Greenlight Re & E.On/Uniper update

Greenlight Re update:

As some readers might remember, I bought shares of Greenlight Re, the Bermuda Reinsurer with investment advise from David Einhorn back in December 2015, but then sold them one month later, triggered by the insight that I don’t really understand his investment criteria. Looking back, the decision to sell doesn’t look very smart, as the stock priced since then increased by around 18% in USD (or 14% in EUR). YTD the stock is up 14,8% in USD.

In early August, Greenlight Re filed their 6M report. Interestingly the NAV per share declined by -4% from 22.20 USD to 21,32 USD per share.

At June 30th, investment performance was +/- 0% vs. +3,8% for the S&P 500, end of July the score was +3,9% for GLRE against 7,7% for the S&P 500.

The decline in the NAV came mostly from a pretty bad insurance result. Net premiums earned in the first 6 Months were 263,7 mn USD, losses 202 mn (~77%) and costs 86,5 mn or a cost ratio of 32,8%. Overall this results in a combined ratio of ~110% and a “technical” loss of 26 mn USD.

So what actually happened was actually a simple multiple expansion, from ~0,8 at the time of my initial post to “at book” at the moment. I am not sure why this happened, especially taking into account their recent strategy shift towards US mortgage insurance.

E.On /Uniper

Back in January, I heavily criticized Einhorn’s new long position E.on. My “anti thesis” had 2 major points:

  1. I didn’t believe that a quick (and beneficial) solution for the nuclear liabilities was on the table
  2. Plus I argued that E.On is managed badly and has so many other problems that the nuclear liability issue is not really driving the stock price

For the time being, it looks like that I have been wrong and right at the same time.

The so-called “Atom Kommision” actually came up with a compromise that the utilities could buy themselves out of the potential risk for the final storage of radioactive waste by paying ~23 bn EUR, which represents a relatively modest 35% premium of 6 bn EUR on top of the 17 bn reserved by the industry for that purpose, which would cover all risks including interest rates,

On the other hand however, they also made clear that a spin-off of the nuclear activities (and potential bankruptcy) will not be that easy. They actually communicated that all spin-offs after June 1st will automatically be subject to “Nachhaftung”, which of course specifically targets the Uniper spin-off.

So honestly, not that much has changed for the utilities, as the actually decommissioning of the nuclear plants still remains with the utilities. I also find it hard to imagine from where all that cash for the fund should come from.

Uniper showed a 3,9 bn EUR loss for the first 6 months which translated into an 3 bn loss for E.on, mostly because of the well-known general issue in the German electricity market.

In the German press one can find speculation that E.On might need a capital increase after the Uniper “spin-off” due to the fact that Uniper might trade a lot lower than the implicit valuation on E.On’s balance sheet. As I have mentioned in the past, the problem with the Uniper spin-off is mainly that it is no full spin-off, as E.On wanted to retain slightly less than half of Uniper in order to sell the rest for cash. E.On has actually included this in their 6 month report (p.20) quite explicitly, including the fact that the haven’t recognized the 35% premium in their accounts yet which might be another 1 bn or so in in losses.

So it is no surprise (to me) that E.On didn’t perform very well and Einhorn most likely lost money on the stock. What I found surprising however is that RWE, the other big German utility outperformed E.On by a wide margin as we can see in the chart:

eoanrwe

So the better instrument to play the nuclear deal would clearly have been RWE (so far).

I can only speculate why RWE did so much better. My guess is that the strategy of RWE to spin-off the good ship (Innogy) does seem to work better. They don’t run the risk of additional write-offs and it looks like a better separation of “good and bad” ship than the E.On strategy.

In my informal score keeping against Einhorn I would rate myself now at 4:0  (Delta Lloyd, AerCap, Consol, E.On), although with E.On the “final verdict” is still open. On the other hand, Einhorn is still a billionaire and I am not, so he seems to do a lot of things (much) better than I do…..

 

 

 

 

22 comments

  • Dear Dave,

    maybe you can share what you find so compelling about Nordex & Siemens Gamesa except for their (optically) low share price?

    • Hi,
      To make short a long story, I see value.
      In my opinion we are in a classic short term myopia from Mr, Market. There has been some slow down in critical size markets such as India, that has prompted short term caution over the companies (i.e. Gamesa-Siemens). On top of already existing problems (post take over) for Nordex-Acciona (i.e. postponement of new turbine design for the German market by late 2018).
      Market is reading (correctly) short term problems.
      Mr Market fears some overcapacity in the short term, leading to margin compression and further consolidation of the industry. I do agree with the offer side picture.
      Nevertheless, the demand side is clearly a favorable one. It is just a matter of time to unlock the full potential of the entire industry.
      The medium term view is bright. China and US will lead the new capacity additions.
      US will double capacity (2013 vs 2020, to 113 GW, that is a delta of +60GW):
      https://energy.gov/maps/map-projected-growth-wind-industry-now-until-2050
      China will triple capacity by 2025 (347 GW, that is a delta of more than +200 GW):
      https://cleantechnica.com/2015/09/22/chinas-wind-energy-capacity-triple-2020-globaldata/
      The entire industry is healthily growing by ca. +50GW/year and would double size close to 2020:
      http://www.gwec.net/wp-content/uploads/2012/06/Global-Installed-Wind-Power-Capacity-MW-–-Regional-Distribution-1.jpg
      If you realize, the market is so vast, there cannot be real demand concerns in the long term:
      Vestas, the leader, is able to produce 10GW/year, and scale is bringing some additional cost benefits (EBITDA margin 17%).
      Siemens-Gamesa is able to produce 5GW/year with some 15% EBITDA margin.
      Nordex-Acciona is around 3 GW/year with 8% margin.
      My bet is that we will see nice growth (though not lineally, while a majority of countries migrate to an auction system) for the entire industry while Nordex is able to grow modestly margins up to 10% (in line with guidance) while growing in line with the industry.
      Should this happen (2020) the share is worth 23€/share (+100% vs current prices, +28% CAGR).
      I hope it helps.
      David.

      • Dear Dave,

        thank you for your thoughts. Allow me a few comments:
        1) History tells us that most likely these forecasts for demand will be wrong. But who knows?
        2) If you look at the power producing capacity in developed countries (despite costs coming down, wind power is not cheap and you must be able to afford it) it seems there is a lot of overcapacity in the market (e.g. electricitymap.org). Besides environmental reasons it does not make sense (at least economically) to add capacity. It will be interesting to see how the german market for wind power will evolve in the coming years. I fear there will be no happy end for the wind turbine producers.
        3) Electricity markets are political markets. Again, if history is any guide, they will not be very rational.

        Anyway, I hope your idea works so that we will have a win-win situation: you and the environment.

        All the best

        • Thank you for bringing a different angle.
          At the end, if you think that the environment is being harmed by the actions of men, then there will be an efficient CO2 pricing mechanism. Should you have this, then wind does not need subsidies to become more competitive than traditional fossil fuel (mainly CCGT which is more competitive and has currently taken the lead) -bear in mind that current CO2 cost of ca. 6€/Ton does not reflect the fundamental cost to migrate production from coal to CCGT-.
          You are right about the political content in the utility arena, but at the same time, precisely this is a good indication of the investment thesis in wind manufacturers: look at you and me, two different thesis/opinions here, though both supportive of the environment. This is also visible for our legislators and I am pretty sure they will act accordingly.

          It is always interesting to share opinions. Thank you. Take care.

    • I tried but my comment is waiting moderation (maybe too long as usual 🙂

      Take care

  • @EasyWISA
    They sell Einhorn Condoms on their “unofficial” Website. Coincidence? 😉

    http://www.uniper.de/produkt/einhorn-kondome-moonshine/

  • “most likely lost money on the stock.”

    Warum bist du dir da so sicher? In Q4 2015 gab es mehrmals Kurse < derzeitigem Kurs + Dividende.

    "RWE, the other big German utility outperformed E.On by a wide margin as we can see in the chart"

    Vllt ist derzeit nichts tun (=RWE) besser als was tun (=E.on)

    Ich finde es derzeit psychologisch interessant, dass sich keiner mehr für Versorger interessiert. Man liest nichts mehr von den Value, Turnaround, Zocker-Experten. Ich würde tippen, dass E.on in 2-3 Jahren höher steht als jetzt.

    Die Karte RWE hätte man (bei einem Glauben an Erfolg) m.E. gut mit der USD-Hybridanleihe A13SHX spielen können. 6,625% und Kurs in Q1 bei rund 88%.

    • Weil er in einem Report gesagt hat dass er zu 8,90 EUR pro Aktie gekauft hat. Ich weiss aber nicht ob er noch hält.

      • Dann steht er knapp im minus. Kurs 8,31 Euro und Dividende 0,50 Euro. Da er dann vermutliche Ende Nov ober Ende Dez gekauft hat, so hätte er mit dem Dax auch leicht verloren.

        E.on hat sich nach dem Brexit m.E. wieder schnell erholt. Aber dann kam halt schon wieder was von Uniper. Allerdings unter 8 Euro fallen sie scheinbar auch nicht mehr. Also muss es auch Käufer geben. Mir gefällt die schlechte Stimmung. Die Telekoms haben sich auch gedreht als schlechte Nachrichten keine neuen Tiefs mehr ergaben und keiner mehr an eine Zukunft glaubte. Trotz des ganzen Internets.

        RWE hat letztes Jahr Hybride in Euro mit 3,x% Kupon rausgeben können. Also so richtig nach Pleite sieht das nicht aus.

        • genau, er steht (knapp) im Minus, genauer gesagt hat er 8,92 EUR pro Aktie bezahlt. Schlechtes Sentiment alleine ist m.E. kein gutes Kaufargument. Zudem gibt es für jeden Verkäufer immer einen Käufer, sonst gibt es keinen Handel.

          Wenn man Versorger kaufen will dann wäre m.E. eher eine Verbund oder Energiedienst erste Wahl. Oder eine Innogy nach Spin off.

        • Du sagst es ja. Irgendjemand muss aber ja auch bei 8 Euro die Teile kaufen. Als Kleinaktionär kann man ja einen SL setzen. Knapp unter 8 Euro bspw.

          Bei Energiedienst hat man dann aber Schweizer Dividende und muss sich da einen Teil wieder zurückholen.

          Bei Verbund würde ich eher deren Großaktionär EVN nehmen.

  • Uniper looks like a nice short candidate after the spin off taking into consideration that EON wants to sell their stake, too. You just have to take a look at their unofficial Website (the one with .de, not with .energy) to see how professionally this spin off was planned. Why didn’t they find a better name? When I first heard it I thought of Juniper Networks…

    • actually you could do a “double short”: You short Uniper, if Uniper drops, E.on needs a capital increase so you short E.on as well.

      • Sorry for playing contrarian here, I follow your opinion in many, many cases except when it comes to German utilities 🙂

        At current levels, in my opinion, E.On is going to be a good bet (after Uniper listing).

        The first thing to bear in mind (just on the listing day) is that the higher the drop in Uniper price will not necessarily translate into a higher drop in E.On price (since E.On price will be dividend-like “adjusted” deducting 100% of Uniper equity but then adding back its 46.65% stake). That would present a “buffer” for E.On listing price next Monday. At around 8.1 €/share (today’s price) the share should list within a range (7.0-7.3) post Uniper.

        At those prices (7.3 € upper range) E.On presents a ca. 40% upside vs. fair value using conservatively EV/EBITDA multiples for the German business (10x for renewables, 8.5x for distribution and 5x for supply).
        Obviously there is a risk (more than that I would say it’s a certainty) of a 2 bn capital increase but it is a rationally motivated one if that implies the closing of the nuclear liabilities and –in my opinion- the market would support such movement, should it occur.
        Let me remind you that the conversion of the nuclear provisions into real debt would be accretive.

        On the contrary the share does not reflect the potential positive outcome of a favorable nuclear tax resolution (that it comes for free).
        I am selling my RWE stake (+50% 1yr) to get exposure to E.On exUniper. By doing so I will have a higher quality long term generation exposure (no thermal, so no CO2 negative impact once the Paris climate resolutions translate into restrict pollution requirements for coal and -to a lower extent- gas -CCGT-) and additionally the commodities rally (mainly coal API4) it seems to have peaked in 2Q so German pool prices should reflect a lower marginal (calendar 2017). Last but not least E.On would present a good organic growth profile looking forward (distribution and renewables) even considering the next tariff review for German grids.

        Take care,

        Dave

        • Dave,

          good timing. there will be a post on this topic within the next 2 hours 😉

          Congretulation for the RWE trade. One rmeakr: You should be careful with EV/EBITDA multiples. Don’t forget pensions. The issue with the nuclear provisions in my opinion ist the fact that they will suck up a lot of cashflow as they have yet to be funded. So sharehodlers have to be patient with regar to any pay outs.

          Spoiler: At the levels you mention ( 10 EUR per share), I would be actually a buyer of Uniper 😉

        • Selling E.On here (+37%). After 1 yr (tax purposes) and having materialized all the events that were not included in the price (1 year ago), that’s to say, favorable resolution of the nuclear tax and the capital increase for taking out the nuclear liabilities, I see a nice dividend yield and a healthy organic growth but I do appreciate better opportunities.
          I will concentrate on wind manufactures, still in Germany 😉 (starting a position on Nordex & Siemens Gamesa).

        • Congratulations, E.on went well for you. Your timing was really excellent.

        • Good timing. This is from Bloomberg:

          Genworth Financial Could Trade Below $1 if Deal Dies: BTIG
          By Danielle Smith
          (Bloomberg) — Genworth could trade below $1 if the China Oceanwide deal blows up due to uncertainty about Genworth’s debt and concern over an “imminent bankruptcy fiiling,” BTIG analyst Mark Palmer (neutral) wrote in a note.
          Uncertainty about further approvals and the possibility of a bankruptcy filing loom over the news of existing approval by Virginia regulator; “road to closing remains long”
          Continues to see outcome of GNW/Oceanside as “too binary,” recommends investors stay on the “sidelines”
          Deal still needs approvals of several entities, whose approvals are “far from certain”
          GNW up 3% pre-mkt on 74k shares

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