Monthly Archives: March 2012

Housekeeping: rejected, sold and forgotten

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Some weeks ago, there was a very good post over at Barel Karsan. I think he hit exactly the right spot here:

Some time after you’ve purchased a stock, you probably have a pretty good idea as to whether you made a good decision or not. This is because you likely follow the stocks you have purchased fairly closely. This feedback mechanism allows you to fine-tune your stock purchase criteria so that you don’t make the same mistakes again. But often, some of the best lessons to be learned come from the stocks you didn’t buy, but considered buying!

I would even add to this, that one should also still try to follow the stocks one has sold in order to find out if the selling decision has added value or not.

So I built up two tracking lists. The first list consists of the stocks which were in the portfolio at one pint in time but sold. I want to track the relative perfomance of the stock and the benchmark since the sale.

Tracking list stocks sold

Stock Date Sale price Current Perf Perf BM Delta
Ensco 23.02.11 53.12 56.5 6.4% -5.0% -11.4%
Sysco 08.04.11 28.0 29.8 6.3% -6.7% -12.9%
Apogee 19.05.11 9.4 13.0 38.1% -7.3% -45.4%
ENI 13.07.11 15.7 17.6 12.3% -5.6% -17.9%
Tesco 15.07.11 403.0 314.1 -22.0% -4.5% 17.5%
Tsakos 20.07.11 9.3 6.6 -28.7% -4.8% 23.8%
DEGI International 09.08.11 27.8 29.8 7.4% 14.9% 7.5%
CS Euroreal 09.08.11 51.9 41.6 -19.8% 14.9% 34.7%
Axa Immoinvest 09.08.11 37.3 27.6 -26.0% 14.9% 40.9%
Pargesa 17.08.11 63.9 66.5 4.0% 12.8% 8.9%
Medtronic 17.08.11 32.2 38.1 18.4% 12.8% -5.6%
Beneton 17.08.11 4.6 4.6 -0.3% 12.8% 13.1%
Noble 17.08.11 31.64 39.1 23.5% 12.8% -10.7%
Bijou 31.08.11 63.5 70.6 11.1% 13.9% 2.8%
RWE 27.09.11 27.8 35.2 26.5% 19.2% -7.3%
Einhell 02.11.11 32.3 33.0 2.1% 14.2% 12.1%
Microsoft 09.12.11 25.1 32.0 27.4% 13.4% -14.0%
Frosta 03.01.12 16.7 18.0 7.7% 9.7% 1.9%
Westag 03.01.12 18.3 17.1 -6.7% 9.7% 16.3%
Magyar 24.02.12 2.0 1.9 -5.6% -0.3% 5.3%
KSB vz 15.02.12 439.9 435.9 -0.9% 0.9% 1.8%
Autostrada 06.03.12 6.3 5.9 -6.3% 3.4% 9.7%
             
Avg           4.7%

A negative delta means the stock has outperformed since I have sold it, positive delta means the benchamrk has performed better. On avarage one can see that the sell decisions added value, outperforming the benchmark based on this simple measure by ~4.7%.

Analysed but rejected stocks

Stock Date Sale price Current Perf Perf BM Delta
Ameron 10.03.11 69.8 85.0 21.8% -4.0% -25.8%
UPM 16.11.11 8.2 10.4 27.5% 14.8% -12.7%
Home Retail 30.08.11 122.5 104.1 -15.0% 17.1% 32.2%
Hewlett Packard 22.08.11 24.5 24.6 0.8% 21.5% 20.7%
Delta Lloyd 15.04.11 17.7 13.4 -24.3% -5.3% 19.0%
Esso SAF 06.12.11 63.4 75.5 19.1% 12.2% -6.9%
April 05.01.12 11.5 15.7 37.2% 11.5% -25.7%
Creston 03.02.12 49.8 60.0 20.6% 0.4% -20.2%
Nintendo 10.02.12 10830.0 11380.0 5.1% 1.8% -3.3%
Lingotes 24.02.12 3.0 3.0 0.0% -0.3% -0.3%
Colefax 08.03.12 223.0 223.0 0.0% 0.0% 0.0%
 
Avg           -2.1%

Here, the rejected stocks have performed on average better than the benchmark. Of course I can not say if they performed better than the portfolio, but it tells me that my “filtering” at least throws out interesting stocks even if I do not finally buy them.

In parallel I try to keep a record why I sold them and why I didn’t buy them, but in theory I can search in my blog as well. This is by the wy one of the really nice things about blogging.

Summary: I think it is a great exercise to look at “past” stocks and keep an eye on them. There might be the time when they become interesting again and “refreshing” old knowledge is much easier than starting from the beginning.

Colefax Plc – Quick valuation exercise

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As promised in the post comparing Colefax and AS Creation, I wanted to have a quick look at Colefax from a valuation point of view.

Mean reversion pricing

One very simple check I am always doing is the following: I look over a period of 10+ years at the following numbers:

– average P/E
– average profit margin

I then multiply current sales times avarage profit margin times average P/E to get a “reversion to the mean” pricing. The same can be done for EBITDA Margins and EV/EBITDA.

For Colefax, this results in the following “mean reversion” price targets (1999-2010):

NI/P/E: 172 pence
EBITDA/EV: 245 pence

So no big upside here compared to the current price of ~220 pence. The main reason is that Colefax was always cheap. Average P/E over those 12 years was 7 and average EV/EBITDA (ex leases) was 3.4. As current margins are also close or slightly above averages, there is no “mean reversion potential” in the stock.

Free Cashflow valuation

If we look at the Cashflows of the last 5 Years (2007-2011) we see the following picture:

2011 2010 2009 2008 2007 Avg
Oper CF AT 6,200 4793 3596 4647 6209 5,089
Delta WC -455 306 725 -815 -427 -133
Normalised OCF 6,655 4,487 2,871 5,462 6,636 5,222
Investing cashflow -2885 -1716 -1729 -1448 -1648 -1,885
Free CF norm 3,770 2,771 1,142 4,014 4,988 3,337
             
Depreciation 2,044 1,883 1,795 1,690 1,629 1,808
Share buyback 1,840 137 895 465 3,093 1,286
Dividends 486 412 592 604 600 539

On average, Colefax generated around 3.3 mn GBP free cashflow. I think it is clear that we should not assume a lot of growth going forward, apart from some potential cyclical recoveries which might be offset by cyclical down turns.

If we look how the “intrinsic” value developes using different growth rates and discount rates we can use the following table:

8% 9% 10% 11% 12%
0% 2.97 2.64 2.37 2.16 1.98
1% 3.39 2.97 2.64 2.37 2.16
2% 3.96 3.39 2.97 2.64 2.37
3% 4.75 3.96 3.39 2.97 2.64

We would need to assume a 3% growth rate under my “standard” discount rate of 10% to get a decent margin of safety. On the other hand, the downside seems to be limited to a certain extent as well. For the time being I would hesitate to use a low discount rate because of the difficulty to explain the relatively high operating leases.

So let’s make a quick summary:

– assuming no nominal growth at all, Colefax seems to be fairly valued using the standard discount rate of 10%
– if for some reason one could assume growth or the operating lease issue would be clearer, the intrinsic value could be significantly higher
– very positive is the shareholder friendly use of free cashflwo with significant share buy backs and dividends

For now, I think the stock is no screaming buy but definitely something for the watch list. For a semi-cyclical, housing related stock like Colefax I would like to see more “reversion to the mean” potential than what we see at current levels.

Autostrada & Italian stocks – lessons learned ?

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Nate Tobik from Oddball made the following comment regarding the “Autostrada Italian job“:

I own one Italian stock and stories like this unfortunately seem too common with Italian companies.
I think I actually fear the lack of Italian corporate governance more than the lack of shareholder rights in Japan. At least in Japan management is quite conservative, in Italy companies are run like little fiefdoms.
The more items I read like this the more I consider just liquidating my position and watching Italy from afar for now.

In the particular case of Autostrada however, I actually have a very different opinion.

Yes, I had to liquidate the position with a loss, but let’s look at the facts:

1. As quoted in the original post, the information that the majority shareholder had bought the first part of Impegrilo and might require Autostrada to buy the shares was available already in Decemeber, however not at Autostrada’s homepage but at Fondiaria’s homepage

2. It was also clear that Autostrada wouldn’t have the money to do this and might need a capital increase to finance this

3. However, not only I was suprised, but a lot of other market participants as well, as the loss of now almost 20% in the stock shows

So clearly, one conclusion would be that Italian Governance sucks and you should keep away from those stocks.

Another conclcusion however could be: In the Italian stock market, existing information seems not to be fully valued into share prices. So we clearly see here some inefficiencies. In this case it was negative information, but as well it could be positive information (see the sale of the LatAm sub at SIAS).

So my conclusion is slightly different:

A) Yes, there are corporate governance issues in Italy
B) However there are also market inefficencies which could (and should) be exploited
C) However, this reuqires an “active” approach, among others searching for ALL available information

For me, this experience is rather an even bigger motivation to research GIPSI (or PIIGS) stock in the future. In my expereince, inefficient markets provide much better oppoertunities than highly efficient ones.

Autostrada, Total Produce, Piquadro

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Autostrada

As mentioned yesterday, I sold my full Autostrada position at yesterday’s VWAP of 6.34 EUR per share, resulting in a loss of -7,88%. I will revisit Autostrada and especially SIAS, the operating subisidiary, once the cpaital increase is underway. Looking at EMAK and Unicredit, this could provide a more interesting entry point and compensating for the risk of unexpected transactions…..

Piquadro

Since yesterday, Piquadro trades below 1,50 EUR, which was my threshold for additional purchases. However, as I am currently much more pesimistic about China I will for the time being not purchase more Piquadro shares.

Total Produce

Total Produce issed preliminary annual fugures (thanks for the link to best_choice). Wexboy and Philipp O’Sullivan already commented on the results.

Positives were the turnaround in the Health foods segment, whereas the rest of the business slightly contracted. The “EHEC scare” was most likely contributing significantly to this decline.

What I don’t really like are the debt financed acquisitions. However the guidance for 2012 (7-8 cents a share) still leaves the company in the “dirt cheap” category.

Duell: Colefax Plc vs. AS Creation AG – part 1

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AS Creation is one of my core holdings. It is the clear market leader for wallpaper in Germany, however subject to an Anti Trust probe. Historically, AS Creation has produced rock solid returns. Currently there is some grwoth potential in the stock as they are building up a significant joint venture in Russia.

I was not aware that there is a UK listed company specialising in wallpaper as well. Interactive Investor Blog (highly recommended by the way) had a very nice summary post on Colefax Plc a few days ago.

So I thought it might make sense to compare the two companies “head to head”. I am not sure if Colefax and AS Creation are really competitors. Colefax sells most of its products in the US and the UK and only a relatively small part in Europe, whereas AS Craetion is more focused on Germany with some French wholesale activities.

Colefax has a market Cap of ~31 mn GBP, AS Creation around 62 mn GBP.

Let’s have a quick look at “traditional” valuation metrics

Colefax AS Creation
P/B 1.19 0.77
P/B tang 1.19 0.86
P/S 0.41 0.36
P/E 7.7 11.1
EV/EBITDA 3.31 4.75
EV/EBIT 4.6 9.1
Debt/Capital 0% 27%

Apart from Price/Book and Price sales, Colefax looks a lot cheaper than AS Creation. AS Creation has some debt on its balance sheet vs. Colefax which actually shows net cash. AS Creation used to have little debt or net cash as well, however the investments in the Russian JV have been funded with debt.

Let’s look at historical profit margins next:

Net margin  
  ACW CFX
1999 5.66% 4.67%
2000 5.75% 5.61%
2001 5.38% 3.77%
2002 5.23% 2.78%
2003 3.94% 3.05%
2004 5.00% 3.43%
2005 5.33% 4.13%
2006 6.68% 5.49%
2007 5.95% 5.20%
2008 5.06% 2.51%
2009 4.14% 3.43%
2010 4.55% 5.88%
avg 5.22% 4.16%

From 1999 to 2010, AS Creation managed to earn 1% more margins on average with a lower volatility than Colefax. So one could conclude that AS Creation at least historically had better pricing power than Colefax.

However if we look at ROE and ROIC, the picture changes completely:

AS Creation   Colefax  
  ROE ROIC ROE ROIC
1999 12.98% 6.90% 26.01% 17.82%
2000 14.87% 8.19% 30.92% 20.42%
2001 13.52% 10.39% 17.72% 13.15%
2002 12.42% 9.83% 12.83% 10.37%
2003 8.79% 7.74% 14.83% 12.81%
2004 11.53% 9.63% 17.55% 19.24%
2005 12.41% 11.05% 20.22% 18.01%
2006 14.93% 12.54% 25.34% 22.55%
2007 13.45% 10.42% 23.57% 26.94%
2008 11.36% 7.86% 9.07% 22.37%
2009 9.14% 7.97% 10.75% 16.55%
2010 9.73% 8.00% 18.85% 21.06%
avg 12.10% 9.21% 18.97% 18.44%

Colefax shows almost twice the returns on equity and invested capital compared to AS Creation. The absolute amount achieved by Colefax is remarkable as well, even if some of the difference could be explained by differences in UK and EUR interest rates.

Before jumping to the conclusion that Colefax is the cheaper and more capital efficient company, we should chekc 2 major items which may distort return on capital numbers and Enterprise Value (EV) multiples:

– pension liabilities
– operating leases

Pension liabilities:

Interestingly enough, Colefax seems to be a very untypical UK company. They have only a tiny defined benefit plan (DBO) with liabilites of 1 mn GBP. AS Creation’s DBO liablities are higher at around 7 mn EUR. So no big impact in both cases (remark: to be on the safe side, DBO should always be added to finanical debt)

Operating leases

This is more interesting. AS Creation only records 600 tsd EUR of Operating leasing liabilities whereas Colefax has around 25 mn GBP gross liabilites. If we look at the different components of assets required to run the busines we see some intersting numbers:

Colefax AS Creation
Sales 77,722 184,603
Non-Current Assets 7,282 50,770
Net WC 11,881 66,424
Operating Leases 25,258 600
 
NCA/ Sales 9.4% 27.5%
NCA+OL/Sales 41.9% 27.8%
Net WC/Sales 15.3% 36.0%
 
NCA + NWC+OL 44,421 117,794
in % of Sales 57.2% 63.8%
 
EV/EBITDA 3.31 4.75
EV/EBITDA OL 7.20 4.80
 
Net Debt+OL+pension/total Assets 47% 14.4%

Non Current Assets (ex Goodwill) at Colefax in percentage of sales is only a fraction of AS Creations non -current assets. However taking into account the (gross) operating leases, the picture suddenly shifts dramatically.

Both, EV/EBITDA and leverage ratios suddenly shift to AS Creations favour if one accounts for the operating leases.

Colefax still uses less capital in percentage of sales, but this is “only” due to much lower working capital requirements.

I don’t really understand why Colefax needs to rent such a large amount of land and buildings if they are not producing the stuff. Do they have a warehouse in Central London ?

Business models

One thing I forgot to mention is that the two companies have very different business models, despite both selling mostly wallpaper. Colefax only designs and distributes their products, whereas AS Creation creation really produces all the wallpaper themselves.

“Producing” wallpaper is basically only a specialised version of printing, with the big advantage that at least so far the internet has failed to come up with a paperless alternative in contrast to many other printing products.

Despite having outsourced production, Colefax employs 305 persons (fy 2011) for 77 mn GBP in sales whereas AS creation generates 172 mn EUR sales with 706 employees (2010).

The differences in the business model can be easily seen if we look at the major cost blocks compared to sales:

Colefax AS Creation
Staff cost 14,933 39,336
– in % of sales 19.2% 21.3%
Marketing, distribution & admin 36,345 27,166
– in % of sales 46.8% 14.7%
COGS 34,929 96,064
-in % of saless 44.9% 52.0%

Colefax needs to spend a lot more on advertising and administrative expenses than AS Creation. I am somehow surprised that Colefax seems to buy their merchandise cheaper in relation to sales than AS Creation has to pay for the raw material.

Staff costs are relatively comparable, which is interesting as well.

First results:

– Colefax “design and distribute” model is less capital intensive than AS Creation’s “full production” operations
– taking into account operating leases, the major advantage seems to be a lower amount of required working capital
– surprisingly, Colefax seems to require a lot of fixed investments if one includes operating leases
– however return on invested capital is still higher for Colefax despite slightly lower profit margins
– the higher voltality in Colefax profit margins ist most likely due to higher leverage through off balance sheet operating leases
– so far I can see no clear “winner” between the two companies. Both copmpanies have problems but also opportunities.
– Colefax might be a good diversification in order to gain exposure to UK and US housing recovery while AS Creation has growth opportunities in Russia and benefits from a still strong domestic market

In the second part I will try to come up with a valuation for Colefax Plc to see if it is an interesting investment for the portfolio.

Autostrada – the real Italian job !! (Holy Cow edition)

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Holy Cow !! (pardon my French..).

After I posted last week about a potential “Italian Job” at Autostarda / SIAS with the sale of the South American activities, the real Italian job now emerged:

Autostrada just released a “breaking news item” that they intend to:

– buy in total 30% of the Italian construction company Impegrilo from it’s parent and Insurance company Fondiaria at a total amount of 237 mn EUR
– The purchase price is above the current market price of Impegrilo shares
– additionally, they want to increase their capital by up to 500 mn EUR which based on the current market cap of 620 mn EUR is a lot.

I have to admit that this is really unexpected and hard to value. In any case, it completely changes the investment case and I am inclined to directly sell the shares or exchange them into SIAS.

One thing is a little bit strange: They say that they pay above market price (3.65 EUR for the Fondriaria part and 3 EUR from the parent company) and spend 237 mn EUR in total. However, those 120 mn shares are actually worth something like 312 mn EUR at the current price of 2.66 EUR for Impgegilo.

Edit:

I have just seen that Fondiaria actually issued a press release in December 2011 about the first part of the transaction:

Argo Finanziaria S.p.A., Immobiliare Fondiaria-SAI S.r.l. and Immobiliare Milano Assicurazioni S.r.l. announce the signing today of the acquisition by Argo Finanziaria S.p.A. of 8,040,000 ordinary shares of IGLI S.p.A., held by Immobiliare Fondiaria-SAI S.r.l. and Immobiliare Milano Assicurazioni S.r.l. and comprising 33.33% of the share capital of IGLI S.p.A.. As previously reported, IGLI S.p.A. in turn holds 120,576,293 Impregilo S.p.A. ordinary shares – 29.96% of the share capital with voting rights. The acquisition price of each IGLI S.p.A. share subject to the agreement was established at Euro
10.89572, based on the forecast balance sheet of IGLI S.p.A. at December 31, 2011, with each ordinary share of Impregilo S.p.A. attributed a value of Euro 3.65.
Argo Finanziaria S.p.A. may designate its subsidiary Autostrada Torino Milano S.p.A. to acquire the IGLI S.p.A. shares held by Immobiliare Fondiaria-SAI S.r.l. and Immobiliare Milano Assicurazioni S.r.l. .

So this was not exectly “brand new” news, but this potential “designation” was never mentioned anywhere on Autostrada’s website.

So let’s wait and see what the stock does tomorrow. Maybe I was the only one who did not know about this…..

Quick update: After a short suspension, the stock now trades down “after hour” at around 6,90 EUR from 7,10 earlier on the day. So I will try to sell them tomorrow with a limit of 6,75 EUR per share.

EDIT: I decided to skip the limit and sell at today’s VWAP without limit. Sell first, ask questions later….

Praktiker AG bond – doing the homework on German law and further thoughts

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“Homework”

My last post about Praktiker contained some mistakes especially about he required votes for any change in the provisions of the bonds. I have to admit that I didn’t read the paragraphs before. So let’s do the homework and look at the “Schuldverschreibungsgesetz – SchVG“.

One of the mistakes I made was the following:

Technically, they need at last the mojority of 50% of the bondholders in the first round. If this doesn’t work, in the second round, the majority of a minimum 25% of bondholders (effectively 12.5% plus one bond) could then agree to the changes on behalf of all bond holders.

The German law says however:

Beschlüsse, durch welche der wesentliche Inhalt der Anleihebedingungen geändert wird, insbesondere in den Fällen des Absatzes 3 Nummer 1 bis 9, bedürfen zu ihrer Wirksamkeit einer Mehrheit von mindestens 75 Prozent der teilnehmenden Stimmrechte (qualifizierte Mehrheit). Die Anleihebedingungen können für einzelne oder alle Maßnahmen eine höhere Mehrheit vorschreiben.

So this means the following: In order for the requested changes to become effective, 50% of the Bondholders have to participate in the first round and 75% of the particpants have to approve the proposal.

The same applies to a second round, if 50% particpation is not reached in the first instance, again, 75% of the partcipants have to agree to the proposal. So in an absolute worst case 18.75% of the bondholder could make the requested “hair cut” effective.

Further thoughts:

I still struggle making sense of the sequence of the events. However I came up with one (maybe unlikely) scenario:

I think no one is really interested in putting money into Praktiker as a “minority” investor. However, due to the CoC “poison pill”, a purchase of a majority would be very expensive. So in theory, a prospective buyer wants to buy as many bonds as at a discount as possible in ordert to lower his total purchase price.

The “offer” of cutting the coupon could therefore be a “tool” to get as many bonds at a discount to make a majority acquisition (i.e. through a highly dilutive capital increase) without paying out 250 mn EUR to the bondholders. For someone potentially owning both, a majority position in the shares and a large block of bonds, the cut in the coupon could be value enhancing.

It doesn’t change my approach (Don’t invest if you don’t know the motives of the players involved), but it makes good entertainment and hopefully a good learning experience.

Commerzbank HT1 tender offer – results

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Commerzbank just released the results for their tender offer.

Interestingly, all tendered securities have been accepted, so the described arbitrage strategy has worked out nicely for anyone able to exploit it.

What I found extremely interesting is the fact, that less than 15% of the UT2 were tendered but almost 60% of the HT1 bonds (584 mn out of 1 bn).

One of the reasons could be that the HT1 bond was owned by hedge funds anyway who had hedged the bonds at least partly with shares even before the tender.

For a small HT1 investor with a medium term time horizon, the outcome is actually positive. In my opnion, the reduced amount of outstanding bonds will increase the chance that Commerzbank will actually call the bonds in 2017, when they switch into floating rate and loose all benefits with regard to capital ratios.

Based on 68%, the potential yield if they are called at par in 2017 would be still 17.2% p.a. which I find is extremely attractive.

Praktiker AG Bond – Greek haircut anyone ?

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In December, I had speculated at what level the Praktiker bond could be interesting. At that time, the bond traded at 38%. During the 2012 rally, the bond almost doubled close to 70% before drifting lower to around 58% in the beginning of the week.

However yesterday Praktiker announced that they will ask the bondholders to accept a “voluntarily” a cut in the coupon from currently 5.875% to 1% in order to “participate fairly” in the burdens for a restructuring.

The bond didn’t trade today, but some broker quotes (without volume) showed prices 34/40 bid/ask.

The German press release says, that potential new investors want to see sacrifices form bondholders and that they are “investigating” a capital increase.

What I don’t understand is the sequence of actions. Those who gain the most from the restructuring have to “sacrifice” first. So the first step would be a capital increase and then asking the bond holders and other creditors. With the current sequeunce of events, Praktiker will most likely never issue a unsecured bond again after this.

As I said in the last post, there is no reason why bondholders should accept anything less than the conditions in the prospectus.

Of course this should be clear to the Management. So is this just a “token” announcement to fullfil some formal requirements or is something else going on ? I do not know.

Technically, they need at last the mojority of 50% of the bondholders in the first round. If this doesn’t work, in the second rounfd, the majority of a minimum 25% of bondholders (effectively 12.5% plus one bond) could then agree to the changes on behalf of all bond holders.

I tried hard to construct any “game theory” situation where this announcement makes any sense. The only one I came up was that management wants to improve the position of the new investors via the bondholders and that they don’t plan to go back to the bond markets for a long time. Addiitonally they have to be sure that a large block of bondholders is voting in their favour for whatever reason.

In any case, as I don’t really understand what is going on, I wil not be tempted to invest anyway, no matter what the price is. The old saying goes “If you don’t know who is going to be the looser, it is most likely yourself”. So for the time being, the senior bond doesn’t look like a winner.

But ut is still a very interesting learning experience for potential distressed debt investments.

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