Monthly Archives: November 2012

Bouygues Q3 update

The Q3 numbers of Bouygues are a first test for my Bouygues investment case.

If I update my simple sum of part valuation, we can see the following:

Market values listed companies:

  16.11 initial
Colas 96.55% 3.56 3.34
Alstom 29.40% 2.42 2.47
Tf1 43.59% 0.667 0.58
Total listed   6.65 6.39

So the listed subs have slightly increased in value.

Now looking at the unlisted, I will simply assume 9 Month EBITDA will equal 75% of total EBITDA:

9 month EBITDA 12M est EV Multiple EV
Bouygues Constr. 432 576 7 4,032
Bouygues Real estate 117 156 7 1,092
Bouygues Telecom 802 1,069 6.5 6,951

Compared to the 6 month numbers I used last time, Telco is slightly below 6M run rates, construction and real estate perfom better.

Both, listed and unlisted subsidiaries in theory look better than at the time of my initial analysis. Net debt has slightly increased to 5.8 bn form 5 bn, mainly due to a 2 bn purchase of mobile licenses in France.

Putting this together, the updated fair value of Bouygues equity at “sum of parts” would be 6,65 bn + 12.075 bn -5.8 bn = 10.9 bn or around 35 EUR per share. From my point of view I see no fundamental reason why the shares have dropped quite substantially. I guess this is more “market psychology” following the announcement of France Telecom to cut their dividend.

However the stock chart looks really ugly now, although I am not a stock chart expert, there doesn’t seem to be any “technical” support on the downside and momentum is clearly negative:

Fundamentally the company seems to be “on track” at least compared to my investment case. So I will use today’s low prices to “fill up” again the current 2.2% position to 2.5% weight, further purchases will follow if the stock goes below 17 EUR (and fundamentals remain stable).

Gronlandsbanken AB (ISIN DK0010230630) – Sleepy eskimo bank or moat company with natural resource option ?

Sometimes the only reason why I research a stock is because I find it interesting for some reason, not because it will be a good investment or so.

Gronlandsbanken AB is such a stock. Although it showed up in my Top 25 Scandinavian stocks, normally I would discard that because it is a bank. With Gronlandbanken however, the fact that this is the only listed stock of a company from Greenland got me interested.

Before looking into the bank, a few facts about Greenland from Wikipedia:

– Greenland has arond 60 tsd inhabitants spread over 2 mn square kilometers, however only 400 k square kilomoters are not permanent ice (Germany has ~350 k Square kilometers)

– politically, Greenland is mostly independent since 1979, however strong ties to its former “Colonial master” Denmark remain, among others the offical currency which is the Danish Krone
total GDP is estimated to be around ~2 bn USD
– However, basically 50% of the countries GDP are transfer payments from Denmark
– Greenland left the EU in the 80ties but still enjoys free trade and other preferred treatments via Denmark
– most people basically work for the Government, the second largest sector is fishing
– Last but not least, Greenland could become one of the prime beneficiaries of climate change, as its vast natural resources could become much easier to access

The Bank:

Grondlandsbanken has been founded in 1967. In 1997 it merged with the only other bank in Greenland, Nuna Bank and is therefore the only bank based in Greenland. However it doesn’t seem to be the only bank with branches in Greenland as this post shows:

There are 2 banks in Nuuk, Greenland Bank and BankNordik. However, the latter has no cash function. There are ATMs in both banks in Nuuk, and cash in advance and Visa Card can be used in all stores and the like.

Anyway, it looks like competition is currently quite limited in Greenland in the banking sector.

Gronlandsbanken valuation looks Ok, but not very exciting:

Market cap: 830 mn DKK (~110 mn EUR)
P/E Trailing ~14
P/B 1.0
Dividend yield 6.5%

Around 65% of the shares are held by large shareholders, among them with 14% the Government of Greenland. So “free float” is around 30-35% or 35-40 mn EUR only.

Interestingly, value shop Sparinvest has a 0.44% stake . Another value fund which I didn’t encounter yet, Nielsen Global Value holds 5% as well. For them it seems to be a quite significant position with 5% portfolio weight according to the latest fact sheet.

Thankfully, no sell-side analyst has discovered the stock yet.

The stock is up 56% YTD, however this is still less then 50% of the peak price back in 2007:

Not surprisingly, the stock has a very low beta of ~0.55 vs. the Danish stock index.

But why buy a bank at book value if you can get banks for 0.3 times book ?

Well, there are a few things which are “not normal”:

– Gronlandsbanken has an equity ratio of 17.3% (that’s right, not Tier 1 ratio or such crap)

– their net interest margin is around 4%-5%, Return on assets is around 1.7% If we compare this to the most profitable banks like HSBC (1.9% – 0.6% and Standard Chartered (2.4% and 0.9%) or DNB (1.4% -0.6%), we can see that Gronlandsbanken is at least twice as profitable as the most profitable European bank.

Due to the high ratio of equity, ROEs do not look spectacular, but still my model calculates ~15-16% total ROE with a relatively low volatility. According to my model, the fair value for such a company should be around 1.3 times higher than the current market price.

Especially interesting for me was the 2011 annual report from Gronlandsbanken.

The pages 8-16 are definitely the best summary of the economic situation in Greenland I have been able to find. Most interesting was the following passage:

Greenland at a Cross-Road
Looking forward the economy of Greenland will come to a cross-road because most likely the economy will follow one of the following paths:
1. If one or more of the major projects are built, enormous pressure will be exerted on the economy of Greenland with concurrent high rates of growth and pressure on inflation. Based on current analyses, a great deal of the required labour force will be from abroad.
2. If none of these major projects is built, the major challenge in Greenland will be to create jobs and to ensure economic growth.
Within a few years, we can be expecting either very high rates of growth or zero-growth, or perhaps even negative growth. On the other hand, it is harder to imagine a middle-of-the-road scenario with reasonable and sustainable rates of growth since there are few growth-drivers in the economy (except for metals and minerals).

So this is fundamentally a very interesting “Binary” situation with a clear “trigger”.

Some of those “projects” mentioned are relatively interesting as well:

– Oil: Uk Cairn Plc seems to have drilled for oil but has found nothing yet
– a public listed company called London Mining Plc is trying to develop a large iron ore mine
– ALCOA seems to be interested in building a large Aluminium plant
– there seems to be a “rare earth” project buy an Australian listed company called “Greenland Mineral and Energy”, the so called Kvanefjield deposit.

Additional interesting articles form the Web about the natural resources developement in Greenland

Natural resources and Oil in Greenland
Cairn’s drilling results in Greenland
Chinese interest in Greenland
Chinese workers to be “Imported” ?

So it seems to be that the Government in Greenland seems to “warm up” to the natural resources projects. Maybe this is the reason why Management is buying shares since end of October. The amounts are not huge but every other day one can see purchases.


Although I wish I had discovered Gronlandsbanken some months ago, I still think it is a really interesting stock:

– as it is the only bank in Greenland, its margins are around twice as high as the best global banks and the balance sheet is rock solid. One could call this a natural moat
– even based on the current state, current valuation implies significant upside to fair value
– the Greenland resource story could add significant growth going forward, even with maybe other banks entering Greenland
– finally, Management has started to buy shares after surprisingly good Q3 numbers
– although there is no direct catalyst, an indirect catalyst could be if some of the projects proceed well and Greenland will move inte the spotlight. Gronlandsbanken is the easiest (and only) way to invest into Greenland without project specific risk

As a result, I will start with a 1% position in order to further track this interesting “opportunity” stock.

Underrated special situation – Deep-discounted rights issues

In many books which deal more or less explicitly with “special situation” investing, for instance Joel Greenblatt’s “You can be a stock market genius” or seth Klarman’s “Margin of safety”, many so-called “Corporate actions” are mentioned as interesting value investing opportunities.
Some of the most well know corporate actions which might yield good investment opportunities are:

– Spin offs
– tender offers /Mergers
– distressed / bankruptcy 

However one type of corporate action which is rarely mentioned are rights issues and especially “deeply discounted” rights issues.

Let us quickly look at how a rights issue is defined according to Wikipedia:

A rights issue is an issue of rights to buy additional securities in a company made to the company’s existing security holders. When the rights are for equity securities, such as shares, in a public company, it is a way to raise capital under a seasoned equity offering. Rights issues are sometimes carried out as a shelf offering. With the issued rights, existing security-holders have the privilege to buy a specified number of new securities from the firm at a specified price within a specified time.[1] In a public company, a rights issue is a form of public offering (different from most other types of public offering, where shares are issued to the general public).

So we can break this down into 2 separate steps:

1. Existing shareholders get a “Right” to buy new shares at a specific price
2. However the shareholders do not have to subscribe the new shares. Instead they can simply choose to not subscribe or sell the subscription rights

Before we move on, Let’s look to the two alternative ways to raise equity without rights issues:

A) Direct Sale of new shares without rights issues
This is usually possible only up to a certain amount of the total equity. In Germany for instance a company can issue max. 10% of new equity without being forced to give rights to existing shareholders. In any case this has to be approved by the AGM.

B) (Deferred) Issuance of new shares via a Convertible bond
Many companies prefer convertible bonds to direct issues. I don’t know why but I guess it is less a stigma than new equity although new equity is only created when the share price is at or above the exercise price at maturity. So for the issuing company, it is more a cash raising exercise than an equity raising exercise. Usually, the same limits apply to convertible debt than for straight equity.

So if a company needs more new equity, the only other feasible alternative is a rights issue. But even within rights issues, one can usually distinguish between 3 different kinds of rights issues depending on the issue price:

1) “Normal” rights issue with a relatively small discount
Usually, a company will issue the new shares at a discount to the old shares in order to “Motivate” existing shareholders to take up the offer. If they do not participate, their ownership interest will be diluted. Usually “better” companies try to use smaller discounts, high discount would signal some sort of distress

2) Atypical rights issue with a premium
This is something one sees sometimes especially with distressed companies, where a strategic buyer is already lined up but wants to avoid paying a larger take over premium to existing shareholders

3) Finally the “deeply” discounted rights issue

Often, if a company does not have a majority shareholder, the amount of required capital is relatively high and there is some urgency, then companies offer the new shares at a very large discount to the previous share price.

But exactly why are “deeply discounted” rights issues an interesting special situation ?

After all this theory, lets move to an example I have already covered in the blog, the January 2012 rights issue of Unicredit In this case:

– Unicredit did not have a controlling shareholder. One of the major shareholders, the Lybian SWF even was not able to transact at that time
– the amount to be raised was huge (7.5 bn EUR)
– it was urgent as regulators made a lot of pressure

As discussed, in the case of Unicredit, before the actual issuance at the time of communication the stock price was around 6.50 EUR, the theoretical price of the subscription right was around 3.10 EUR. However even before the subscription right was issued, the stock fell by 50 %. At the worst day, one day before the subscription rights were actually split off, the share fell (including the right) almost down to the exercise price without any additional news on the first day of subscription right trading.

But why did this happen ? In my opinion there is an easy answer: Forced selling

Many of the initial Unicredit Investors did not want to participate or did not have the money to participate in the rights issue. As the subscription right was quite valuable, a simple “non-exercise” was not the answer. As history shows, selling the subscription right in the trading period always leads to a discount even against the underlying shares, in this case some investors thought it is more clever to sell the shares before, including the subscription rights. Sow what we saw is a big wave of unwilling or unable investors which wanted to avoid subscribing and paying for new shares which created an interesting “forced selling” special situation.

Summary: In my opinion, deeply discounted rights issues can create interesting “special situation” investment opportunities. Similar to Spin offs, not every discounted rights issue is a great investment, but some situations can indeed be interesting. On top of this, those situations often are not really correlated to market movements and play out in a relatively short time frame.

Weekly links

Good analysis of the Bulgarian economy and stock market and an interesting Bulgarian company called Yuri Gagarin.

Some top hedge fund investment ideas form a recent investment congress in Chicago

Stephan at Simple Value analyzes an interesting French plantation company (only in German)

Wexboy like two German residential property stocks especially KWG kommunale Wohnen.

Since this week, short positions for German shares of large Hedgefunds can be accessed here. Most interesting: 15% in total of Aixtron are sold short….

Boss Score: Top 25 Scandinavia

Next in my “top 25” series from the “Boss” database is now Scandinavia or the “Nordic” countries, namely Denmark, Finland, Norway and Sweden.

Again, as the process is only semi-automated, I have currently “only” about 300 Nordic companies in my database.

Let’s start with the Top 25 according to the 10 Year score:

Followed by the ranking for the 5 Year score

Finally I want to introduce something a am also looking at: A “pure” quality score without actually looking at the current market price. As some readers might recall, the Boss model first calculates a theoretical fair multiple to book value and then divides this by the market price.

If we leave out the last step, we can sort by the achieved multiple. Based on empirical experience, I use a blend of the 5y and 10y value with a double weight for the 5 year score.

After sorting the list by this criteria, we get the best “quality” companies:

Again there seem to be some interesting companies in the Nordic countries. Let’s have a quick at some of the names which I find interesting at a first glance:

B&B Tools (Sweden)

They seem to have a quite interesting business model, a servicer and supplier (without own production) of tools and consumables to industrial companies. However they seem to have some problems at the moment. Strongly declining profits, new CEO etc.

Capman OY

Finish private equity vehicle. Maybe worth a look at some point in time.

Takoma OY

Finish engineering group. However Stock chart looks like free fall. According to one of their publications, they are currently in breach of loan covenants. So a “no go” here.


Very interesting. One of the leading caravan manufacturers. Also “high quality” in my model. Maybe

Fenix Outdoor

Both, designer of outdoor products as well as operating a retail chain. Relatively expensive but high profitability.


Producer of heat pumps, boiler, freestanding fireplaces. Expensive but high quality.


Finish specialist for fishing tackle. Main competitor for Shimano in this area.


This might be an interesting special banking stock. It seems to be the ONLY commercial bank in Greenland according to Wikipedia. The balance sheet is super solid and if the Greenland natural resources story would really play out, this would be the stock to have. So a “hidden” commodity play so to say.

Summary:All in all my feeling is that the Nordic capital markets are much more efficient than for instance France. Thos companies which score well do mostly have some issues or their overall scores are not very high compared to other countries. “Quality” companies seem to be priced accordingly.

Performance October 2012 & Comments

October has been a “normal” month for the portfolio. The Benchmark (Eurostoxx 50%, Dax 30%, MDAX 20%) gained 2.5%, whereas the portfolio “only” gained 1.5%. Year to date, The portfolio now shows a gain of +30.6% against 21.1% for the Benchmark. Since inception(1.1.2011), the portfolio is up by 25.3% against 4.4% for the benchmark.

Main performance drivers in October have been Dart Group (+15.1%), AS Creation (+11.8%), HT1 (+7.5%). Main “detractors” were Cranswick (-5.1%), Vetropack (-4.9%), Bouygues (-2.2%) and Rhoen (-2.1%)

Just for fun, I calculated the Sharpe ratio based on the 22 available monthly returns, both for the portfolio and the benchmark. The sharp ratio for the Benchmark is 0.2, however for the portfolio it is an incredible 0.90. I don’t think that I will manage such Sharpe ratios over the long run but it is still interesting to see.

Portfolio as of 31.10.2012:

Name Weight Perf. Incl. Div
Hornbach Baumarkt 4.7% 5.1%
AS Creation Tapeten 4.3% 21.6%
WMF VZ 3.8% 49.4%
Tonnellerie Frere Paris 5.0% 25.4%
Vetropack 4.5% -7.6%
Total Produce 5.3% 26.8%
SIAS 6.0% 39.4%
Installux 3.0% -0.1%
Poujoulat 0.8% -4.6%
Dart Group 2.8% 28.2%
Cranswick 4.8% -6.4%
April SA 3.4% 20.9%
Bouygues 2.4% -4.5%
KAS Bank NV 5.1% 12.6%
Drägerwerk Genüsse D 10.1% 104.6%
IVG Wandler 3.5% 9.5%
DEPFA LT2 2015 3.0% 45.1%
HT1 Funding 4.6% 29.4%
EMAK SPA 5.0% 26.9%
Rhoen Klinikum 2.5% 0.5%
Short: Focus Media Group -1.0% 2.4%
Short: Prada -1.1% -6.1%
Short Lyxor Cac40 -1.3% -0.5%
Short Ishares FTSE MIB -2.2% -2.9%
Terminverkauf CHF EUR 0.2% 4.9%
Tagesgeldkonto 2% 15.9%  
Value 60.9%  
Opportunity 28.7%  
Short+ Hedges -5.4%  
Cash 15.9%  

Following the “autumn cleanup” post, I have already sold down all the “low conviction” positions, as the two last days of the month were “up days”. I increased only IVG and Rhoen so far.

In detail, the following positions were closed:

EVN, total return -4.87%
Mapfre +44.75%
Short Kabel Deutschland -52.87%
OMV -3.92%
Fortum -24.17%

Apart from the hedges, the portfolio has now 23 “single names” which is something I consider within the optimal range considering the amount of time I can spend on the portfolio.

The other announced position increases will be executed in November and as a general rule only on “down days”.

Comment & Outlook

One fascinating aspect of the current stock market is in my opinion the obsession of many money managers with the US Fed and the ECB and low interest rates in particular. Just as an example, one could read for instance the latest publication from Steve Romick (FPA) which argues quite strongly against the current policy of Fed Chairman Ben Bernanke.

The argument more or less goes as follows: The low interest rates inflate asset prices (Bonds, real estate, stocks) which distorts capital allocation and will in the medium to long run create even bigger problems than today’s problems.

I have to admit that I can only partly follow this logic. It is true, that interest rates are relatively low and maybe artificially so for certain segments. On the other hand we see a lot of deflationary developments for instance within the Euro zone.

However, I find it strange that many people relate the level of the stock market directly and exclusevily to the interest rate level. Interest rates are one of many factors in valuing stocks. Although many people make their living in trying to explain on CNBC or Bloomberg why the stock market has moved up or down, obviously no one knows the reasons, otherwise they all would be rich and counting their money from successfully predicting the market.

Many people seem to think that stocks should be cheaper because of “macro uncertainty”, although in my opnion this is wrong. There is always macro uncertainty, for me it seems that only the majority of commentators seems to forget about that sometimes.

Going back to Steve Romick: I guess his commentary might have something to do with the recent underperformance of his flagship fund which has missed out a significant part of the rally. Although I really like those guys, this comment sounds a little bit like a lame excuse to blame the “market bubble” for the underperformance.

So to make it short: In my opinion one should either ignore all those commentators which try to explain why the market is over- or undervalued based on macro factors or consider them as “entertainment”. Uncertainty and central bank intervention are part of the market since many many decades. For all those pundits who think that a “free” capital market without central banking is the answer, I would highly recommend to read some history books how markets and banks behaved BEFORE central banking had been established.

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