Monthly Archives: November 2013

Some links

If your have time for only one item this week, then read the latest memo from Howard Marks

Joel Greenblatt on value investing and patience

Very good interview with Marc Adreessen, one of the “pioneers” of the WWW

Good review about a new book called “”The Frackers: The Outrageous Inside Story of America’s New Billionaire Wildcatters””

Discovered by chance: Walter Schloss video on value investing (first 3 minutes).

Interesting article in the Ecominst on the Bitcoin Mining Industry

One more: Frenzel & Herzing with a new Vetropack analysis

TGS Nopec ( ISIN NO0003078800) – an “Outsider” Company Buffet would buy if he could ?

Disclaimer: This is not an investment advice. The author will most likely own the stock already and sell it without telling anyone as well….

As the post is rather long, a short Elevator pitch:

– TGS Nopec is a potential “outsider” style oil services company with a distinctive and capital efficient business model
– currently cheap because of cyclical issues, negative sentiment for the oil and natural resources and top line decline yoy
– underlying business much less sensitive to oils price than the market believes and yoy top line decline is due to “outsider” behaviour

Read more

Book review: “Short stories from the stock market” – Amit Kumar

Books about short selling are few and rare so I decided to buy the Kindle version, which around 7,50 EUR is fairly cheap. The author, Amit Kumar runs an independent research firm called Artham Capital Partners and used to post occasionally on Seeking Alpha. There is also a “Manual of Ideas” interview with him to be found at Beyond Proxy.

The book itself is fairly short with 167 pages, which in itself is not bad. The book covers many aspects of short selling, including some case studies from the author himself.

However what is completely missing in my opinion are for instance references to existing books like the “Financial Shenanigans” classic from Howard M. Schilit. He also mentions David Einhorn’s Allied Capital Short thesis and Bill Ackman’s fight with MBIA, but again he does not reference to the book about Ackman and MBIA.

Jim Chanos, the most famous short seller, is mentioned once with in the context of Enron but nowhere else. Chanos made some great presentations for instance with regard to value traps.

It is also strange that in the beginning, the author explain the P/E ratio over a full page, but later on assumes quite some advanced accounting know how like knowing what Comprehensive Income is.

The best parts of the book are the sections where he lists the various areas in Balance Sheets and Income statements where to look for trouble and the interview with the guy behind “Off Wall Street”. Strangely enough, in his list he doesn’t mention the Cash Flow statement as another place to detect “Shenanigans”, but he gets a special point from me for mentioning differences between Net income and Comprehensive Income as a warning sign.

I would have also expected something about Chinese Reverse mergers, but it seems that the author somehow was not interested in that part of the market although it might have been one of the “Life time” short gold mines in the last few years.

So overall, I have some mixed feelings about the book. Yes, it covers a lot of stuff and there are not many books out there which cover the topic. On the other hand, a lot of important stuff and sources are missing. the book could gain a lot, by referencing more to existing works of other short sellers like Chanos, Block, Bronte etc.

Nevertheless, for the price offered I think the book looks like reasonable good value for investors who are generally interested in short selling, although in its current form it will be clearly not an “investment classic” anytime soon. T e fair, the author mentioned that there will be future editions of the book, so maybe he will add some of the missing parts.

Some fun with Enterprise Value – E.ON AG Decommissioning Liabilities

This is a follow-up to both, my recent post about EV/EBIT & Co as well as a discussion in a forum about how cheap German utility stocks really are.

German utility stocks are clearly in many lists for cheap stocks. Here is for instance a list of large utilities in Europe sorted by EV/EBIT:

Name Mkt Cap Curr EV/T12M EBITDA EV/T12M EBIT
ENDESA SA 23038.45 4.43 7.17
RWE AG 16827.67 3.06 7.27
E.ON SE 27849.92 4.89 7.64
PGE SA 8340.95 4.55 7.74
GDF SUEZ 41669.47 5.31 10.04
VERBUND AG 5739.31 4.93 10.07
EDF 49364.74 5.83 11.08
GAS NATURAL SDG SA 18052.44 6.91 11.26
DRAX GROUP PLC 3286.74 9.41 12.12
NATIONAL GRID PLC 34397.63 10.20 14.02
ENEL SPA 30805.4 6.22 14.94
A2A SPA 2562.72 7.52 15.16
SSE PLC 15811.63 12.01 18.76
IBERDROLA SA 29309.16 9.92 21.69
PUBLIC POWER CORP 2343.2 6.87 21.72

Apart from Endesa, EON and RWE really look like bargains. Even most “club Med” Italian utilities are trading at twice the EV/EBIT or Ev/EBITD levels than RWE and EON. A “mechanical” investor will say: I don’t care if they have issues, I will buy them because they are cheap.

However, there is a small problem: As many people know, following the Fukushima incident, the German Government decided in 2011 to speed up the exit from nuclear power and switch off the last nuclear power plant in 2011. Funnily enough, only in 2009, they decided to extend the licenses significantly.

Anyway, just switching of a nuclear power plant is not enough. Especially in a densely populated country like Germany, you don’t want to have those nuclear ruins everywhere. So the utilites are required to fully “decommission” the reactors and also all the nuclear waste. Decommissioning is expensive, for instance it is estimated for instance at currently 70 bn GBP for all UK nuclear power plant.

In order to avoid that utilities just go broke before they close their nuclear power plants, the are required to build up reserve accounts in their balance sheet. Let’s take a look into their 2012 annual report page 159:

eon nuclear

EON has 16 bn EUR of reserves on its balance sheet for the decommissioning of nuclear power plants. Those 16 bn are clearly already reserved in the balance sheet, but as they will be due in cash rather sooner than later, they should be clearly treated as debt and added to Enterprise value.

However, there is a second issue with them: For some reasons, they are allowed to discount those amounts with 5% p.a. This is around 2% higher than for pension liabilities which in my opinion is already quite “optimistic”. They do not offer any hint about the duration of those liabilities, but if we assume something like 10-15, just adjusting the discount rate to pension levels would increase those reserves by 3-5 bn and reduce book value by the same amount.

So all in all, net financial debt for EON more than doubles if we take into account a realistic value for the nuclear waste removal obligations.

Interestingly enough, E.on presents its own “economic financial debt” calculation on page 45 of the annual report, including pensions etc.:

EON net debt

If we adjust the nuclear liabilities for the unrealistical discount rate, we get around 40 bn “economic” finanicial debt. So let’s look how EV/EBIT and EV/EBITDA change if we use those debt figures:

Before adjustment:

Enterprise Value of 48 bn (28 bn Equity, 3 bn minorities, 23.5 bn debt minus 6.8 bn cash)
EBITDA ~ 9.8 bn
EBIT ~6.3 bn

Adjusting for economic debt, we get an EV of 71 bn and the ratios change as follows

EV/EBITDA adj = 7.2 v. 4.9 unadj.
EV/EBIT adj = 11.3 vs. 7.6 unadj.

So adjusting for economical debt already eliminates most of the “undervaluation” compared to the peers. All things equal, a Verbund for instance which only produces “clean” power at the same valuation seems to be a much much safer bet than EON.


Even quite useful metrics like EV/EBIT and EV/EBITDA can be misleading if a company has large other liabilities which turn out to be very similar to debt. If a company looks cheap under EV/EBITDA, always check if there are pensions, operating leases or in the case of utilities Decommissioning liabilities which are not captured by the standard formula.

In this case, the company evene presents its “true” debt, but it is still not adequately reflected in almost every investment database.

Finally a quick word on “mechanical” investment strategies: I cannot prove it, but I am pretty sure that a mechanical strategy based on EV which adjusts for “obvious” shortcomings like operating leases should perform even better than the published results from O’s et al. However It is almost impossible to backtest this.

Short cuts: Rhoen, EGIS, Krka, Pharmstandard

A quick “healthcare round up” :

Servier was succesful with its offer and secured more than 95% of shares. Just a few days later, they then called for the remaining shares. Lesson learned: Holding out does not make money in Hungary…

One remark: I hold the EGIS stock via the German direct broker DAB Bank. The service here is really really bad. I called them with regard to the squeeze out proceedings and they said the cannot do anything because they did not officially receive the information. They refused to look at the web site with the offer and help me in any regard. They already disappointed me more than once with trading European shares, especially French small caps.


Krka, the Slovenian version of EGIS reported very good Q3 results. Interestingly enough, all the growth and profit increase came from Russia. All the other areas are not doing that well.


Clearly, I was lucky to sell early after I detected my research mistake in September. Since then, the stock lost a further -16%.

Since then, there was quite some news flow from the company. The company reported Q3 numbers, which overall were not very good. The reason given was that the Government delayed auctions into Q4.

For the mentioned buy out offer, twice as many shares were tendered as were available. So the “acceptance” was only around 50%. So even if I would have qualified, I would have been only able to tender half of the shares.

Finally there is some news on the spin-off. For me the situation is still not clear, but on their website they mention that even GDR holders might get spin-off shares, although the might not be listed:


If the spin-off is approved and once NewCo has been formed, NewCo is expected to consider establishing a separate GDR program in which new GDRs would be issued representing the shares of NewCo distributed to Depositary on behalf of the Company’s existing GDR holders.

If decided on, the GDR program will be set by the time of the registration of the NewCo; GDRs will be unlisted.

The reason that I still follow the stock is that in my opnion this is a very good way to learn more about Russian stocks and how things work there. I am not sure if this will be rewarded but I find it highly interesting (and entertaining….).

Rhoen Klinikum

The entertainment factor at Rhoen Klinikum is hard to beat. Founder Eugen Muench gave an interview yesterday, where among other stuff, he suddenly wants to use the sale proceeds from Fresenius for a share buy back at 28 EUR per share. Suprisingly, he also mentioned not to sell any shares personally.

Clearly, one should be careful with everything Münch is saying. I will stick to my strategy and sell out if the “old” purchase price from the first deal is reached (22,50 EUR).

Some Links

MUST READ: Great new blog from two young German guys. 2 comprehensive write ups: Sto AG and Hornbach AG

Congratulations ! The writer of the “Value Uncovered” blog got a full-time job at Yachtman because of his blog.

Gannon on Catering International, an interesting French company.

Good post from Nate why not every value investor should / could “go Buffet”.

Great post about the South Sea bubble in 1720. Nothing is new in finance.

A review of a new book about short selling. Interesting and very counter cyclical….

Editorial stuff: New “Investment Fundamentals” page

In order to organise the content a little bit better, I have created a new page called “Investment Fundamentals” within the blog which collects all the more general posts I have written over the last 3 years.

It makes it easier for me to find the stuff and maybe it helps some of my readers as well. In order not to overload the blog, I deleted the German “Anlagephilosophie” and the “Boss Score” page.

For the moment the new page looks like this:

General valuation / accounting know how

Risk free rates and discount rates for DCF

How to calculate Enterprise value

Operating Cashflow and interest expenses

Operating Leases and IFRS (German)


Special situations

Underrated Special situation: Deeply discounted rights issues

Some thoughts on holding companies

3 part series on European spin offs: part 1, part 2 and part 3

Preference shares (German) part 1 and part 2

Portfolio construction / management

Momentum and Value Investing

Position sizing and cash quota

Leveraging Investment returns if you are not Warren Buffet

Behavioural Investing: Averaging Up vs.Averaging down

General thoughts

Competitve advantages of individual investors

The value of paying divdends

Short interest and stock performance

Transformational acquisitions

Special situation: MAN AG (ISIN DE0005937007 / DE0005937031)

Short Background:

Volkswagen, the Geman car giant bought the majority of MAN AG, the German truck maker back in 2011. Over the next year, they increased their shareholding to 75%.

Under German law, once the 75% threshold is reached, a majority owner can implement a contract which cedes the full control to the majority shareholder. However, a compensation amount plus a guaranteed dividend has to be offered to minority shareholders. (for a true squeeze out, at least 90% ownership is required). The main benefit of those kind of contracts is not only control but also a big advantage from a tax perspective.

In the 2013 shareholder meeting of MAN, a “Beherrschungs und Gewinnabführungsvertrag” (BGAV) was decided with the following amounts:

– shareholders will receive a compensation of 80,89 EUR directly if they hand in the shares
– OR a guaranteed dividend of 3,07 EUR per share if the compensation offer is not accepted

Normally, investors have 2 months time after the BGAV has been registered in the commercial register (Handelsregister) in order to tender the shares. Minority holders however have the right to challenge the terms if they think that the offer is too low.

And here it gets interesting

As part of the process, MAN had to present the underlying assumptions and the valuation details to the shareholders. The document can be downloaded here (German).

And there the fun starts.

For instance on page 114, they describe the inputs for the calculation of the terminal value starting 2018. For some unexplained reason, the starting EBIT is some 24% lower than the official company plan on page 91.

As a risk free rate they use 2.5%, which for a German company should be a lot lower. Also the assumptions for Beta and Growth (-1%) as well for the equity premium are not in line with “standard” assumptions.

If any of those assumptions gets successfully challenged, Volkswagen has to pay more. One can easily calculate this in a spreadsheet.

All in all, a final price of 105-110 EUR might not be unrealistic. The downside is limited. If the court approves the original price, shareholders can still “put” the shares to Volkswagen at 80,89 EUR plus a 5% interest since the BGAV has been implemented.

The “Spruchstellenverfahren” is held in Munich which is known to be rather minority friendly.

One remark: 3. quarter results of MAN on a net income basis were quite weak, but this will not be taken into account for the current trial. Only the assumptions of the submitted document are relevant, not the “real world developement”.


So we have a quite interesting situation here:

The downside is ~82 EUR, I.e. a loss of 7 EUR for the common shares vs a potential gain of 15-20 EUR. If we assume a 50/50 chance, we already have a positive “expected” value of 11-13 EUR per share.

The stock price itself is slowly trading up since July:

Although this does not sound like a huge deal, I think it is a nice, uncorrelated “bet” with a rather short time horizon and a clearly limited downside. Therefore, I have opened a 2.5% position in the common shares at 89 EUR and hope for a minority friendly outcome….

Edit: There are by the way a couple of erman stocks which have this guaranteed dividend. Some of them might be an interesting alternative to bonds. More in a later post.

Some links

Great analysis of Nicholas Financial by the excelent Punchcard blog

Eddy Elfenbein with a great look back into history into the Great Salad Oil Swindle. Good for Warren Buffet who bought into Amex because of this.

Damodaran still thinks that Twitter is worth only 18 USD per share

Sear has been an actually good investment over the last 20 Year, if you include all spin-offs.

Will the machines take over investing ? They seem to be even better at brewing coffee now.

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