Monthly Archives: March 2013

Deeply disounted rights issue watchlist: Severfield-Rowen Plc (ISIN GB00B27YGJ97)

UK based Severfield-Rowen is according to Bloomberg

Severfield-Rowen plc is an engineering and construction company. The Company designs, fabricates and erects structural steelwork, specialist claddings, and ancillary products. The Company also manufactures and markets a range of equipment for the meat and poultry processing industry through the subsidiary Manabo Limited. Severfield-Rowen operates primarily in the United Kingdom.

S-R came out in November with a profit warning, estimating Pre Tax profits of ~ 1mn GPB

By James Amott
Nov. 5 (Bloomberg) — Pricing pressure, protracted contractual settlements posing significant challenges, co. says in statement.
• Performances of U.K. businesses mixed
• FY pretax profit likely to be ~GBP1m
• Co. confident revamp will improve performance

Then, a little bit like in the Imtech case, the news got worse in January:

By Nadine Skoczylas
Jan. 23 (Bloomberg) — Severfield-Rowen says U.K. performance, further, “and materially,” hurt by cost overruns on 122 Leadenhall contract.
• Board intends to review current contract base, will provide update to mkt as soon as possible
• “In light of these recent developments,” board concluded that change of leadership needed to “re-establish confidence” with stakeholders
• CEO Tom Haughey standing down, leaving board with immediate effect
• Chairman John Dodds will assume role of CEO until new chief found; board “actively engaged” in search

Of course, after the CEO departure some more issues were identified and again, similar to Imtech, a capital raising was more or less dictated by the banks.

Last week then, Severfield came out with the preliminary 2012 numbers (Loss of 18.2 mn GBP) and the details of a deeply discounted rights issue.

At a current market cap of 70 mn GBPs, Severfield wants to raise ~50 mn GBP. In order to guarantee success (and to please the underwriting banks), they will issue new shares under the following conditions:

– 7 new shares for 3 old ones
– issue price 0.23 GBP (against 0.79 current price), so a discount of almost 70% !!
– the “ex date” for the subscription rights is March 19th, trading of the subscription rights will happen from March 19th to April 4th

The value of one subscription right should be at current prices:

(0.79-0.23)/((3/7)+1)=0.39 per share/subscription right.

Clearly, shareholders are not big fans of large capital increases.

The shareholders are the “who is who” of UK fund managers, the biggest are:

Prudential 13.4%
M&G 12.7%
Jo Hambro 11.3%
Aviva 10.1%
Threadneedle 6.7%

Interestingly, US Small Cap value firm Royce had built up a 3.9% stake end of last year, I guess they are not that happy now.

The stock price has been punished quite severely over the last months:

One can also see the different stages of hope and despair, especially in the last few weeks. I haven’t looked too closely at the company yet, but in my Boss model, the stock doesn’t look that bad. Interestingly, if one looks at the balance sheet, one might think that debt should not be such a problem, although they do have pension liabilities as well.

So for the time being no action, but an interesting candidate for my “deeply discounted rights issue” research.

Weekly links

Must Read: Warren Buffet’s annual letter to Berkshire shareholders 2012

Must Read (2): Charlie Munger transcript from the Daily Journal annual meeting

Turning around retailers is really hard: The Periodic Capitalist on JC Penney

Retailer turn around (2): Eddie Lampert’s annual letter to Sear’s shareholders

One of the best investment blog out there, Aleph Blog got six years old. Congratulations. If you don’t follow this blog, it’s your own fault.

Performance February 2013 – Filtering out the noise

February performance for the portfolio was again very satisfactory. The portfolio gained 2.5% against 1.4% for the benchmark (50% Eurostoxx, 30% Dax, 20% Dax). YTD the portfolio is up 11.3% against 4.7% for the BM.

Since inception (1.1.2011), the score is now 46.6% for the portfolio against 14.2% for the BM.

Portfolio as of February 28th 2013:

Name Weight Perf. Incl. Div
Hornbach Baumarkt 4.1% 8.3%
AS Creation Tapeten 3.9% 29.6%
WMF VZ 3.5% 60.5%
Tonnellerie Frere Paris 6.0% 79.1%
Vetropack 4.5% 8.1%
Total Produce 5.4% 48.3%
Installux 3.0% 12.1%
Poujoulat 0.9% 6.4%
Dart Group 3.7% 97.5%
Cranswick 5.1% 17.5%
April SA 2.9% 23.3%
SOL Spa 2.4% 8.0%
Gronlandsbanken 1.2% 41.1%
KAS Bank NV 5.0% 29.3%
SIAS 5.6% 51.2%
Bouygues 2.7% 12.5%
Drägerwerk Genüsse D 10.2% 166.4%
IVG Wandler 4.4% 13.8%
DEPFA LT2 2015 2.7% 53.0%
HT1 Funding 4.6% 48.5%
EMAK SPA 4.1% 21.0%
Rhoen Klinikum 2.3% 9.0%
Short: Focus Media Group -0.9% -3.5%
Short: Prada -1.1% -22.0%
Short Kabel Deutschland -1.0% 3.6%
Short Lyxor Cac40 -1.2% -8.2%
Short Ishares FTSE MIB -2.0% -5.4%
Terminverkauf CHF EUR 0.2% 6.3%
Tagesgeldkonto 2% 11.8%  
Value 46.6%  
Opportunity 47.4%  
Short+ Hedges -5.9%  
Cash 11.8%  

Performance drivers were Tonnelerie (+15%), Buzzi (+13%), Draeger GS (+10%) and Gronlandsbanken (+13%). Underperformers were April (-11%) and SIAS (-6%). I find the Buzzi performance especially interesting, it seems to be that the market has realized that they are much more an international than an Italian stock.

The only notable change in February was the new -1% short position in Kabel Deutschland. Additionally, I trimmed back the Draeger Position, but again it increased above the 10% threshold.

At the moment, a lot of “preliminary” 2012 numbers are coming in but I find it hard to base any decisions on those preliminary numbers. I prefer to wait for the annual report in order to really see how the companies have developed.

Comment: “Filtering out the noise

If you follow the financial media, the world seems to be jump from one life threatening event to another. “Fiscal cliff”, vote in Italy, “the sequester”, speech of Japanese BOJ chief; Bernanke speech etc. etc. The media wants to promote the picture that thw whole world is “walking on a tight rope” and if any one event goes wrong, doom is ensured. As a result, people are “glued” to their TV sets, Bloombergs etc. in order not to miss the one “big event” which will change it all.

In reality, in my opinion this is all bullshit. The world doesn’t stop if Bersani gets elected or Monti or Berlusconi or if Bernanke is changing the order of words in his statements. The big problem with all the “sensational” media reporting is in my opinion that the “average investor” is driven into bad and sometimes fraudulent investments.

In Germany for instance, despite the relatively good economic background, many people are scared to death about financial markets and the inevitable hyper inflation, that they are easy prey for all kind of scams, like the recent “S&K” scandal or schemes like WGF. The basis theme of those scams is always the same: The world is going to end soon and the only way to protect is to buy “real assets” like precious metals or real estate. Many people are so scared that they forget to make even basic due diligence. The same applies to the mad rush of people in large German cities to buy on a highly leveraged basis residential properties at price level where rent doesn’t even cover depreciation.

Often, i try to discuss this with people but they think I am a madman if I tell them that most of my money is in stocks. What the “man on the street” doesn’t seem to notice is that a stock in a solid company is a very “real asset”. And yes, the price may fluctuate but good companies (or cheap companies) will create real value over time no matter what happens.

The other extreme is of course the permanently bullish sell side information stream, but that is a topic for another comment.

But I admit, it is very hard not to be influenced by the constant stream of mainstream media news. Some of the “tricks” I try to handle it (and filter out the noise) are the following:

– follow only blogs of people who have a long term horizon (see blogroll)
– focus on media appearances of proven long term thinkers (Buffet, Chanos)
– actively ignore media appearances of sell side analysts, market timers etc.
– don’t watch Bloomberg television, cnbc etc.
– take time to read investment classics, biographies, economist articles etc.

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