Monthly Archives: May 2012

Performence review April 2012 & comments

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April 2012 was a relatively good month for the Portfolio. Against a Benchmark Performance in April of -2.6%, the portfolio showed a gain of +1.2%. YTD, the portfolio is now up 12.6%% against 11.9% of the Benchmark.

Performance overview:

Bench Portfolio Perf BM Perf. Portf. Portf-BM
2010 6394 100      
2011 5509.87 95.95 -13.8% -4.1% 9.8%
           
Jan 12 5972.48 99.27 8.4% 3.5% -4.9%
Feb 12 6275.00 105.90 5.1% 6.7% 1.6%
Mrz 12 6329.66 107.22 0.9% 1.2% 0.4%
Apr 12 6168.20 108.02 -2.6% 0.8% -3.8%
 
YTD 12 6168.20 108.02 11.9% 12.6% 0.6%
 
Since inception 6168.20 108.02 -3.5% 8.0% 11.6%

The outperformance in April was mostly triggered by the jump in the share price of AIRE KGaA, which went up from around 11 EUR to 17 EUR at month end. Luckily, I only sold a very small amount after the 10% tender offer from the company itself (~1000 stocks) before the AIG offer of EUR 17 was announced on Monday April 30th.

The relatively weak performance of my Italian positions (EMAK, Buzzi, Piquadro, SIAS) was partly off set by the gain in the FTSE MIB short position.

Other notable outperformers in April were WMF and AS Creation.

Portfolio Changes April:

Nestle: fully sold
Piquadro: 0.5% added at around 1.43 EUR (50% hedged with FTSE MIB short)
AIRE KGAA As discussed above, I sold 1.060 stocks at 13.52 EUR (25% of trading volume) before the announcement on Friday April 30th with a gain of 54.50%. On Friday April 30th, the volume was so high, that I sold 22.952 stocks (position down to 5%) at 17 EUR with a gain of 94.26%, almost a double.
Installux: Beginning on April 30th, the first 55 shares were bought. This will be a long way to establish a position…

Portfolio composition April 30th

Name Weight Perf. Incl. Div
Hornbach Baumarkt 5.1% 4.92%
Fortum OYJ 4.4% -14.56%
AS Creation Tapeten 4.0% -4.02%
BUZZI UNICEM SPA-RSP 5.1% -12.75%
EVN 2.8% -13.72%
Walmart 3.9% 18.75%
WMF VZ 4.2% 44.32%
Tonnellerie Frere Paris 4.9% 7.07%
Vetropack 4.6% -2.99%
Total Produce 5.0% 15.98%
OMV AG 2.2% -14.99%
Piquadro 1.6% 8.78%
SIAS 2.4% -6.40%
Installux 0.1% 0.00%
     
Drägerwerk Genüsse D 8.9% 44.61%
IVG Wandler 2.2% 7.70%
WESTLB 6.9% 5.6% 35.25%
DEPFA LT2 2015 3.1% 29.04%
AIRE 4.8% 96.72%
HT1 Funding 4.7% 5.92%
EMAK SPA 4.8% 0.96%
DJE Real Estate 4.2% -3.18%
Praktiker 2016 2.5% 0.75%
     
     
Short: Kabel Deutschland -2.2% -23.07%
Short: Green Mountain -1.6% 14.30%
Short Ishares FTSE MIB -2.4% 3.74%
Terminverkauf CHF EUR 0.2% 4.43%
     
Tagesgeldkonto 2% 14.9% 0.00%
     
Summe 100.0%  
     
Value 50.1%  
Opportunity 40.8%  
Short -6.0%  
Cash 14.9%

Outlook & Strategy:

As a contrarian investor at heart, current times are quite exciting. There are a lot of industries and entire countries (PIIGS, utilities, financials) which trade at very cheap valuations. Of course there are a lot of macro risks on the horizon. As a value oriented contrarian investor one should howver focus on the long run. The “This time is different” argument should also be applied on the positive side, meaning that the world will not end, people will still need bank accounts, electricity or want to travel in the future.

So the focus should be less on guessing and interpreting daily Central Bank actions or election outcomes but on analyzing cheap companies with lasting business models, no matter where they are located.

Greed and fear are the two worst investment advisors available. Because of this, one should not fear investing in currently depressed businesses if they are deemed to be lasting, on the other hand one should try to avoid chasing expensive past “winners” like consumer stocks, flats in Munich etc.

However this is often easier said than done, especially if one takes the daily news “tsunami” too serious. My personal technique is to read a historical finance book from time to time in order to get the “right perspective” and that current problems are nothing new. At the moment I am reading “Lombard Street” from Walter Bagehot, I hope I can post a rview soon.

Catching up: Green Mountain, AS Creation and AIRE KGaA Tender offer at 17 EUR

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What a week for the portfolio ….

Green Mountain

Green Mountain imploded (again) last week after they lowered their guidance.

Green Mountain had many attributes making it a “perfect short”:

+ shady accounting as revealed early by Sam Antar at WhiteCollarFraud
+ massive insider sales
+ negative free cashflows
+ pumped up growth through expensive acquisitions
+ expiring patents in 2012

David Einhorn, now credited for “revealing” the over-valuation was actually relatively late in the game. However one has to admire his timing capabilities. I was relatively early and hat to swallow a intermediate -40% loss on the position before I got into the money.

The question is now, how low can the stock go ? If GMCR is a “real business”, then the current valuation seems to be fair. If they are a real fraud, the stock could go down much further. Also one should remember that momentum always goes in both directions. Nevertheless, as the easy money on the short seems to have been made, I will exit (cover) the short on Monday.

AS Creation

AS Creation reported surprisingly good Q1 numbers which show that at least with a certain time lag, the company does have some pricing power in its core business. The outlook is mixed as they expect losses when they ramp up the Russian JV.

Nevertheless, I think the first quarter gives credibility to the managment as they always told investors that on an annual basis they are able to pass cost increases onto clients.

AIRE KGaA Tender offer EUR 17 per share

After I was already happy that my special situation investment AIRE KgAA offered to buy back 10% of the shares at 14 EUR, suddenly AIG real estate issues an offer for 17 EUR per share for the whole company.

Luckily, I only sold relatively small amounts of AIRE at around 14 EUR. As someone said before: Sometimes it better to be lucky than smart.

What I find interesting about the offer are two things:

– first, they seem to have already 31.8% of shares under their control, so from their existing 7.85% the have bought 24% through option contracts

– second, based on the official NAV of around 21 EUR, the 17 EUR offer in theory does not leave a lot of upside for AIG. However one has to remember, that AIRE KGaA owns a lot of highly leveraged equity positions in US developements which were pretty aggresively written down to zero over the last few years. So there is lot of positive optionality in the legacy portfolio. If some of those projects are “coming back”, the NAV could be significantly higher. AIG Real estate as the previous manager should know those projects pretty well.

If I remember correctly, they were active in residential, multi tennant developements. Maybe this has to do with AIG’s decission from early April to go back into real estate investments on a larger scale. I had actually read this but didn’t really make the connection.

For the time being, I will wait for the final offering documents to decide what to do, however I will continue to sell down to 5% of portfolio weight.

As Green Mountain was the ideal short, AIRE KGaA was the ideal special situation:

+ unusual vehicle (listed, closed real investment fund, US and Asian real estate, only German listing)
+ difficult to analyse (lot of debt, but non-recourse)
+ bad name / scandal, however no direct exposure (AIG)
+ early entry of “activist” investors (Grevenkamp, Swiss guy)

From a timing perspective, I was very lucky in the portfolio, getting in at a very low point in January 2011. The chart shows that with such investments, one usually has time to analyse and invest. It doesn’t reallypay out to invest driectly after the drop:

After the big drop in 2008/2009, the stock was “sleeping” now for almost 3 years before something happened.

That is something to keep in mind for investing in such situations. I t takes some time until the value will be (hopefully) realised by someone.

French stocks part 2: Installux SA (FR0000060451) – Boring is the new sexy

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Installux is a small French Company which according to Bloomberg:

manufactures and distributes aluminum and steel components used in carpentry, locksmithing and building. The Company also refurbishes office buildings and factories.

Traditional valuation numbers show that the stock is relatively cheap and conservatively financed:

Market Cap 44 mn EUR
P/B 0.81
P/S 0.4
P/E 7.8 (Trailing 2011)
Div. Yield 5.5%

So far so gut, however, EV/EBITDA is at a sensational 2x EV/EBITDA

This is due to the fact that the company has around 46 EUR per share in net liquidity. Unfortunately, the 2011 report is not yet available, but some preliminary figures can already be accessed for instance here.

If we adjust the P/E for cash we would get a corresponding lower PE of around 5.2 for 2011.

A company with a valuation at 2 x EV/EBITDA and a P/E of 5 needs to have some kind of serious problem. However if you look at Installux, it is hard to find problems. Let’s look at historical numbers:

EPS NI Margin ROE ROIC
1999 10.2 5.5% 16.7% 15.9%
2000 13.4 6.2% 19.1% 18.7%
2001 14.1 6.3% 18.4% 15.5%
2002 10.4 4.6% 12.7% 13.0%
2003 12.4 4.7% 13.8% 14.9%
2004 17.5 5.6% 17.7% 15.5%
2005 18.5 6.6% 16.6% 15.0%
2006 19.8 6.4% 15.4% 14.6%
2007 18.8 5.6% 13.3% 13.2%
2008 17.9 5.4% 11.9% 11.8%
2009 15.1 4.7% 9.5% 10.2%
2010 21.8 6.4% 12.6% 19.6%
2011 17.9 4.9% #DIV/0!

What we can see here is a generally growing profit (with some minor hiccups), an unspectacular but very stable Net margin between 4.7% and 6.4% and Mid teen ROEs and ROICs.

The business is highly cash generative. Despite the growth achieved, over the last 13 years, on average 12-13 EUR free cashflow per share have been generated. Around half of that has been paid out as dividends, the other half has accumulated on the balance sheet (in 1999 Installux still had a tiny amount of net debt).

Also the balance sheet is cleaner as clean, no goodwill, no pension liabilities and no operating leases as far as I could see.

So let’s stop here and summarize:
We have a consistently growing and profitable business with very low volatility, attractive ROE and ROIC and a valuation of 2x EV/EBITDA and 5x P/E adjusted for cash (7.8 unadjusted) which produces a large amount of free cashflow despite growing nicely over the years.

Let’s have a quick look at the business:

Installux is processing aluminium, i.e. shaping and forming and coloring it to be used in shops, for windows etc. Interestingly, despite the fluctuation in aluminium prices, they seem to be able to pass on price changes relatively quickly.

Their clients are mostly “corporates” like building contractors etc., they run a small retail segment which however doesn’t seem to be very profitable at the moment (Roche Habitat).

A Net margin of 4-6% is Ok, but does not indicate a big moat. The relatively high returns on equity and invested capital seem to be the result of a relatively low fixed asset base required to run the business.

So the business seems to be nothing special, but produces double digit returns on invested capital which is quite good and is not really cyclical.

In the last 13 years, Installux roughly doubled its sales and profits, so one could not say that this is a shrinking or dying business either.

Management

The current CEO Christian Canty seems to be in charge since 1987 and has bought the company according to the company history website in 1991. They made small acquisitions along the way but nothing spectacular. He is 65 years old and might not continue forever. However his son, Christophe age 38 seems to be already working in the company as a director.

He holds 50% plus some shares and has been buying smaller amounts of shares for instance in 2010 (1500 shares according to the annual report).

I haven’t found a disclosure how much he pays himself, but with a total of +12 mn salaries for all 450 employees, there is not a lot of space for a large CEO salary. Additionally they don’t issue any options or new shares to directors.

It is interesting to read Canty’s “press communication” which seems to be issued in irregular intervals. Another one can be found here.

It becomes clear how cautious he approaches exports and how hands-on he comments on the loss of his smallest division, Roch Habitats. One gets the impression that the “boss” is in control of things.

I also didn’t find any hint that any improper transactions etc. have been made between the CEO as majority owner and the company.

So why is the stock so cheap ?

Some possible reasons are:

– no investor relations at all, on their homepage you neither find a share price nor a link to the annual reports or quarterly news. This is the first time that I see a company homepage of a listed stock which basically denies the existence of its share….

– no trading volume. On a “good” day, 100 shares are being traded. prices jump around a lot between auctions.

– small free float: The CEO Christian Canty owns 50% of the shares and three 5% packages of French institutions are disclosed in the 2010 annual report. No international shareholders as far as I could see.

– even on Bloomberg, you cannot find links to recent news, reports etc. Also the historical numbers are screwed up. In their historical earnings database they show a profit per share of 175 EUR in 2004 per share instead of 17,50 EUR.

– Installux generates more than 95% of sales in France. if France goes into deep recession, it will be hard to compensate for Installux

Valuation

With a stock like Installux, one can take a rather simple approach. As we have seen, the business is cash generative. So if we assume that they just continue to produce around 5.5 mn profit a year and discount this with 10%, we would get a valuation of 55 mn EUR. Plus the 14 mn cash on hand would make a conservative “no growth” valuation of around 230 EUR per share.

Of course we do not have something like a “catalyst” here, on the other hand at least based on historical volatility, a 10% discount rate might even be too high.

Another way to look at this would be: At the moment one can buy Installux at ~80% of book value. The earn 15% on Assets ex cash so one is buying at close to 20% effective ROE (ex cash) which is really really good !!!!

Share price

The stock price looks pretty boring:

Nevertheless, Installux has easily outperformed the CAC 40 even before dividends.
So let’s stop here and summarize:

+ Installux is a very conservatively financed company with a profitable growing business which doesn’t need a lot of assets to run

+ current valuation seems very cheap and neither takes into account the cash on hand nor the relatively high ROCEs and low volatility

+ a very conservative valuation approach would imply at least 50% upside in a no growth scenario

+ if Installux would continue growing at approx. historical growth rates, the stock should be much more expensive.

– however no catalyst in sight other than a slowly growing dividend which might help in the long run. So this is for the patient investor.

For the portfolio will start to accumulate shares at my usual rules (max 25% of daily volume).

Appendix: Others sources from the web for Installux:

– relatively good blog post 2 years ago on a French value blog which doesn’t seem to be active any more. He concludes that the stock is very solid and extremely cheap.

– from time to time there are posts in the boursorama forum. Th few people who discuss the stock seem to come to the same conclusion

– “Worlreginfo” seems to be the best source for Installux company filings

Weekly links

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MUST READ: Aswath Damodaran has published a very interesting 77 page paper called “Value Investing: Investing for Grown Ups?”

If you don’t want to read the full paper, you should read the summary on Greenbacked (part 1, part 2, part 3, part 4)

The “Canadian Buffet” Prem Watsa has published the Fairfax 2011 annual report

Good write up of Chemring at Expecting Value

Interesting Interview with Restaurant company boss (Steak Shack) Danny Meyer

Great write up from Nate at Oddball about Precia SA, a potential hidden champion from France.

EDIT: Damodaran link editetd

AIRE KGaA – annual report published

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AIRE KGaA published their annual report 2011 yesterday.

The NAV slightly increased from Q3 2011 to EUR 21.30 per share.

The most interesting news however is to be found on page 5: From the initial 65.6 mn EUR potential investment commitments, only 2.4 mn EUR seem to be now relevant, as most of the other commitments did expire or will expire soon.

At year end 2011, AIRE had almost 22 mn EUR in cash on hand, representing around 5,20 EUR per share. The buyback announced this week, will use only up to 5 mn EUR, so we can expect some further buy backs soon.

So for the time being, despite the insider issues discussed, I think the value of the shares should be strongly protected to the downside.

For the portfolio, I will continue to sell down until a 5% weight is achieved (from ~7%). However, due to the low volume this might take a while.

Quick analysis: Klöckner & Co SE (ISIN DE000KC01000)

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First of all thanks to all the readers who send me interesting investment cases, I really appreciate this, especially if you already include some “homework”.

One reader recommende to me to look at Kloeckner and Co SE, the German steel trading company as this might be a cheap investment.

Traditional Value metrics indeed look Ok but not overly cheap:

P/B 0.55
P/S 0.1
P/E is 120
EV/EBITDA 7.3

If we look at historical numbers, we can clearly see that Klöckner is a very cyclical company:

EPS EBITDA p.Share Sales p. share FCF ROE
2006 3.50 6.69 93.80 -0.10 44.98
2007 2.26 5.78 106.38 -0.51 18.43
2008 6.75 10.11 114.44 1.71 43.53
2009 -3.29 -1.33 67.30 8.92 -17.31
2010 1.07 3.20 71.22 -0.48 6.51
2011 0.14 2.34 83.13 -1.14 0.75

As Kloeckner was Ipo’ed in 2006, we only have data for one cycle. I would in general prefer for cyclical stocks being able to look at 1999-2011 data including the 2001-2003 period to have two cycles to analyze.

If we look at a “6 year historical” P/E, this would be around 7-8 x average earnings which would be OK, but not overly cheap. Compared with Buzzi for instance, which trades at 3x average earnings over the last 10 years, Klöckner looks relatively expensive.

A few other things which I Didn’t really like at a first galnce :

– share count increased dramatically (doubled) because of 2 capital increases in 2008 and 2011

– in the 6 years since IPO, they managed only 3 times to pay a small dividend

– their business is very capital intensive for a trading operation. The cannot finance their inventory through payables from supppliers but they finance it through capitzal market debt and bank loans, which is very risky in my opinion

– recent acquisition in the US (never a good sign for a German company)

EDIT:

– VERY NEGATIVE: The CEO even managed to increase his salary in 2011 despite the very disappointing 2011 results and the dilutive capital increase. This does not look like an “alignment” of interest between shareholders and CEO.

Positive aspect:

+ does not have a controlling shareholder

A quick view at the chart doesn’t show a very nice picture either:

Summary: As a contraririan “reversion to the mean” play, Klöckner is relatively expensice, compared to Buzzi for example. The business model itself seems to be very risky, especially the financing of invetory thorugh capital market debt. So for the protfolio, Kloeckner is not an interesting candidate, as there are in my opnion better value alternatives in the “contrarian” stock segment.

Real estate investment funds – SEB Immoinvest and DJE real estate

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Interesting developement with regard to the last two remaining closed real estate funds, CS Euroreal and SEB Immoinvest:

SEB wants to save itself by opening just for one single day on May 7th.

The price of the fund already jumped this morning:

EDIT: The SEB Immoinvest is not in the DJE Real estate fund

It will be interesting to see how this works out on May 7th. To a certain extend I find it relatively unfair, as this move punishes traditional fund savers, which might not know about this or have not enough time to react.

I am not sure, if the SEB Immoinvest itself would be a good special situation right now. According to the details of the “offer” , they will collect all orders from now on.

If the orders are less or equal existing liquidity (30% of the fund), they will pay out all orders, otherwise they will not pay out anything. So no “odd lot” tendering for the small guys, it is just “all or nothing”.

For me it is extremely difficult to assess how many people will redeem, my assumption is that all institutional ones more or less have to submit orders.

At current prices of 40 EUR, the upside would be some 30% whereas the donside would be the old price of around 34-35 EUR. So one has to assume at least a 50% chance of reopening to make this a positive exected value investment.

DJE Real Estate:

As Perlenfischer pointed out in the comments, there is a con call on MAy 7th with regard to further proceedings from DJE. This should be interesting.

Macro post: Does having an own currency solve all problems ? (HUF, GBP, ARS)

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If one observes the current debate at the moment, there are is a lot of criticism for the Euro as a concept in general.

Many so called experts basically say the following:

If [Ireland/Spain/Greece/Italy/Portugal] would have their own currency, all problems could be easily solved just by a little devaluation and everyone would be happy again.

As the “poster child” for this example, many pundits than refer to the Icelandic example and how well Iceland is doing these days.

Star economist Steven Keen for example is promoting a similar approach in this Interview in Ireland, where even his Irish host seems to have a problem in understanding how this really should work.

I am not a trained economist, only a “humble” value investor, but out of my actual experience, I try to reconcile the “Euro is evil” thesis with reality. I find it interesting that there are at least 3 countries with their own currency, where thiscurrency does not solve any problems. Let’s look at them seperately:

Argentina

Argentinia is the well documented poster child of what can go wrong with its own currency. Despite a commodity led export boom, devaluation of 80% and more they still didn’t really manage to turn the ship around. Many observers attribute this to widespread mismanagament and corruption, but at least in the case of Greece one could expect the exact same outcome. However without any chance from additional exports and natural resources.

As far as I know, banks were not the problem in Argentina, but the lack of trust in leadership and rampaging inflation following the devaluation despite price controls etc.

Hungary

Also an interesting case. Hungary was on “convergence path” with the Euro. The following devaluation brought many Hungarians on the brink of bankruptcy, because everyone had financed everything in EUR or CHF anyway, so devaluation actually backfired big time.

Since then a nationalstic Government tries to achieve some sort of “Silent Nationalization” through special taxes on foreign owned companies (see Magyar Telekom, which i owned but sold due to this risk).

As most of the foreign currency loans were granted by bank subsidiaries of Italian, German and Austrian banks, the Hungarian Government did not have to stabilize banks in a significant way.

United Kingdom

The Uk did the full program: Quantitative easing (several times), deficit spending (a lot), devaluation and achieved some significant inflation. Nevertheless, the UK is already in a double dip recession .

So also in the UK, the own currency including the full instrument case doesn’t seem to be the silver bullet, at least in a time frame of 3-4 years time.

So what can a value investor learn from this ?

In my opinion there are a few take aways:

– exiting the Euro and having one’s own currency is not the silver bullet for countries like Portugal, Spain, Ireland, Italy and even Greece. It only really helps if you can export much more than you import, otherwise you just end up with high inflation

– politicians are not completely stupid. They will be aware of this.

– current discussions about a Euro break up, especially from the notorious US based perma bears should be weighed against the actual experiences in those 3 countries

– investments in the PIIGS countries are risky, but a currency break up might not be realistic, even in the case of Greece

– within any analysis, one should focus on structural changes, where the impact is only seen at a later stage

– one should never forget: Real (positive) change only happens in the time of crisis.

AIRE KgAA – 10% Buy back tender offer at EUR 14

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As one of the readers commented yesterday, one of my special situation investment, real estate investment company AIRE KgAA issued a 10% buy back tender offer yesterday after close.

This is of course good news in general, as this was one of the catalyst events I was looking for.

Based on my initial investment thesis from Decemeber 2010, we are currently at the “mid case” scenario.

However I have some isues with this tender offer:

1) Why was it launches just before the publication of the annual report ? Normally, the annual report came out always on the last day of April. Do they want to fix the price now because there is unexpected good news (e.g. a written off project came back to life) ?

2) In my opinion, there was some serious INSIDER TRADING going on. This is the only explanation for the strange rise of the stock against the general market) in the last few days:

The insider aspect really worries me, as this could also go into the other direction. So my current reaction is to start to exit the position from today, even if this is what AIRE KgAA or its major shareholders are trying to achieve.

The tender offer itself is an “Odd lot” type of offer, with the “odd lot” being 100 shares which will be accepted 100%, above 100% there will be only a partial repurchase based on the total amount tendered.

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