Monthly Archives: June 2012

Macro: EU Summit – Hot Air only or circuit breaker ?

I don’t want to transform this blog into a macro blog, as I do not have the competence to really talk about macro events. However I wanted to follow up on the Bull case for Europe post to quickly look at the results of last week’s EU summit

As it is always best to ignore most of the press stuff, let’s look at the original statement:

In my opinion, the 120 bn “growth budget” is less important, as well as the intention to move to a fiscal union. The most important part in my opinion is this one:

Euro area summit statement

Eurozone heads of state or government decided:
to establish a single banking supervisory mechanism run the by the ECB, and, once this mechanism has been created, to provide the European Stability Mechanism (ESM) with the possibility to inject funds into banks directly.

Spain’s bank recapitalisation will begin under current rules, i.e. with assistance provided by the European Financial Stability Facility (EFSF) until the ESM becomes available. The funds will then be transferred to the ESM without gaining seniority status.

It was also agreed that EFSF/ESM funds can be used flexibly to buy bonds for member states that comply with common rules, recommendations and timetables.

The Eurogroup has been asked to implement these decisions by 9 July 2012.

I would call this decision the “Spanish bank circuit breaker”. Up to now, everyone was aware of the potential death spiral, if the ESM gives money to Spanish banks only via the government because this further incrases the debt load.

Interestingly, they did not specifiy what instruments should be used, My assumpton would be someform of “Contingent Convertible” which would provide much needed Tier 1 capital to Spanish banks. The ESM original document speaks of “lending”, but CoCo loans or bond would not violate this.

So in theory, we now have the “full package” for any Eurozone bank:

1) unlimited liquidity from the ECB plus
2) a big pot of potential bank equity from the ESM.

Draghi’s bazooka from last year was only a small bonfire without the possibility to inject capital.

For those who still remember the beginning of the crisis, this was exactly how the US TARP developed. The 700 bn USD fund was initially planned to buy mortgages etc. but was then used to inject money directly into banks. The “vicious circuit” was only broken, when Bazooka Paulson forced his Tarp funds into any large US banks.

So does this end the crisis ? Are banks stocks now good investments ?

I don’t think so, but this feature definitely reduces both, the probability and severity of a tail risk event.

As expected, the usual suspects again come out and say: This is not enough.

Like Nobel laureate Paul krugman, who of course demands a complete solution to any problem being implemented right now.

However, for me it looks like a necessary and logical next step. No solution but risk mitigation. And therefore important and good. I hope it leads to ample supply of loans for PIIGS companies in order to have time to implement necessary other reforms.

At some point in time one might want to start to look into PIIGS bank subordinated securities…….

Weekly links

Always worth to spare some minutes: Jim Chanos Interview on short selling

Final post of Damodaran’s series about value investing

Royce funds on diversification and valuation levels

A couple of more or less interesting presentation from a US value conference

Even the razor blade business model seems to get into some trouble

Avenue capital on the opportunities in Europe

Mark Cuban on High Frequency Trading and the purpose of stock makets

Quick check: Cairo Communication (ISIN IT0004329733) – 12% dividend “wonder” or liquidation ?

A reader pointed out that Italian company Cairo Communciations might be an interesting investment.

Company description per Bloomberg:

Cairo Communication S.p.A. carries out its activities in the communication field as an advertising broker for a variety of media, such as commercial television, analog and digital pay television, press, and the Internet. The Company also publishes magazines and books and operates an Internet portal through its own search engine, Il Trovatore.

Cairo looks relatively cheap on an earnings basis (2011):

P/E 8.5
P/S 0.7
P/B 3.13

The company doesn’t have any debt but significant net cash (0.70 EUR per share against a share price of 2.56 EUR).

ROCE and ROE are both above 30%, so is this a value investor’s wet dream ?

Cairo is listed since 2000, so let’s look at some figures from the past:

BV Sh EPS DPS NI Margin Sales pS ROIC
29.12.2000 1.62 0.09 0 5.6% 1.5348 3.03%
31.12.2001 1.70 0.08 0 4.8% 1.7509 2.84%
31.12.2002 1.73 0.07 0.04 4.7% 1.5929 1.93%
31.12.2003 1.72 0.07 0.24 3.8% 1.7299 2.74%
31.12.2004 1.65 0.09 0.16 3.6% 2.3745 3.54%
30.12.2005 1.58 0.08 0.16 3.5% 2.3161 3.81%
29.12.2006 1.19 0.15 0.30 0.0% 2.7983 7.74%
31.12.2007 1.11 0.15 0.25 5.4% 2.9956 11.34%
31.12.2008 0.91 0.17 0.40 5.6% 2.9527 14.22%
31.12.2009 0.86 0.16 0.20 5.3% 2.9259 15.12%
31.12.2010 0.90 0.27 0.20 8.3% 3.2273 27.67%
30.12.2011 0.82 0.30 0.40 8.3% 3.6192 31.81%
Total   1.67 2.35    

The numbers look really interesting. On the one side, it looks like a liquidation, with dividends being constantly higher than earnings. On the other hand, Cairo managed to more than double their sales with almost half of the equity and at the same time increase their margins to a healthy 8%.

Together, this of course leads to a dramaticv increase in ROE and ROIC.

Interestingly the stock price hovers only slightly above the post internet bubble prices:


I think this really looks interesting and worth a deeper look into the drivers of the sales increase and profitability development. If this would be “sustainable” then Cairo might indeed be an attractive opportunity.

Portfolio updates: AIRE KGaA, April SA, Cranswick, Dart, Installux


For AIRE KGaA, I decided to accept the tender offer at 18.25 EUR per share. There is not a lot of upside left and I guess the stock will be really illiquid after the offer.


Whereas the built up of Poujoulat goes really really slow, For some reasons, last Friday almost 2.500 Shares have been traded. That’s almost 1% of the market cap. Interstingly, in Bloomber a new fund called “Agicam” showed up at the end of April with a 0.99% position. Due to those sales, I could now already built up a stake of 1.8% of the portfolio in Installux shares, a lot faster than I thought.

DJE Real Estate

The sell down of this position is quite cumbersome. Up to know, I could only sell half of the position so far. However prices are relatively stable.

Dart Group & Cranswick

Both shares were relatively active over the past few days, so I could establish 2.5% positions fopr both. Dart Group issued their “preliminary annual” statement as of MArch 31st, a very good write up can be found here at ExepctingValue.

For Dart I will wait for the final annual report in order to determine if I increase the position to the full amount (5%).

April SA

Since I ahve increased my buying limit for April to 11,50 EUR, I could establish a small position in the stock (0.6% of the portfolio). Of course I got punished and bought ~2% higher than today’s share price……

Cash is now down to around 16.5% of the portfolio, but taking into account the AIRE Tender Offer, Cash is around 21.5% of the portfolio. So plenty of room for 2-3 new ideas…..

Quick check: Fabasoft AG (AT0000785407) – Cheap EV/EBITDA 2.4 stock or value trap ?

From time to time, readers ask my about my opinion on certain stocks. First of all this is of course flattering, secondly it is also a good motivation to look at as many stocks as possible.

However, I am not an expert on all stocks in the universe, but nevertheless I want to share some of my thoughts from time to time on the blog.


Fabasoft is a small Austrian software company which is active in Document management solutions, mostly for Government and Defence companies. Fabasoft was IPOed in the middle of the “Neuer Markt” boom in 1999.

According to Pat Dorsey, Software companies can be interesting “moat” business, also the business scales pretty well, meaning increasing sales incrrease profits over-proportionally.

For Fabasoft, this doesn’t really hold true. Although they managed a turn-around in 2011/2012 according to their annual report, they seem to swing from profit to loss like a pendulum from year to year. The loss in 2010/2011 was preceded by a profit in 2009/2010 and again a loss in 2008/2009. the same again for the preceeding 2 periods. Loss, profit, loss, profit.

Since 2000 this looks like this:

29.12.2000 -0.37 3.24 -21.35%
31.12.2001 -0.20 3.09 -12.11%
31.12.2002 -0.12 2.91 -6.14%
31.12.2003 0.41 3.31 12.90%
31.12.2004 0.53 3.80 13.21%
30.12.2005 0.34 3.92 7.57%
29.12.2006 -0.07 3.68 -1.98%
31.12.2007 0.09 3.80 2.36%
31.12.2008 -0.29 3.27 -7.35%
31.12.2009 0.45 3.45 10.02%
31.12.2010 -0.05 2.76 -2.03%
30.12.2011 0.15 2.91 3.35%

The stock chart shows that since 2005/2006 the stock is trading sideways:

Sales have remained more or less constant since at least 2006. What makes the stock attractive under EV metrics is the relatively large cash pile.

As of 31.03.2012, the company showed around 14 mn EUR in cash which, based on 5 mn shares, a shareprice of 3.75 EUR and roughly 2 mn EUR EBITDA results in an implied EV/EBITDA of around 2.4, which looks very cheap.

However, this is one of the cases where a simple EV/EBITDA calculation might be a bit misleading. On the liability side for instance, they show prepayments of around 7 mn EUR. One could discuss this now for some time if we have to deduct prepayments from EV, but the major point for me is the followng:

Fabasoft is not a Net-Net, the market cap is still higher (19 mn EUR) than net short term assets (13 mn EUR) as well as net equity (14 mn) and the business is not consistently profitable. We do not know what they do with the cash. They paid some dividends and bought back some shares in the past, but nothing regular.

So even if they pay out all the cash, one is still left with a business which over the cycle does not earn its cost of capital. At least for me that doesn’t sound very attractive. I would prefer companies like Installux, who have a profitable business AND low EV/EBITDAs, there are plenty of them out there.

Summary: Despite an optical low EV/EBITDA, I don’t think Fabasoft is a very attractive investment. Mainly because they couldn’t prove that their business is actally profitable ovewr a longer period of time. If one is sure about a lasting turn around, than it might be a good investment, but as I don’t really know the business, this would be too risky for me. Based on past performance, this could well be a typical value trap.

Weekly links

Howard Marks on making and exploiting mistakes.

Must Read: Damodaran on Contrarian Investing

Interesting article in the FTD about Prokon. Looks like this might be ending soon.

Bronte on how the financial system in China works.

Citron is out with a new report on one of the biggest Chinese real estate developer Evergrande.

Long post at Brookly investor how interest margins at Wells Fargo correlate with overall yields.

Boss Score Harvest part 4: Tipiak SA (ISIN FR0000066482) & Toupargel (ISIN FR0000039240)

Back to the micro level ;-). Let’s jump back over the channel from Dart Group, Braemar and Cranswick to France.

Tipiak is a French Company which according to Bloomberg does the following:

Tipiak SA manufactures and distributes frozen food, prepared dishes, grains and sauces in France and abroad. The Company’s products are marketed under the “Tipiak” and “Relais” names.

So its basically the French version of Frosta AG, the company I used as Benchmark for Cranswick.

The company looks cheap under standard metrics:

Market Cap 32 mn EUR
P/B: 0.7
P/S: 0.2
P/E 2011: 10.1
P/E 2012 (est): 6
Dividend yield trailing 8.5%

In the Boss model, they show an average ROE of 16% over the last 10 years with a standard deviation of only 6.6%, which puts them in the absolute “top decile” in the database.

However if we look at the “Boss ROEs”, we can quickly see that this is a company where things deteriorated significantly in 2011:

Boss ROE NI margin
2002 14% 1.7%
2003 15% 1.7%
2004 31% 3.1%
2005 19% 3.7%
2006 21% 2.9%
2007 19% 3.8%
2008 12% 2.9%
2009 12% 2.7%
2010 14% 2.8%
2011 6% 1.9%

The stock chart shows a pretty alarming picture:

So this is definitely a warning sign at first glance.

A quick look in to the French annual report 2011 shows that the reason for the decline in profits is mostly a relatively strong increase in costs across all categories which could not be compensated through the increase in sales. Somewhere hidden in the annex they show that the reserves for doubtful receivables on outstanding receivables have increased from 2% of outstanding to 4% which explains around half of the decrease in profits.

As we had checked Cranswick and Frosta with regard to capital management and capital efficiency, let us quickly check how Tipiak looks there:

2011 2010 2009
Sales 167.6 158.1 154.6
NI 3.2 4.5 4.2
NI in % 1.91% 2.85% 2.72%
Inventory 19.8 18.6 15.9
Receivables 50.1 47.1 48.3
Trade liabil- -27.6 -27.8 -27.2
Net WC 42.3 37.9 37
In % of sales 25.24% 23.97% 23.93%
PPE 44.6 45 45.3
in % of sales 26.6% 28.5% 29.3%
Goodwill 6.9 6.9 6.9
Net WC+ PPE in % of sales 51.85% 52.44% 53.23%

Short answer: Bad news.

Both, working capital and fixed investments in comparison to sales are higher than at Frosta (25% WC vs. 20%, 27% PPE against 21% at Frosta) and miles away from the efficient capital management at Cranswick. Interestingly, in one of his many writings Warren Buffet warned that companies with high working cpital requirements are suffering most from inflation. This is what one can see live at Tipiak.

So without digging deeper: Tipiak might be a “reversion to the mean” play at some point in time but at the moment it is a business in trouble and not what I am actively looking for.

To make this post a kind of “French frozen food” edition, lets look at another company as well, Toupargel Group SA.

Toupargerl has a slightly different business model:

Toupargel Groupe specializes in the home delivery of food products to individuals. The Company operates through two segments: Frozen Foods and Fresh Foods & Groceries. Toupargel Groupe is based in France.

Toupargel also looks “suspiciously”cheap:

Market Cap 75 mn EUR

P/B 0.9
P/S 0.2
P/E (2011) 9
EV/EBITDA 2.9 (!!!)
Div. yield 5.5%

The stock chart looks similar bad like Tipiak’s:

Average “Boss ROEs” and NI margins are higher than Tipiak but also more volatile and declining as well:

Boss ROE NI margin
2002 20.6% 1.7%
2003 44.7% 1.7%
2004 43.0% 3.1%
2005 34.2% 3.7%
2006 18.0% 2.9%
2007 17.7% 3.8%
2008 20.3% 2.9%
2009 23.0% 2.7%
2010 15.4% 2.8%
2011 13.0% 1.9%

Still this would result in an excellent score overall.

A quick view into the business developement looks impressive but only if one reads it from the wrong side. according to the annual report, sales and profits are shrinking almost every year since 2006.

According to their annual report, they are a clear market leader in the French market, but it seems to be that the market is shrinking as well.

Just for fun a quick look at capital usage:

  2011 2010 2009
Sales 339 351 359
NI 8.1 12.9 12.9
NI in % 2.39% 3.68% 3.59%
Inventory 12.6 11.6 12.2
Receivables 2.9 1.7 1.8
Trade liabil- -23.6 -22.6 -22.4
Net WC -8.1 -9.3 -8.4
In % of sales -2.39% -2.65% -2.34%
PPE 43 46 47.6
in % of sales 12.7% 13.1% 13.3%
Net WC+ PPE in % of sales 10.29% 10.46% 10.92%

And surprise surprise, they manage to run their business with negative working capital !!! Overall capital requirements are very low which explains the historically strong ROEs.

The reason is also relatively clear: Like a super market, Toupargel distributes directly to retail clients against cash, but enjoys the usual payment terms from its suppliers. So capital wise this business model is much nicer than being a supplier to a supermarket etc. but it seems to be that despite the internet boom, frozen food home delivery has seen its best days in the past.


Both companies show, that of course the “Boss Score” is not the perfect model for each and every situation. As with every mechanical screener one has to be carefull not to get sucked into value traps.

Of the two companies, Toupargel seems to have the more capital efficient business model, but unfortunately the business model looks like terminal decline. If they manage to reinvent them somehow (Internet ?) they would be however a prime turn around story. But so far both companies do not qualify as “BOSS” (boring sexy stock).

Macro: The Bull case for Europe and the Euro

If you read any news source today, there is one common theme: “The EUR and the European union are doomed”.

Every economist, politician, bank boss, asset manager, talk show host (and their grandmothers) now know exactly what Target2 accounts are and why Europe is on a one way track into doom and bust. Additionally they ussually mention that they always said so. Some of them offer additional advice for instance how helpful it would be if countries would go back to theri own currencies, or adapt the gold standard etc. etc.
Read more

Italian updates – Piquadro, Sol Spa, Emak

Reporting season in Italy. Among my portfolio and watch list, several companies issued relevant material.


Piquadro had a sort of “trading update” which for some reason cannot be found on the homepage but for instance here.

Although sales went up 4.3%, Profits declined from 9.1 mn to 7.8 mn (0.18 EUR per share to 0.156 EUR per share). And they are cutting the dividend from 0.10 EUR per share to 0.06 EUR.

Based on my initial valuation, Piquadro is still within the base case (20% EBITDA margin). So for the time being no action, but a reminder to check the annual report how non-Italien sales and own shops performed against the other segment.

Sol Spa

Watchlist stock Sol Spa has issued two interesting pieces of information. First of all, they were able to place a 12 year private placement bond at 4.75% in USD. With 12 year USD swap rates at around 2%, this represents a credit spread of around 2.75%. This is around 1.5% lower than Italy has to pay for the same duration. So we clearly see that a well managed Italian corporate can finance cheaper than the Italian Government !!!

Secondly, they have issued an investor presentation which shows that for some unkown reasons they are also investing in Hydro Power in Slovenia and Macedonia. I am not sure how this fits into the corporate strAtegy, but it explains part of the increase in Capex.

Q1 results are a mixed bag. Increasing sales but a reduction in margins. Capex still high as the aggressively move into Eastern Europe (Bulgaria, Albania).

Difficult stock. Still on watch.


Emak had issued Q1 numbers already a couple of weeks ago. Interestingly again the acquired companies dare doing relatively well. Based on the first quarter, Emac could earn around 0.08 EUR per share which would result in a 2012 P/E of around 6.

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