Monthly Archives: March 2013

Severfield-Rowen – Follow up deeply discounted rights issue

A few days ago, I mentioned UK based Severfield Rowen as a potential interesting “deeply discounted rights issue” special situation.

Problem is that I don’t know much about the company. So the problem is always: How do you start looking at a new company ?

That’s when I remembered a very good post of Geoff Gannnon a few days ago:

I recently mentioned something in an email that I’m not sure I’ve said before on this blog. I always read the newest and oldest 10-K for a company when I start analyzing it. Reading the oldest 10-K gives you perspective.

I have to confess that normally I would start with the latest report and then work my way back, but the approach of Geoff really makes a lot of intuitive sense to me. So why not try with Severfield-Rowen ?.

The oldest annual report to be found on S-R homepage is the one from 2000.

So let’s compare some key figures from 2000 against 2011:

The difference couldn’t be bigger. In 1999/2000 we have a completely unlevered company with OK margins but very nice ROE/ROCE because of a quite efficient capital/sales ratio.

The 2011 company however looks very different. Sales have doubled, but lower margins, significant goodwill and debt including a growing pension liability reduce ROE/ROCE into low single digits.

So what happened in between ? Well of course, acquisitions:

2005: Acquisition of Atlas Ward, however this looked like rather a small fish at a bargain price

But then the big bummer:

2007: Acquisition of Fisher Engineering for a whopping 90 mn GBP

Fisher Engineering seemed to have been a Northern Ireland based company at least, the seemed to have paid partly in new shares according to this article:

Severfield-Rowen has agreed to buy AML for a total consideration of approximately £90m, of which £36.6m will be satisfied by the issue of 1,750,000 new shares at approximately 2,089 pence each with the balance in cash.

The rational given now f course sounds like a big joke, but at that time Ireland was still “hot” (for another 6 months or so:

The Fisher acquisition will extend Severfield-Rowen’s leading market position in the UK and give Severfield-Rowen a stronger presence in the growing Irish steel fabrication market.

In 2010 finally, they started a JV in India, but more on that later.

SO let’s look at 2006 vs. 2007 :

We can see in 2006 a very very healthy company with lots of net cash on the balance sheet, no goodwill nothing. In 2007, profits still went up but didn’t really compensate for the increased invested capital.

Interestingly, 2008 and 2009 were quire ok, however in 2010 S-R was hit by the “Wile E. Coyote” moment:

I spare myself the details, but i think this table is quite telling:

2007 2008 2009 2010
United Kingdom 289.6 314.6 325.4 260.5
Republic of Ireland and mainland Europe 8.9 79.5 23.2 3.6
Other countries 0.9 2 0.8 2.5

The access to the “Fast growing Irish market” for which they paid 90 mn GBP in 2007 had completely “vaporized” in 2010. I have to confess that this seems to be one of the worst timed acquisitions I have seen in my life.

interestingly enough, the still carry proudly the whole acquisition goodwill on their balance sheet. I wonder how the auditors sign this on a subsidiary without sales ?

The rights issue

Propectuses for rights issues are a very good ssource of information, the one from S-r is no exception.

Especially the following paragraph makes clear, how severe the problems are:

Severfield-Rowen will be in breach of one or more covenants under the Existing Facilities on 18 March 2013, being the date of the General Meeting. A breach of any one of such covenants would be an event of default under the Existing Facilities entitling the Group’s lenders to demand immediate repayment of all outstanding amounts and cancel the facilities. As at 14 February 2013 the Group had net financial indebtedness of £44.0 million. In the event that Shareholders’ do not vote in favour of the Resolution and the Group’s lenders demanded repayment of all outstanding amounts and cancelled the Existing Facilities on 18 March 2013, the Group would have insufficient funds to repay the amounts outstanding. The Group would then immediately need to find alternative sources of funds to replace the funds that would have been made available pursuant to the Rights Issue and the Revised Facilities. The actions that the Group would then seek to take to make up the shortfall in its funding requirements (which the Directors believe would need to be pursued simultaneously and immediately), include seeking to negotiate a new facility agreement with its lenders; seeking to obtain a sufficient amount of alternative funding from other sources; seeking to dispose of some or all of its assets or businesses; and/or seeking to find a purchaser of the entire Group. The Directors are not confident that any of the above actions will be achievable. In the event that the alternative courses of action set out above fail, the Group
ultimately may have to cease trading at that time. As a result, Shareholders could lose their investment in the Company.

So it is pretty clear: A failure to get the rights issue approved will lead to a direct insolvency of the company.

Quick valuation exercise

We have seen that the business of S-R is clearly very cyclical. At the moment, the UK and S-R are clearly at a low part of the cycle. Also, years like 2006 and 2007 will not be repeated any time soon.

Over the full 1999-2012 cycle, S-R has an average net margin of 3.7%. The exactly same average is the result of the “Normal” years, taking out 2007-2009 and 2012.

So if S-R gets back to ~300 mn GBP sales, that could result in 11.1 mn GBP normalized earnings. After the capital increase,S-R will have 290 mn shares outstanding. This results ~ 3.7 cents normalized earnings per share or a “fair value per share” after the capital increase of around 37 pence.

In order to make this interesting, the price should be definitely cheaper than that, so I would only buy below 25 pence or so.

Stock price

The rights have been split of on Tue, March 19th. The stocks are trading now around 0,37 GBP


Looking at Severfiled-Rowen in 1999 and 2011 is like looking at two different companies. Especially the misguided acquisition in 2007 lead the company in deep trouble. However, despite the very significant decrease in the share price, S-R is still not a real bargain due to the massive dilution of the rights issue.

Only if one believes in a short term recovery of the UK economy, S-R would be a “buy” right now. So for the time being “no action”.

Gerard Perrier – Follow up (Acquisition history)

In my initial post, I was actually quite sloppy. As reader al sting pointed out in the comments, they actually made a couple of acquisitions over the last years:

– 2005: Ardatem
– 2007: Maditech (?)
– 2011: SERA

Let’s look for first at Ardatem,, the service comnpany specialised on nuclear facilities. In their 2005 annual report they mentioned the acquisition as follows:

24.- Evénements postérieurs à la clôture du bilan. Acquisition de la société Ardatem le 4 janvier 2006, par la SAS Soteb : cette société de prestations de services intervient dans le secteur du nucléaire et réalise un chiffre d’affaires de l’ordre de 5 millions d’euros pour une marge nette d’environ 4% en 2005.

So in beginning 0f 2006, when they bought it, Ardatem had sales of 5 mn EUR with a margin of 4%.

In 2007, they bought “Maditech” which complemented the Ardatem acquisition and seems to be now als part of the “Energy” segment. Maditech had sales of 3 mn EUR at the date of the acquisition.

In 2011 then for comparison, the “energy” segment had sales of 28 mn EUR and an operational result (before tax) of ~2 mn EUR. That is quite a good developement 4-6 years. So yes, G. Perrier did acquire companies, but most of the growth happened after the acquisition !

Seirel was acquired in 2007 as well, the following can be found in the 2007 report:

Le chiffre d’affaires de la SAS SEIREL AUTOMATISMES, contrôlée indirectement est de 3 887 367euros (exercice de 6 mois) contre 6 307 313 euros l’an passé (exercice de 12 mois) et le résultat de 134 426 euros contre 285 731 euros l’an passé.

In the 2011 report this looks like this:

Le chiffre d’affaires de la SAS SEIREL AUTOMATISMES, contrôlée indirectement est de 7 551 587 euros contre 6 471 226 euros et le résultat de 491 215 euros contre 229 896 euros l’an passé.

Again, within 4 years, the doubled sales and even managed to increase profit 4 times. Seirel looks like it was a “distressed buy”.

Overall, the recent acqusition startegy looks quite successful. They seem to buy opportunistic and are able to put those companies onto a growth path. This makes me worry less about their cash pile. I think having cash and then being able to move quickly can be a great advantage. Especially now that maybe more companies are struggling in France, G. Perrier could make very interesting deals.

I will use the current weakness of the stock to buy some more below 35 EUR.

Cyprus bank deposit guarantee scheme – fact checking

Yesterday and today, the press and most of the blogs I follow are full of comments on the Cyprus Deal.

Some examples:

Pragmatic Capitalism, Naked capitalsim, self evident

The summary is clear:

“Insured” bank deposits are going to be confiscated because of the evil (Germans/IMF/ECB). This is a catastrophe because no one will believe in bank deposit insurance any more.

Fact checking:

What I find extremely interesting is the fact that no one actually bothered to really look at the so-called “bank deposit insurance” in Cyprus. The Central Bank of Cyprus has an English language description of the scheme on their homepage.

In the beginning it sounds like a “normal” deposit guarantee:

Deposit Protection Scheme (DPS) was established in September 2000, and operates since then, in accordance with Article 34 of the Banking Law of 1997 as subsequently amended, and the Establishment and Operation of the Deposit Protection Scheme Regulations of 2000 to 2009. In accordance with these Regulations, a Deposit Protection Fund has also been established which operates as a separate legal entity administered by a Management Committee.

The purpose of the DPS is to provide protection to deposits and compensate depositors in the event that a member bank is unable to repay its deposits. The DPS covers deposits denominated in all currencies.

But then this:

The maximum level of compensation, per depositor, per bank, is €100.000. This limit applies to the aggregate deposits held with a particular bank. When calculating the amount of compensation payable to a depositor, any loans or other credit facilities granted by the depositor’s bank are set-off against the deposits. Any counterclaims that the bank concerned may have against the depositor in respect of which a right of set-off exists, can also be set-off.

I have to admit that I didn’t check all European deposit guarantee schemes but setting of loans against your deposit first looks unique to me. So in practice this means if you have a 300 k mortgage from your bank and for some reason a deposit of 100k at the same bank, your guarantee is worth nothing/nada/niente/nichts.

So the proposed deal of getting a 6.75% haircut on deposits irrespective of outstanding loans will be a much better deal for many people than being the “beneficiary” of this so-called “deposit guarantee”. Maybe that is one of the reasons they did this ?

It also seems to be that the word “guarantee” means something different in Cyprus than in the rest of the (finance) world.

Book review: “The success equation – Michael Mauboussin”

The subtitle of the book claims the following: “Untangling Skill and Luck in Business, Sports, and Investing”

As being able to distinguish between luck and true skill is quite an important issue especially in investing, I was really curious to read the book.


Mauboussin really does a good job to look at this from several perspective, like sports, business and investing and how to place this activities on what he calls the “luck – skill continuum”.

The relationship between luck and skill then is important for instance if you want to test something statistically. The larger the part of luck, the more observations you should use to make statistical assumptions. So Buffet’s famous “investors of Graham and Doddville” would not qualify as statistically relevant in this regard, because only using a handful of examples for an activity with a lot of luck involved is not significant.

Another implication is that when you try to assess mean reversion, activities with a lot of luck involved will move quicker back to the mean compared to activities with mostly skill.

He mentions also some interesting aspects with regard to strategy. As an underdog you might prefer to complicate a certain competitive situation, as this increases the potential “luck” percentage in outcomes. Very simple games with uneven opponents do not leave a lot of room for luck.

Investing is for the author an activity with a lot of luck involved, at least in the short-term. The best mitigation in his opinion is a coherent investment process.


All in all it is a quite interesting read with many interesting stories. However, I have one big “quibble”: The day after reading the book, I did hardly remember any specific details. I had to kind of speed read again to actually being able to write this summary.

So for some reason, the content of the book seems not to stick with me. I had the same problem with “Think twice”. Well written book, but nothing that really sticks. Also, I was a little bit disappointed that as an investor, you don’t gain a lot of insight.

I am not sure why this is the case, maybe Maubousin should have concentrated more on specific areas instead of jumping between sports, management and investing.

So if you want to have a well written book about diverse topic you might consider buying it. If you are looking for a book that might qualify as an investment classic, save your money.

Quick update Gronlandsbanken (DK0010230630) – 9% Dividend yield & elections

Since the first post about Gronlandsbanken last year, the stock developed quite nicely so far, around +33%.

Part of that positive developement can be clearly attributed to the very positive 2012 annual report.

The first sentence of the report sets the tone:

Record Profits at The BANK of Greenland in 2012 – Return on Equity of 17.9% p.a.
Throughout the years of the financial crisis, The BANK of Greenland has managed a consistent series of fine results. Therefore, the bank is satisfied with the fact that the 2012 result was the best in the bank’s history. The profit on ordinary activities was DKr. 135 million – an increase of 72% as compared with 2011.

Earnings after tax were ~51 Kroner per share, resulting in a Trailing P/E of 12. Surprisingly for me, Gronlandsbanken decided to almost double the dividend from 30 Kroner to 55 Kroner, providing a “juicy” 8.8% dividend yield based on current share prices of 625 Kroners.

The report is again a very good summary of the situation in Greenland. They also mention the potential big projects and as a bank of course the recommend the following:

These major projects are a unique opportunity. It is crucial to take advantage of them.

Now comes the interesting part:

3 days ago, Greenland elected a new Government. And, surprise surprise, the opposition party did win, with Aleqa Hammond becoming the first woman to become prime minister.

In the press, the new Government is often cited as “Anti Mining”, in my opinion however they only difference is that they want to receive higher taxes and make sure local people get work too. For the mining companies, this means of course higher costs, but for local businesses (incl. Gronlandsbanken) this could mean that more money stays in the country which would be very good.

An additional interesting aspect was that the old government was against rare earth mining, because that stuff contains Uranium which was a no go for the old president.

There is also a quite recent article in the Economist which kind of confirms that view.

So all in all I think the Bank is on good track and the nice dividend will maybe attract further investors. The change in Government should be good for local businesses going forward. I have therefore increased the stake by 1% of the portfolio (2000 Shares) up to a 2% position at a share price of ~630 Danish Kroners, representing the VWAP from March 8th to March 14th.

Short updates: Rhoen, KPN, HT1 Funding

A few short updates which i think are worth mentioning in a post:

Rhoen Klinikum

One of my “special situations”. My original thesis behind this was that it is a solid company with a lot of interested suitors. Just today, the Fresenius CEO stated in WSJ Germany that they are still interested.

So this is still a solid, uncorrelated speculation that something could happen any time.

As one part of their capital raising effort, KPN issued two Hybrid bonds last week, 1.1 bn EUR at 6.125% and 400 mn GBP at 6.875%. According to Bloomberg, both bonds seem to have a “change of control” clause, meaning the bonds have to be paid back if someone becomes majority shareholder of KPN. This is quite uncommon for hybrids and looks a little bit like a “poison pill” against Carlos Slim.

Additionally, I found that rating review from Fitch (via Reuters) quite interesting.

KPN is facing some headwinds in the Netherlands. A fourth entrant plans to set up a 4G network (Tele2) and there seems to be a potential 2 bn liability from a subsidiary called Reggefiber, where KPN currently seems to have a 41% share but will soon have the majority.

Commerzbank HT1 Bond

Commerzbank just released news that they plan to increase share capital by 2.5 bn EUR and paying back their silent participations. This is not so nice for shareholders, but very good for HT1 holders as more equity is now “below” the subordinated capital, reducing downside risk.

So not surprisingly, the price of the HT1 bonds increased significantly.

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