Short cuts: Coface & Interactive Brokers
Disclaimer: This is not investment advice, please do your own research !!!
I made two smaller purchase over the last few days:
- Interactive Brokers at ~39,75 USD/Share, 1,4% of the portfolio
- Coface at ~5,70 ER per share, 1,5% of the portfolio
A quick summary of the ideas behind it:
Although I am not a client (yet), i do think that IAB is a very well run company. Clearly there is cost pressure on the fee side but IAB is a leading tech player in that space and is run by an exceptional founder/enterpreneur. Times like these are also great times to acquire new customers. I used today’s announcement regarding a loss due to the Oil price 65 sigma event to buy a starter position for my “Different” bucket of the portfolio.
As a fun fact, founder Thomas Peterfly states in the IR page that he doesn’t want non-users as shareholders because:
Investment by passive investors, and by others who do not use our platform, tends to cause a run up in our share price. This makes it more difficult for our clients to purchase our shares.
You may be considering investing in IBKR. We would like to ask you not to buy our shares unless you become an active user of our platform prior to doing so.
So please don’t tell him that I violated this rule….
I owned the company before as a special situation and made a decent profit. For the business model etc. please read the old post as not a lot has changed, only that the market leader Euler-Hermes is not listed anymore.
Coface will be hit during this crisis badly, this is for sure. How badly, no one knows. However one thing changed over the last few days: Many Governments have created special assistence programs/guarantees for credit insurance for instance:
Germany (30 bn of losses (!!!) in 2020 for 65% of the premium, net retention of 500 mn)
France (10 bn Guarantee)
UK (in discussions)
Although I have no visibility on how this actually play out, I am willing to make a small “punt” here. Why ? Trade Credit insurance over the last years was in competition with other forms of Supply chain finance and more often than not companies asked “why do I need this at all ?”
The current crisis clearly demonstrates the benefits of these policies as funding for alternatives dries up and the Government aid could also be interpreted as a government sponsored customer acquisition program.
As far as I have seen, these Government announcements had zero effects on the share price. I do think this guarantees are worth something.
Plus, the credit insurers have build up some decent buffers and as elsewhere in insurance, a real “cat event” will increase premiums going forward. I was clearly to early but I am willing to add in the coming days for a “counter cyclical” special situation.
Sold my Interactive Brokers shares today at 43 USD and “exchanged” them into Sino AG. Probablyagain super bad timing but more on that later.
I am making my point here as a customer. I’ve been looking extensively in the past on a cheap and reliable broker, and IB really has some lead, and a solid name.
So it is definitively a tick in the Reputation criteria that may be of some (tiny) importance in an investment decision.
It came as a shock for me to learn here that the interest income is the core of their revenue, I really didn’t know about that.
Also, as stated here by other members, I don’t think this is extraordinary value at the moment.
Just my thoughts about it.
Thanks a lot for the comment. However what would be “extraordinary value” at the moment for you instead ?
I have seen many write-ups on VIC, etc on IKBR which miss the point on what kind of business it really is. IKBR is an excellent platform with a great founder, that is true. But it is a bank – that’s how it really makes its money and that will only get more pronounced as the broking commoditises. I’ve yet to see Peterffy acknowledge this which is worrying. For a bank, it is doing around 13-14% ROE and trading at 2x book and 15x earnings, so not really undervalued by any stretch.
As for its capital, it may technically have capital surplus to its regulatory requirements, but its core institutional clients would not keep their funds there if it were not capitalised as it is. Its leverage ratio is 11%, which is not unusual for the lending it is doing.
The leverage in the business model is undeniable, as is the fact that IBKR is increasingly reliant on net interest income given the commoditization of broking business. However, with from notable exception of margin lending, the credit risk incurred to earn that net interest income is very different from that assumed by a traditional bank. Even so, your point on interest rate risk is a very valid one. A prolonged period of zero rates or lo-and-behold, negative rates, would be particularly harmful to its earnings profile.
Thanks for the comment. Yes, Interactive is a bank after all. The difference in my opinion is that they don’t compete on interest rates but on product. You don’t use Interactive because they have the cheapest margin loan but because they have the best system. That is a very different value proposition and much harder to copy.
Konkurrenzfähige Margin-Konditionen sind meines Erachtens sehr wohl ein Kriterium. War jedenfalls einer der Gründe, warum ich mich für mein Unternehmen für IB entschieden habe. Als Kunde kann ich aber auch absolut nur Gutes berichten.
VIC seems very interesting. I have joined as a guessed a few days ago. Are you a full member by any chance?
IBKR – there is also latent value on its balance sheet. As at Dec 31, 2019, IBKR carried ~$6.4bn of capital in excess of regulatory requirements. This translates into $15.32 in per share terms. This excess regulatory capital per share has compounded at a 9% CAGR since 2010.
I see 2.8bn cash on their balance sheet, outside the segregated accounts.
I also saw the announcement of 6bn “excess regulatory capital”, but I’m not sure what that means. I think its their stockholder’s equity? If they do have 6bn excess cash that I’m not aware of, I’d like to know it!
Good question – I think the answer is on page 74 of the 10-K. There’s $14bn of securities purchased under agreements to resell ie, reverse repos. This is basically IBKR lending out its excess cash in exchange for UST as collateral.
You may want to look at Grupo Catalana Occidente SA
Atradius has a solid reputation as an underwriter in the coface space.
And I may add that Atradius, like Coface, are probably considering a discounted rights issue to beef up reserves….
DFS has announced one last week (Ennismore holding)
One may want to wait until this happens before jumping all in to gage shareholder support level.
I haven’t heard that they plan to do a rights issue. Any sources for that ? Or ist this just your speculation ?
Yes, Atradius is a good company, but is only 50% of Catalana’s profits.
Interestingly, today is an article on Government backstops on FT Alphaville:
Yep, as Rob said, IBKR is exposed to interest rates. Interest income was 97% of PBT last year, but trading income should improve this year with increased mkt volatility.
Do coface’ profits depend on interest rates? Their insurance is for weeks or months (?), not years like life/medical/property.
Investment income was around 15% of operating income in 2019. For many other insurance companies it is 100% or more.
Thanks, coface looks really interesting, classic cyclical industry bought down by recession/virus. Maybe barriers to entry too. But will take me a while to learn about insurance, its a lot more than looking at the balance sheet & cashflow stmnt.
Have you compared Interactive with Charles Schwab?
Not really. Schwab is a very different kind of business. I guess it is a good one though.
This article should shed some light on Schwab (very good blog in general!):
Wish I had so much time as you to spend on such tiny positions!!
Well, you seem to be a busy person.
It’s worth mentioning that the 65 sigma event is not why IB is down as far as it is. That hit was less than 1% of equity (and 1.5months of profit) Reasoning almost certain is that they’ll “be lucky to get $150m/quarter” in interest income in today’s environment vs $250m/quarter over the past year. That was a much larger drop than anticipated. If interest rates stay low (Japan style) across the world for the next decade, and they grow their commission/other revenue at high-single-digits/low-double-digits over the next decade then the market is basically pricing this thing correctly. I do agree, it’s the best platform and the low-cost leader with a very strong management team.
Good point. Interest margins will be under pressure for some time.