Disclosure: author might own one or several securities mentioned, The discussed securities are illiquid and very risky.
Last year, I introduced Depfa Plc, the subsidiary of the Bank formerly called Hypo Real Estate already and started a position in LT2 bonds.
In my post about Porsche SE, I concluded the following:
However on a relative basis I don’t think that there is a lot of upside in the Porsche shares, as I don’t see a quick “real” catalyst and a certain structural discount (20-30%) is justified due to holding structure and non-voting status of the traded shares.
Geoff Gannon used this summary to come up with his view on holding company discounts:
I do know something about holding companies that trade at a discount to their parts. And I don’t agree with that part of the post. If the underlying assets are compounding nicely – you shouldn’t assume a holding company discount is correct just because the market applies one to the stock.
So he is basically saying one should ignore the holding structure and look at the underlying only.
Interestingly, we had such a discussion on the blog about the same topic in the Bouygues post. Reader Martin commented that “one usually applies a 20-30% holding/conglomerate discount” which I didn’t apply in my sum-of-parts valuation.
So far this seems to be quite inconsistent from my side, isn’t it ?
I have to confess that especially for Porsche, I did not mention all my thoughts about why I applied a discount there. However maybe I can shed some light on how I look at “holding structures” and when and how to discount them.
For myself, I distinguish between 3 forms of holding companies:
A) Value adding HoldCos
B) Value neutral HoldCos
C) Value destroying HoldCos
A) Value adding HoldCos
This is in my opinion the rarest breed of HoldCos. Clearly, Berkshire Hathaway is an example or Leucadia. Those HoldCo’s add value through superior capital allocation capabilities of their management. In those cases I would not apply any discount on the underlying assets, however I would be hesitant to pay extra.
B) Value neutral HoldCos
Those are holding structures which exist for some reason, but most importantly are transparent and do nothing stupid or evil to hurt the shareholder. Ideally, they are passing returns from underlying assets to shareholders.
A typical example of such a company would be Pargesa, the Swiss HoldCo of Belgian Billionaire Albert Frère. They are quite transparent and even report their economic NAV on a weekly basisandpass most of the dividends received to the shareholders. Nevertheless, the share trades at significant discount to NAV as their own chart shows:
At the moment, we see a 30% discount for Pargessa. So one should ask oneself, why such a discount exists for such a transparent “fair” holding co ? I can think of maybe 3 reasons:
– The stock is less liquid than the underlying shares
– people do not really trust Albert Frere despite being treated Ok so far
– no one wants to invest into this specific basket of stocks
Nevertheless, one has to notice that even for such a transparent company like Pargesa, a 30% discount does not seem to be the exception.
C) Value destroying HoldCos
Here I have the privilege to have documented such a case in quite some detail, Autostrada Torina, the Italian Holding company for toll road operator SIAS SpA.
As I liked the underlying business, I thought buying at a discount, following Geoff Gannon thoughts that a nice compounding business at a discount is an ever nicer business.
However, I had then to find out the hard way that the discount of the holding company was clearly a risk premium. In this case, the controlling Gavio family “abused” the holding to buy an interest in another company (Imprgilo far above the market price. They couldn’t do this in the operating subsidiary, as the sub was subject to regulation. The Holding co stock recovered to a certain extent but in this case the underlying OpCo was clearly the better and safer investment
My lesson in this was the following: Stay away as far as possible from such “value destroying” HoldCos. They are totally unpredictable and doe not have any margin of safety.
So going back to our Porsche example, what kind of Holding company is Porsche ?
Well, it is definitely not a “value adding” holding. The question now would be if it is a “neutral” or potentially even “value destroying” hold co ?
In my opinion there are already some warning signs:
– Porsche SE already communicated that they will not distribute the cash, but build up an additional portfolio of “strategic participations”
– Porsche only issues detailed reports twice a year, accounting is rather “opaque”
– in my opinion, Volkswagen has a lot of incentives to achieve a weak Porsche SE share price in order to then acquire their own shares at a discount (and swap them into VW pref shares if possible) at a later stage. Common shareholders (Porsche & Piech family might get a better deal. Under German law it is possible to treat pref holders differently
Compared to Pargesa for example, I would definitely prefer Pargesa with a 30% discount to a Porsche pref share at 35% discount.
So to summarize the whole post:
– With holding companies, it is very important to determine the intention and risks of the holding structure
– neglecting or even “evil” holding management can quickly turn a “discount” into a real loss
– better err on the safe side in such situations
– in doubt, assume there is a reason for the discount if you cannot prove the opposite
– however for skilled activist investors, those situations might create potential. So maybe Chris Hohn has a different game plan.But don’t forget that a lot of famous Hedgefund managers (incl. David Einhorn lost a lot of money with Porsche/Volkswagen already in the past.
November was a quite good month in the end for the market despite a short slump by the mid of the month. The Benchmark (50% Eurostoxx, 30% Dax, 20% MDAX) made 2.0% for the month against 1.4% for the portfolio. Again, this is something I would expect in a normal “up month”.
Best performer was clearly Dart Group with ~+33% in November and Total Produce with +9.3%, underperformers were mainly Kas Bank (-7.1%), Emak (-8%) and April (-7%).
YTD the portfolio is now up 32.4% against 23.5% for the BM.
| Bench | Portfolio | Perf BM | Perf. Portf. | Portf-BM | |
|---|---|---|---|---|---|
| 2010 | 6,394 | 100 | |||
| 2011 | 5,510 | 95.95 | -13.8% | -4.1% | 9.8% |
| Jan 12 | 5,972 | 99.27 | 8.4% | 3.5% | -4.9% |
| Feb 12 | 6,275 | 105.90 | 5.1% | 6.7% | 1.6% |
| Mrz 12 | 6,330 | 107.22 | 0.9% | 1.2% | 0.4% |
| Apr 12 | 6,168 | 108.02 | 0.8% | -2.6% | -3.3% |
| Mai 12 | 5,750 | 108.90 | -6.8% | 0.8% | 7.5% |
| Jun 12 | 5,969 | 110.17 | 3.8% | 1.2% | -2.6% |
| Jul 12 | 6,229 | 112.15 | 4.4% | 1.8% | -2.6% |
| Aug 12 | 6,428 | 119.48 | 3.2% | 6.5% | 3.3% |
| Sep 12 | 6,510 | 123.48 | 1.3% | 3.3% | 2.1% |
| Okt 12 | 6,672 | 125.32 | 2.5% | 1.5% | -1.0% |
| Nov 12 | 6,804 | 127.04 | 2.0% | 1.4% | -0.6% |
| YTD 12 | 6,804 | 127 | 23.5% | 32.4% | 8.9% |
| Since inception | 6,804 | 127.04 | 6.4% | 27.0% | 20.6% |
The composition of the portfolio looks as follows:
| Name | Weight | Perf. Incl. Div |
|---|---|---|
| Hornbach Baumarkt | 4.5% | 1.7% |
| AS Creation Tapeten | 4.2% | 20.9% |
| BUZZI UNICEM SPA-RSP | 5.2% | 6.5% |
| WMF VZ | 3.6% | 45.5% |
| Tonnellerie Frere Paris | 4.8% | 25.1% |
| Vetropack | 4.6% | -4.3% |
| Total Produce | 5.8% | 38.2% |
| SIAS | 6.1% | 43.5% |
| Installux | 3.2% | 3.9% |
| Poujoulat | 1.0% | -2.7% |
| Dart Group | 3.6% | 68.0% |
| Cranswick | 5.0% | -0.8% |
| April SA | 3.1% | 12.4% |
| Bouygues | 2.7% | -1.3% |
| KAS Bank NV | 4.7% | 4.8% |
| Gronlandsbanken | 1.1% | 5.2% |
| Drägerwerk Genüsse D | 9.7% | 99.3% |
| IVG Wandler | 4.9% | 8.7% |
| DEPFA LT2 2015 | 3.0% | 49.1% |
| HT1 Funding | 4.8% | 35.6% |
| EMAK SPA | 4.5% | 17.1% |
| Rhoen Klinikum | 2.5% | 4.2% |
| Short: Focus Media Group | -1.0% | -0.4% |
| Short: Prada | -1.1% | -7.1% |
| Short Lyxor Cac40 | -1.3% | -4.3% |
| Short Ishares FTSE MIB | -2.2% | -4.9% |
| Terminverkauf CHF EUR | 0.2% | 4.8% |
| Tagesgeldkonto 2% | 12.8% | |
| Value | 62.1% | |
| Opportunity | 29.5% | |
| Short+ Hedges | -5.4% | |
| Cash | 12.8% | |
| 98.9% |
As discussed, I took a first 1% stake in Gronlandsbanken and slightly increased the Installux and Poujoulat positions under the usual rules.
Comment & Outlook
December is always the month for predictions for the next year. In my opinion, those predictions should be viewed as entertainment rather than a serious effort. No one knows what’s going to happen, so it’s best to stay prepared for any outcome.
However one thing I can predict with absolute certainty: The popular trailing 10 year average returns for stocks will dramatically increase. The arithmetic is relatively easy:
From the beginning of 2002 to the end of 2011, for instance the DAX earned a meager 1.35% annually. Much less than bonds. Next year however, the 10 year average will exclude 2002 but include 2011. 2002 was a very bad year (-44%), 2012 seems to be a quite good year (YTD +26.6%).
So this small statistical change results in a sudden jump to an annualised 10 year yield of 9.94% for the DAX !!! So all this talk of the “lost” decade for stocks suddenly will move into a “stocks performed great over the last decade”.
I don’t know what that means for the stock market (most likely nothing), but it shows that many of “common known truths” like “the lost decade for stocks” are in fact nonsense and/or (Bond) marketing slogans.
Edit: Starting next year I will switch to quarterly reviewss as the monthly review is somehow not so interesting for a longer term oriented portfolio.
Felix Salmon on stock picking as an upper class men’s hobby
Expecting Value on Morgan Sindall. He seems to have similar issues then I had when i looked at the stock.
Some very good “common sense” investment advice from the Aleph Blog
Great and detailed analysis of a Bulgarian REIT
Geoff Gannon has a post on catalysts based on my Porsche update. I will definitely follow up…
Fascinating story about human crowd management from The New Yorker. Maybe there is a lesson for stock market bubbles ?
In June 2011 and July 2011, I looked at Porsche Holding SE.
To summarize the German language posts in a few points:
– Porsche is basically a holding company for 32% of Volkswagen at a discount
– they do not have any operational business left
– at that point in time (end of June 2011), the then prevailing calculated discount of ~33% wasn’t that exciting, considering the legal risks, corporate governance etc.
So what happened in the meantime ?
Volkswagen “cleaned” up the structure to a certain extent that the rest of the operating business was transferred to Volkswagen against 4.5 bn cash (and one share for tax reasons).
Then, a few days ago, Chris Hohn from TCI presented Porsche as one of his best ideas. As Chris Hohn in my opinion is one of the few guys one should really pay attention to, let’s look quickly at his main arguments (via Marketfolly):
Long Porsche
– Concerns about the impact of the litigation surrounding Porsche’s Volkswagen (VW) short in 2008 have depressed the price
– Hohn thinks the market has overreacted and Porsche will settle for less than is expected
– Porsche trades at a 40% discount to NAV
– It’s stock has traded sideways for many years
– Porsche owns 32% of VW
– VW is also cheap so there is a double discount
– VW is perceived as a budget brand but a substantial amount of its earnings come from the premium market where there is more pricing power: Audi and Porsche
– VW and Porsche have good emerging market exposure
– VW grew its volume even during the financial crisis
– It is steadily destroying other European carmakersHohn believes there’s 4 big ways to win by investing in Porsche:
1. VW appreciates
2. The discount to NAV narrows as the litigation is resolved
3. The discount narrows due to a higher dividend
4. A merger of Porsche and VW
Personally, I don’t buy the argument of Volkswagen as undervalued. For me, Volkswagen is much more like an accident waiting to happen, but anyway, based on his analysis, the discount is now 40%. According to his latest report, he seems to be short Fiat, so maybe he has set this up as a kind of “pair trade”.
However, let’s try to verify the discount first, starting with the last available half-year accounts:
| 30.06.2012 | ||
|---|---|---|
| At Equity Part | 29.8 | VOW + Porsche Holding |
| other receivables etc | 4.1 | |
| short-term assets | 0.3 | |
| Cash | 0.5 | |
| Total assets | 34.7 | |
| Hybrid debt | 0.3 | |
| Financial debt | 5.9 | |
| Other liabilities | 6.7 | Option VW |
| Net Assets | 21.8 | |
| Per share | 71.2 | |
| Market Price | 54 | |
| P/B | 0.76 | |
| “Discount” | 24.1% |
Now we can transform this into a “market value” balance sheet including the reported transaction:
| Current | ||
|---|---|---|
| At Equity Part | 22.8 | VOW at market |
| other receivables etc | 4.1 | |
| short term assets | 0.3 | |
| Cash | 3 | +4.5 minus 2 debt |
| Total assets | 30.2 | |
| Hybrid debt | 0 | |
| other liabilities | 3.9 | |
| Other liabilities | 0 | Option exercised |
| Plc loan | 0.3 | Formerly cons. |
| Net Assets | 26.0 | |
| Per share | 85.0 | |
| Market Price | 54.0 | |
| P/B | 0.64 | |
| “Discount” | 36.4% |
So we end up with a discount of ~36% based on a share price of EUR 54.
In my opinion, a 36% discount is nice but not a screaming buy for the following reasons:
– without a clear catalyst, a holding Co. will always trade at a certain discount. Even transparent Holdings like GBL trade at something like 15-20% discount
– additionally, the traded Porsche shares are non-voting pref shares, so an additional discount might be applied here
– the discoutn does also have to take into account potential litigation payments
So without a clear catalyst, I don’t think Porsche is a “must” buy but rather “fairly” valued. So let’s look at Chris Hohn’s catalysts:
1. VW appreciates
2. The discount to NAV narrows as the litigation is resolved
3. The discount narrows due to a higher dividend
4. A merger of Porsche and VW
I have to admit, I don’t buy any of these.
1. With regard to Volkswagen, I have to admit that I find it really hard to understand how much they are actually earn. Both with the MAN and Porsche acquisition, they booked so many special effects that the balance sheet is more or less incomprehensible. Alone the treatment of the “Porsche option” would be worth 2 extra posts and reminds me of a certain US energy company now bankrupt…
2. Ok, if they pay nothing, than the discount might shrink a little bit, but personally I think a 25% discount on NAV might be justified in any case
3. Unlikely. Volkswagen just revealed a 50 bn investment program over 3 years
4. Nope. Just as a reminder: Volkswagen for unknown reasons keeps their subsidiary Audi AG listed since many many years despite they could legally squeeze out any time. I do not see the big advantage of a merger.
Summary:
I still don’t think that Porsche is such a great investment. There might be a certain upside if the litigation ends quickly and without large payments. If one believes in Volkswagen as a great investment, it might be interesting as well.
However on a relative basis I don’t think that there is a lot of upside in the Porsche shares, as I don’t see a quick “real” catalyst and a certain structural discount (20-30%) is justified due to holding structure and non-voting status of the traded shares.
Sometimes it makes sense to reflect why one has done something and why not.
Following my “boss Score harvest” project, I invested in two new UK stocks this year, Dart Group beginning of June and Cranswick in Mid June.
In September I increased the Cranswick position to a full position, for Dart however I was hesitant and could not decide to increase .
One doesn’t need to be a genius in order to find out that increasing the Dart position would have been better:
Since mid of September, Dart made 50%, against more or less flat performance for Cranswick. If I look back to September, I think one of the “true” reasons why I didn’t increase Dart was that I would have to “average” up on Dart, as the stock was already 20% up against my purchase price.
For some reason I am much more hesitant to buy at higher prices. So for Cranswick, it was easier to increase the position because I could slightly decrease my average purchase price. Somehow I seem to prefer lowering the percentage loss on a loss position (“averaging down” than to lower the percentage profit of a gain position (“averaging up”).
I am not sure if this fits into the standard behavioural biases, maybe it is a special form of “anchoring”.
This behavioural bias, not increasing the Dart stake cost me around 1% of portfolio performance so far and now I am even more hesitant to buy. It is also in direct contradiction to the fact that “momentum” combined with Value seems to generate strong results in the long run as demonstrated by O’Shaugnessey’s “what works on Wall Street”.
Lessons (hopefully) learned:
In the future I need to have a better formulated plan for scaling into a position in order to avoid this “behavioural bias”. Either a clear timeline or some clear fundamental triggers where I then execute regardless if the position has already increased to a certain extent or not.
First of all, thank you to anyone who recommends investments on the blog. It is always great to get new ideas. So let’s quickly check some of them if they would be interesting from my point of view:
Bongrain (ISIN FR0000120107)
Bongrain is a company I have been looking into quite often over the last view years. For some reason it always appears to be cheap.
Currently it trades at quite low multiples:
P/B 0.6
P/S 0.2
P/E Trailing 15, P/E 2012 ~8
Div. yield 2.7%.
However, despite the significant discount to book, Bongrain does not score well in my Boss Score. My model only calculates a fair value close to current prices.
The reason is mainly that ROE is simply relatively low. Over 10 years they managed 8.5% ROE over the last 5 years only 6.5%. They were always profitable but profitability is not really stable. L.D.C for instance shows better ROEs with less volatility. There would be clearly some “mean reversion” potential but I think that there are more interesting stocks in France at the moment.
For my investment philosophy, it is vital that a company earns at least its Cost of capital to make it a worthwhile investment. Bongrain seems to struggle with that. Unless there are dramatic changes in management or shareholder structure, I would prefer L.D.C. against Bongrain, but maybe I manage to have a more detailed look at Bongrain at some point in time.
M6 Metropole Television
M6 looks great from a free cashflow perspective and ROE, ROA and ROIC. The company has net cash (~2-3 EUR per share). In my model, it scores Ok, but due to the fact that it already trades at 2.2x book, the upside is limited.
Additionally, M6 is one of the shares where stated EPS do not correspond well with my own calculated “total return”. Especially in 2010, my model actually shows a loss:
| EPS | BV per share | Dividend | Tot Return | Delta EPS | |
|---|---|---|---|---|---|
| 31.12.2007 | 1.29 | 6.07 | 0.95 | ||
| 31.12.2008 | 1.07 | 6.17 | 1.00 | 1.05 | -2.4% |
| 31.12.2009 | 1.08 | 6.37 | 0.85 | 1.20 | 11.7% |
| 31.12.2010 | 1.22 | 5.32 | 0.85 | -0.19 | -141.7% |
| 30.12.2011 | 1.17 | 5.50 | 1.00 | 1.03 | -13.9% |
Instead of the expected increase in Book value based on the stated EPS, book value per share decreased in this year significantly. One would have to check what the reason is for this, but it doesn’t seem to be the result of a share repurchase.
In general, I do have also reservation against TV stations. There is a clear underlying shift going on, away from traditional media to internet media. I do not have a really good insight how far this would go but one can see the “classical” patterns which were mentioned in the book “The innovators dilemma”:
– there seem to be a series of “disruptive innovations” rather than a sustaining innovation
– traditional companies struggle hard, after ignoring this they now seem to overpay for access
– truly disruptive innovations are quite unpredictable and established companies have only a very small chance to prosper in such an environment
In those cases, in my opinion, it would be very dangerous to rely on past numbers and assume mean reversion. For the time being I would be very uncomfortable with “traditional” media company, unless it would be a “hard asset play”.
So again, M6 would not be one of my favourite French stocks at the moment.
Banknordik
Banknordik came up in the Gronlandsbanken analysis as the only other bank being active in Greenland.
Banknordik interestingly is the major bank in the Faeroe Islands, another one of those “Denmark related” islands.
Other than Groenlandsbanken, Banknordik seems to do 50% of their business in Denmark and only 50% in Faeroer. They seem to have taken over parts of a no bankrupt Danish bank But nevertheless, the stock looks appealing to me as I start to “warm up” for “specialist” financial stocks.
Banknordik looks like a very interesting stock and might be a “complimentary” position to Groenlandsbanken. So I will definitely look deeper into that one.
Good French Stock blog with an interesting French Squeeze out, Banque Tarnaud (via Red). Banque Tarnaud was in my Top 25 France Boss Score but I didn’t manage to have a look at it.
The Interactive Investor on Dart Group
Cassandra with a contrarian short gold – long Japanese bond or Cotton trade idea
Stable Boy is not a big fan of JC Penney any more
Damodoran on lockup expirations and stock prices (Facebook)
Chris Hohn likes Porsche. I guess I will have to update my Porsche analysis from 18 months ago.
Yesterday’s post was of course only a first step towards a potential “special situation” investment.
In order to decide if this is actually an interesting investment, one would need to come up with
A) some more considerations with regard to timing
B) at least a rough idea about intrinsic value
With regard to timing, I think it makes sense to look at Rhoen Klinikum, where there was a similar situation:
On April 26th, Fresenius offered 22,50 EUR per share from an “undisturbed” level of 14.76 EUR the day before. Then, when doubts came up, the stock went down to around 16 EUR before once again climbing to around 20 EUR, before then the deal fell apart. Interestingly, the current share price seems to have a floor at the previous undisturbed level.
For TNT Express, the truly “undisturbed” price the day before the offer was 6,34 EUR, so the current price is around 10% higher than that level.
Just as a side remark:
There were a couple of articles which said that there is now a 50/50 chance of the deal happening, like here.
However at current prices(6.95 EUR) we can relatively easily calculate the implied probability of the deal happening:
Undisturbed price: 6.34 EUR
Current prcie: 6.95 EUR
Offer price: 9,50 EUR
So the implied probabality of the deal happening can be calculated the following way:
(6.95-6.34) / (9.50-6.34) = 19.3%.
Anyone who thinks that there is really a 50/50 chance of the deal happening should buy now as the expected share price under this assumption should be 7.92 EUR (6.34 + (9.5-6.34)/2).
Going back to timing: What we haven’t seen here is a upmove of the stock like we have seen with Rhoen. So far we only saw the price going doen and the implied probability of the deal happening decreasing.
B) intrinsic value
This is somwhow difficult. The 9,50 EUR is a “private market” value, maybe including a premium for synergies.
TNT Express since its spin off has yet to prove that they can achieve margins like their competitors. Based on Q3 numbers, they are curently heading to something like 220 mn “operating income” or EBITDA for 2012 which equals an “operating margin” of only 3%.
UPS for example has an operating margin of 11.4%, FedEx of 7.8%. Deutsche Post has an ~9% EBIT Margin in the Express segment. So TNT has definitely some room to improve.
If we assume 8% operating margin, TNT would show ~600 mn EBITDA. Current EV is 3.5 bn, potential EV/EBITDA ~6.
This is much lower than UPS (10x EV/EBITDA) but higher than Fedex (4.9x). Deutsche Post is at 5 times EV/EBITDA.
So at current prices and assuming quite a turn around, TNT Express is not really cheap. So any investment would be a pure “Merger arbitrage” or “control premium” inevstment which might or not work out.
No action yet.
Edit: During writing this post, the share price jumped some 3.5% compared to yesterday, is this the first leg of the rebound ?…..
TNT Express is the express parcel service spun off from PostNL in 2011. I have looked at the stock a couple of times as a spin off situation.
In February 2012, UPS announced it’s bid to buy TNT Express. In march they increased the bid to finally 9.50 EUR.
In the meantime it looks like that there is a lot of unexpected resistence from the European monopoly regulator.
The share now trades below 7 EUR, interestingly this is only a little higher than the “undisturbed” price in January/February which was between 6.10 -6.50 EUR. Since then, for instance Deutsche Post for gained some 15% from February, Österreichische Post even some 20%:
Since February, the correlation to the overall market is very very low, almost close to zero.
So basically, the market now does not believe at all in the takeover, as TNT Express is trading very close (or even below) to its “undisturbed” price. In the meantime they made some progress with regard to the merger, among others they sold their Airline which was one of the preconditions to get the deal approved.
All in all I am somehow “tempted” by this. It is a Spin-off situation which in itself is interesting. Additionally, the “option” that the UPS deal closes is only partially priced in. If the deal falls through, I think similar to Rhoen, there might be other groups interested in the business.
The risk is of course that some (very slow) hedge funds might sell if the deal finally falls thorugh but I assume that the 2.55 EUR difference to the bid price implies that most of the “Clever” merger arbitrage players are already out.
As a first summary, I will watch this and maybe start a 1% position in the next few days for my “special situation” bucket.
value and opportunity 