value.

Disclosure: I do not use the screener and I do not get any money etc. by recommending it.

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