Monthly Archives: September 2013

Some links

MUST SEE: 30 minute video with and from Ray Delio about the “economic machine”.

Damodaran with a 4 item checklist in order to identify potential value traps

The Brooklyn Investor explains, why one should concentrate on businesses, not on stock market levels, tapering etc.

A potential arbitrage opportunity with US “forever stamps” ahead of an announced price increase

Punchcradblog on Blackbaud, a software company with an interesting business model, which nevertheless is too expensive. Very nice write-up and way of analyzing a company.

EGIS minority buy out – What’s next ?

Only 4 months after I bought EGIS for the portfolio, majority owner Servier has offered (for me totally unexpected) 28.000 HUF per share to minority shareholders.

This is roughly a 40% gain in 4 months, so quite oK, although in my opinion, the stock should be worth more especially compared to peers. The current offer is around 8.3 x 2013 earnings (ex net cash) and 1.1 x book value.

That’s what I wrote back then:

I think one doesn’t need to be to sophisticated here. A decent company like EGIS with a solid, non cyclical business should not trade at a P/E of 5 and P/B of 0.8. A fair price in my opinion, taking into account some issues from above should be a P/E of 10 or 1.5 times book, which would be still significantly below western peer companies.

Now the problem is the following: Acceppt the offer (and/or sell) or wait for a better offer ?

In most German cases I had so far, the first offer was ususally followed by a better offer and/or much higher stock prices, such as AIRE KgAA and Draegerwerke Genußschein.

In the EGIS case, Servier communicated the following:

– there will be no second offer
– they will ask the AGM to delist the company after the offer is settled

After googling a little bit, I found this from Lawfirm Weil (written in 2005):

In general, a simple majority of the votes is required to adopt a decision at a shareholders’ meeting. However, certain fundamental decisions (eg changes to the charter, merger or winding-up of the company, listing/delisting of shares) require a three-quarters majority of the votes. The charter may also impose supermajority voting requirements for decisions which, by law, could be adopted by a simple majority.

A 75% majority of votes is most likely relatively easy to achieve, unless an activist fund steps in and buys a large anough stake. I don’t have any clue how likely that is and how chances are in Hungarian courts.

So all in all, I guess the best will be to accept the offer and try to find another place to invest in. Somehow the number of cheap shares seem to become smaller and smaller….

Trilogiq SA (ISIN FR0010397901) – Another of those hidden French champions ?

DISCLAIMER: The author might own the stock already before the release of this post. The stock discussed is very illiquid. Please do your own research. This is not a recommendation to buy or sell or anything.

As many readers might have figured out, I am currently looking a lot at French stocks. I already had mentioned in my August review that I am building up a stake in a company which I didn’t disclose back then. Well: here is the company: Trilogiq SA.

If one looks at Bloomberg, the description is quite short and meaningless:

Trilogiq SA manufactures a wide range of flow racks.

However, looking at the Corporate Website is much more revealing:

Trilogiq is manufacturing a modular system of flexible components which supports the material handling at an assembly line. The underlying philosophy is based on the Japanese “Kaizen”. More on that later.

The company went public in late 2006 at a price of EUR 28.59 per share, a level the share hasn’t seen since as the stock chart clearly shows:

Valuation:

Traditional value metrics look OK, but not super cheap (at 18,15 EUR) :

Market Cap: 68 mn EUR
P/B 1.46
P/E 12.0
P/S 1.1
Div. yield 0%
EV/EBITDA 6.0
Debt: Net cash of ~5 EUR per share

So why do I think the company is interesting ? Well, if we look into the last annual report, they seem to do something right:

Net Margin 8.6%
ROE of 12.2% BUT: ROIC (ex cash) is 20%

ROE was higher in previous years, but adjusted for Cash, ROICs are relatively constant at 20%.

EPS DIV ROE ROIC
29.12.2006 0.87 #N/A N/A 25.6% 25.7%
31.12.2007 1.48 #N/A N/A 29.0% #WERT!
31.12.2008 1.45 #N/A N/A 22.1% 19.7%
31.12.2009 1.64 0.50 20.7% 19.9%
31.12.2010 1.75 0.50 18.3% 18.7%
30.12.2011 1.50 0.50 12.6% 23.7%
31.12.2012 1.68 0.00 12.4% 20.7%

So this now gets interesting: We get a company with a (cash adjusted) PE of 8 and an ROIC over the last 7 years of around 20% and the company is growing. This is very good and hard to find these days. On top of that, the company is growing quite nicely and : only around 15% of the business is in France, 85% is “Export”.

So in current times, this definitely is a good reason to investigate the company further.

Business model:

In such a case as Trilogiq, where I do not know the company really well, I usually try to figure out what they are doing in more detail in the next step. Here, fortunately, we can still find the (French) IPO prospectus on Trilogiq’s web site

General Remark: IPO prospectuses are always a very good source for information about the business model, competitors etc. So if one can get hold of it and it is not too old and outdated, this is usually the single best source for such information. Much better than annual reports, because the risks are usually disclosed quite extensively.

The founder of the company worked as an engineer at Renault and had the task to study Japanese car manufacturing. He then started out on his own, producing equipment to improve manufacturing efficiency for Renault and Peugeot.

The basic “philosophy” is to have a lean flexible production process which avoids unnecessary material, handling steps, heavy machinery, large quantities etc. Among others, it is advised to transport small amounts only within the assembly lines, avoid unnecessary distances etc etc.

Now comes the interesting part: Trilogiq itself does not only provide the tools, but is offering the full consulting service as well. So a company calls Trilogiq and they start with simulating the production process on a computer (CAD) and then optimize it using their various tools. They will then go on site and then implement the stuff including full project management etc.

So in essence, Trilogiq rather seems to be a specialised consulting company with a physical product than your typical car parts supplier. This in my opinion also could explain the rather high margins which are quite unusual in the automobile industry.

A few videos which explain the principles:

(company movie)

Some product presentations

In order explore this thesis a little bit more, let’s look at two ratios:

– What amount of raw material etc in relation to sales does Trilogiq show against other companies ?
– What amount of sales do they generate per employee ?

Lets look at some companies, I have chosen 2 car parts companies + 3 of my portfolio companies as comparison:

material cost/Sales Sales per Employee (K EUR)
 
Trilogiq 43% 350
     
PWO 55% 33
Sogefi 56% 15
 
Poujoulat 59% 73
Installux 48% 198
Thermador 60% 389
     
G. Perrier 26% 90
 
Accenture   295
IGE 22% 284

The result is quite interesting. PWO and Sogefi are 2 “typical” car parts manufacturers. Material cost is more than 50% of sales, sales per employee are relatively small, so implicitly this is rather pretty “low tech” work.

If we look at my Portfolio companies, only Thermador has a similar per employee sales number but this is normal as it is primarily a trading and logistics company. Poujoulat for instance needs more material than Trilogiq as well as Installux and even Installux only manages 2/3 of Trilogiq’s sales per employee.

Just for fun, i also listed software company IGE + Xao and Accenture. Interestingly those companies generate similar sales per employee volume.

While this is clearly no scientific proof, I think it is however fair to say that Trilogiq is not your typical “manufacturer” but rather something different. It is no trading company either so I think my thesis that it is a kind of consulting company with a physical product might not be unrealistic.

Another interesting aspect shown on page 33 of the IPO prospectus is the aspect that they do create significant recurring revenues out of their products. According to this, they have a 4 year cycle. If they sell an amount of 100 in the first year, they will expect 20 maintenance revenue in year 2 and 3 and then (if renewed) another 40 in year 4.

Competitors:
They only consider 2 companies as direct competitors: Fastube in the US and Yakazi from Japan, both privately owned. As Trilogiq is currently expanding quickly in the US it seems like Fastube is maybe not the strongest competitor. They don’t seem to be active in Asia, maybe too much respect versus the Japanese “master” like STarbucks and Italy ? Of course, the “traditional way” is a competitor too.

Why is the stock cheap ?

– One reason is clearly the non-existent financial communication. Minimalistic reports in French only, only a few small research houses cover the stock (5 according to Bloomberg, only 2 in 2013). Interestingly, in 2007 and 2008 they still made some additional press releases about large new orders, but from 2009 on they only released their reports and nothing else
– they only paid a dividend once (50 cent in 2009). Since then they are accumulating cash.
– data for the company for instance in Bloomberg is not very accurate, 2011 and 2012 numbers are not updated. TheyWon’t show up in many screeners
– it is a French company and sentiment is still bad for France
– they are viewed as an “average” car parts producer

Now it gets interesting: Shareholders

No reliable data in Bloomberg. According to them, French value fund Amiral Gestion owns 2.13%.

According to this research report however, the founder still owns 77%, but Amiral Gestion owns 13%. Leaving a tiny free float of 10%. Amiral in my opinion is one of the better European Value companies and maybe the best in France.

Shareholder activism:

AMIRAL, actually has increased its stake to 13,55%. On the general assembly a few days ago they went kind of activist and demanded a special dividend of 3.75 EUR per share.

As the owner most likely seems to have been present at the AGM, I guess this was voted down, but nevertheless it clearly shows the strategy Amiral is running here. They are in for the long run and will press for some form of payout, be it dividend or share buy back.

In my opinion this is also an interesting kind of “insurance” against any unfriendly behaviour from the CEO and majority owner, as Amiral is not a small fund. With their 13% stake (which is more 56% of the free float) Amiral is automatically committed for the long-term as it will be extremely hard to get out of this stake via the rather illiquid market.

I found this interview with the founder and CEO (in French), where he explains the company and mentions that taking the company private would be worth a consideration….

There is a quite active discussion (in French) on Boursorama about Trilogiq and someone is even claiming that the special dividend was approved, however I am not sure that this is the case.

France / Portfolio concentration

As some readers might recall, I sold my Bouygues stocks when I bought Thermador because I thought that my exposure to France is big enough. With Trilogiq, I don’t have this problem. trilogiq has only 15% of its sales in France and is currently expanding rapidly outside France, especially in the US. So I don’t see an issue here.

Interestingly, french sales haven’t improved much over the past years, the growth came almost exclusively from outside France.

Summary:

In my opinion, Trilogiq is a very interesting company and might even be a true “Hidden champion”. For me it looks more like a consulting company with a physical product than a manufacturer which helps to explain the good margins and 20% ROICs.

There are clear reasons why the company is cheap compared to the quality of the business, especially the negligence of shareholders so far. However, with Amiral having built up a 13% stake, this could improve.

Nevertheless it shares many characteristics I like in a stock:

– founder/owner majority owned
– relatively illiquid and negelected from investors/analysts
– business model not too easy to understand
– negative headline news for home country

In my opinion, the company is worth much more than its current price. Conservatively I think if this would be a German or UK company, People would pay 15x earning plus the cash which would be 25 EUR +5 EUR or 30 EUR per share.

Trilogiq is therefore a clear “buy”. For the portfolio I assume that I was able to build up a position of 20000 shares at 18,27 EUR per share which is roughly 50% of the trading volume since July 1st and represents a 2.3% allocation of the portfolio.

Some links

Investor letter of a very good value fund: RV Capital including short summaries on all the holdings (among others Tonnellerie, Hornbach, Bechtle, Atoss etc.) as well a thoughts on value investing and technologies and circle of competence.

Always worth watching: Jim Chanos on Bloomberg TV. Looks at companies which do a lot of acquisitions

Interesting special situation analysis on Prime Office REIT AG

Nice NYT article about a 99-year-old investor, Phillipp L. Carret. He was even a broker client of Buffet’s father Howard.

Must read: Detecting accounting fraud in Asia

Potential Level 3 mistake: CIR SpA

Two months ago I looked briefly at CIR SpA ( or more precisely an analysis on beyondproxy), the Italian holding company which had the following special feature:

CIR carries a €564 million liability that has been booked as “Borrowings”. In reality, this is not borrowed money – it is a legal reserve for an infamous legal proceeding that has been making headlines in Italy for the past twenty years: the so-called ‘Lodo Mondadori’.

At that time the share price was around 95 cents. According to my analysis, the fair value of the shares at a 480 mn settlement would be around 1.12 EUR per share.

I wrote the following:

Although I like the unique aspect of this special situation, the potential upside is NOT attractive enough to justify an investment at current prices.

I will keep this on the radar but I would not invest above ~0.70 EUR. I would need 50% upside in order to justify the risk of the underlying companies which are clearly struggling.

Yesterday, the Italian top court finally decided that Berlusconi has to pay 500 mn.

The CIR stock then jumped to a price of 1.20 EUR,which over this 2 months would have been a nice gain of over 25%.

The question I am asking myself is: Was this a typical level 3 investment mistake, analysing a company but rejecting it and maybe even forthewrong reasons ?

If we compare the CIR share price with the two listed subsidiaries SOGEFI and Espresso, we can clearly se that the CIR share reacted mostly to the ruling, this wa not a fundamental revaluation o the businesses, although Espresso performed similar:

I am especially surprised that based on the stock price reaction, this positive ruling doesn’t seem to have been priced in at all or to a very small extent.

So looking back I think I made 3 mistakes:

– I might have overestimated the efficiency of the Italian stock market. I thought a lot of that would be priced in already.
– I could have “isolated” the special effect maybe with a FTSEMIB short position
– requiring a 50% “margin of safety” for such a short term catalyst was maybe too much

Additionally, I think it is important to look at the special situation as special situation first. It might be a mistake to apply both, my usual value criteria plus the “probabilty” approach to special situations.

A few more thoughts on Rhoen Klinikum

In my recent post, I had made a very quick analysis how I looked at the news that Rhoen now sells 2/3 of their business to Fresenius in order to sidestep the blocking shareholders.

That was my conclusion:

So for the time being I will not sell the shares and watch what is going to happen. At some point in time, the stub itself coul dbe an interesting situation in itself, as it will most likely drop out of the index etc. Sow I guess I will sell before the extra dividend is actually paid.

Let’s move a step back before that:

Before we knew that Rhoen wanted to sell and Fresenius wanted to buy at around 22,50 EUR (old offer). Initially, before the Fresenius offer, the shares traded at ~15 EUR, which I would define the “undisturbed price” without any control premium. Until last week, the market seems to have valued a rather low probability for the deal going through.

Very simply, the implied probability was around (17,50-15)/(22,50-15) = 1/3 or 33%.

Now a deal seems to be much more likely, but it is unfortunately not as “clean” as the old deal. Instead of getting only cash, one now expects a certain amount of cash plus a remaining “stub”. On the other hand,”all in” the price seems to be even slightly better as the old 22,50 EUR.

So why is the share now trading only at ~19 EUR ?

There are three explanations for this in my opinion:

A) uncertainty the deal is NOT going to happen
B) what will the remaining company (“stub”) be worth ?
C) the effect of the withholding tax on the special dividend

In my opinion, the withholding tax is not very relevant. If I buy now at 19,15 and I pay the withholding tax next year, I can make a “wash sale” (sell at a loss and buy again) to set off the tax. For institutional investors this is no issue anyway.

I am also pretty sure that the likelihood of the deal happening is very high. After the fiasco two years ago, Fresenius and RHoen will have put a lot of effort into this deal. So I would think that there is at least a 90% probability that the deal is happening.

This leaves us with c): People don’t seem to like being stuck with the “stub”. If we look into the Rhoen 6 month report, we can see that on an annual basis, Rhoen earns around 300-310 mn EUR EBITDA. The part which was sold to Fresenius is clearly the currently more profitable part with EBITDA of 250 mn EUR according to the filing.

This leaves the stub with EBITDA of around 50 mn EUR. The “implied” valuation of the stub is around 340 mn EUR EV at the moment, so we are talking about an implied valuation of 6-7x EV/EBITDA which is not much. Rhoen announced that they intend to earn 150 mn EUR EBITDA in 2015 in the remaining company. Even if this is too optimistic, I still think the “stub” is implicitly very attractive as RHoen has a very long history in turning around hospitals.

So all in all, at the current price, the stub looks like a very interesting investment.. The only problem is that I need to invest the full 19 EUR now in order to get expsure to the 5,20 EUR implied valuation of the stub.

In theory, as a professional investor, I could borrow up to 13,80 EUR against the Rhoen shares to lower the amuont of capital I need to commit and increase my Return on Investment. At the moment, as I have a lot of cash anyway, I do not need to borrow.

Expectation management:

Just to make sure, I do not expect that the shares will jump 5 or 6 Euros until the dividend will be paid. One has to think about the stock rather as a 13,80 cash deposit plus a 5,30 EUR stock. There will be very poor “visibility” about the stub in the next few months until the deal is finally settled. So I do expect some price appreciation on the “deposit part” but not that much, rather like an implicit attractive deposit rate as off set for the execution risk or so. My return expectation until mid next year is rather something like +1 EUR with a very limited downside.

Qualitative aspect

What I do like is the fact, that funder, Mastermind and 12% shareholder Eugen Münch has to a large extent the same interests as the “Normal” shareholders. This is different from similar situations where the CEO just wants to get a big golden handshake. I think the adversaries (Braun and especially Asklepios) might even be tempted to take over the “stub” at some point in time before someone else thinks about buying this (then unlevered) turn around case.

Summary:

So instead of waiting and selling, which was my first reaction, I will actually increase my RHoen position to a full position (5%) as I think that the current risk/return relation is not spectacular but still very good and not correlated much to the overall market.

This translates into around 3.6% exposure on a portfolio basis to the cash payament (Risky deposit) and only 1.4% “true” equity exposure to the stub. I will watch this carefully and potentially increase the position up to 2.5% “stub exposure” if prices gow below 19 EUR. For me the “stub” is one of the most interesting special situations at the moment.

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