Interactive Brokers (Sell), Sino AG (Buy), Tiffany & Co (Buy)
As mentioned in the comments on the previous post, I sold my Interactive Broker stocks. Why ? Mainly because of the following reasons:
- although I still think that it is a very good company, I reconsidered some of my assumptions after reading the “Chuck” Schwab autobiography
- Despite the fact that the Covid-19 crisis seems to have driven an increase in new accounts and trading commissions, the long term effects of lower interest rates (and margins) will be significant as interest margins are the main driver of profitability in the mid- to long term. My current scenario is that interest rates will remain very low even in the US for a very long time.
- I also don’t believe in any “excess capital”. The security of deposits is essential for a broker as Chuck Schwab lines out nicely in his book and the capital of the broker provides the security. Without that buffer, they would have a lot less business especially with professionals
- Finally I also had issues to fully understand the P&L of the company. Due to the special structure with the LLC, the statements are hard to read anyway but at the end I did not understand a couple of line items which makes me feel uneasy. Not that I imply anything here, I just like to understand P&Ls of companies that I invest in and the annual report is not self explanatory.
I covered Sino AG in my “All German Shares” series part 18 when the share price was around 50% lower than it is now. Sino is at its core a small high-end brokerage stock. But the main attraction is actually their stake in the German version of Robinhood, an app called “Trade Republik”.
Between my post back then and now, Trade Republik managed to do a big funding round. As part of that funding round, Sino AG cashed out 8 mn EUR which was 50% of their market cap when I wrote that post. They still own 16% of Trade Republic which translates into a value of 22 mn EUR. Another 2,5 mn EUR “extra” asset is a 12,7% stake in listed company Tick Trading. Together this already covers the current market cap of 25 mn EUR. The core business is basically “for free” plus net cash.
Sino has paid a
0,64 0,89 EUR per share dividend at the end of May, but there should be still a few million cash on their accounts.
For me, the Sino AG investment is a FinTech “bet” on Trade Republic. I think the “Robinhood” like business model has very good potential and with some new top investors on board (Accel, Peter Thiel), they should have a good chance to grow outside Germany as well. The business model of Trade Republic als depends less on interest margins and has some very interesting opportunities to offer different products to the target clients (mostly young people who invest the first money they have saved).
Personally, I do think that the Trade Republic business model is at least as attractive as the “Neo Banks” like Revolut, Monzo or N26. Actually I do think that the target customer group is even more attractive. At some point in time, Trade Republic might be even an interesting acquisition target for these guys.
Therefore I allocated 1,5% of the portfolio as a starter position into Sino AG at a share price of around 10,70 EUR/share.
In November 2019, LVMH made an improved offer for Tiffany at 135 USD/share. The “Undisturbed” price has been around 95 USD/share.
In the meantime, shareholders both, from Tiffany and LVMH approved the deal, so in theory closing should be a formality and was expected for the middle of 2020.
In recent days however some rumors surfaced that LVMH might somehow walk back from the deal. FTAlphaville has for instance a good summary of pro’s and con’s here.
At the current share price of 114 USD, the market seems to assume a 50/50 chance of the deal happening or not (depending of one considers the 95 USD still an “undisturbed price” after Covid-19).
My personal take is that the chance of the take-over is above 50%. The main reasons are:
- the long term value of Tiffany’s jewelry business should be not impacted too much. At Richemont for instance, jewelry held up much better than watches
- If LVMH walks away now, this opportunity will not come back any time soon. And there are not that many comparable “trophy” assets available
Therefore I decided to initiate a 2% position in Tiffany as special situation at 114 USD/share.
I´ve just reviewed Sino AG´s half year report and also noticed their management´s intention to give back 120m Euro (or slightly over 50 Euro per share) to their shareholders through either a share repurchasing program or through dividends. The value of their remaining Trade Republic stake (ca. 2.8%) is around 50+ Euro per share based on the valuation post the latest funding round. Although the stock has performed so strong recently, the valuation looks quite attractive. Have you considered re-entering the position? Could be or become a situation very similar to Sapec with the high payout and the possible further divestment of the Trade Republic stake (which is now locked up for around 18 months).
Tiffany vs LVMH doesn’t look good. LVMH tries to pull out:
Sold all Tiffany shares at USD 109.
Sino´s altes Stammgeschäft mit heavy-Tradern war über die letzten Jahre, so weit ich mich erinnern kann, verlustbringend. Ich beobachte die Gesellschaft auch, finde aber das Investment in Tick Trading Software deutlich interessanter.
Tick ist der Softwareanbieter für Sino aber auch Trade Republic und wird von dem allgemein gestiegenen Trading Volumen profitieren (zumindest mittelfristig, schwankungsanfällig).
Außerdem zahlt Tick 100% ihrer Erträge aus, wobei man natürlich betrachten wird, dass 1,75 Mal der Jahresergebnisse noch nicht ausgeschüttet wurden. Somit ergibt sich nach Abzug der Abgeltungssteuer auf die Dividenden ein sehr interessantes EInstiegsniveau für ein Unternehmen, das selbst kein Cash in Investitionen stecken muss, weil Produktneuentwicklungen von den Kunden getragen werden….
Ich werde zu der Gesellschaft nächste Woche auch mal einen Beitrag in meinem Blog valuebinvest.de veröffentlichen.
Deinen Blog lese ich echt sehr gerne und habe mich vor kurzem dazu entschlossen, selbst einen zu erstellen.
One way for LVMH to pressure TIF’s hand would by taking advantage of the following clause: “The Merger Agreement provides for certain customary termination rights of the Registrant and Parent, including the right of either party to terminate the Merger Agreement if the Merger is not completed on or before August 24, 2020 (the “Outside Date”), provided that the Outside Date may be extended up to an additional 90 days by either party if all conditions are satisfied other than the receipt of regulatory approvals or absence of legal restraints”
LVMH could drag its feet when replying regulators questions… possibly one pending approval could last beyond November.
Trade Republik seems like a good opportunity, just a few signals cause for worry. The company has just 2.8 rating on Google. Many of the complaints are on being unable to open accounts or to execute trades. Google Play 3.5 rating with similar complaints. App store 4.6 rating seems like an outlier. They might use the investment to hire more staff for customer service, but fixing their software platform would take more time. Google Trends shows increased traffic but dwarved by eToro.
On another topic, things are happening at Vostok New Ventures between renaming to VNV Global, moving to Sweden and the rights issue. What is your take on the rights issue? I was invested in Vostok Nafta and have confidence in them.
Thanks for the comment.
Trade Republic: My interpretation is that these are typical “Kinderkrankheiten” caused by a too rapid increase in customers and trades. The customers that I know are mostly happy but clearly they have to improve availability.
VNV: Yes, a lot of action and the stock has recovered nicely. I am however still skeptical on the prospects of their mobility investments. I also think the valuation of Babylon is now on the more aggressive side of things.
I think we will see more opportunities with TIF, they report Q1 next week, and it seems they are looking now for some waivers on their covenants. LVMH would be looking at any breaches to see if they can lower the price, but as leverage is measured as gross debt, they always have the option to use some cash to pay some debt before the day of the covenants are measured.
From yesterday, Faber on CNBC: “According to people close to the situation, LVMH remains focused on whether or not it will somehow be able to engineer a price cut in the deal. They do remain unhappy that TIF paid its dividend & all its rent. LVMH’s latest focus seems to be on TIF’s leverage ratio. A covenant of a bond deal is it needs to keep its leverage at 3.5x or below. As the summer goes on, it could exceed 3.5x & TIF is in the process of trying to negotiate a waiver w/its lenders which would allow it to move its leverage ratio to 4.5x. If it can’t get to that ratio, it could paydown some of its revolver & still be able to get below its leverage ratio. It still remains unlikely given the tightness of the contract that Arnault can claim a breach & get a price cut, but doesn’t mean they won’t continue to try & focus on that.”
Good timing on Tiffany !
I think I destroyed my track record of ultra bad timing here. Pure luck and not intended.
Chauvenet’s Criterion applies ! 😛
Just an editorial remark: Sino AG have adjusted the dividend proposal to 0.89 EUR per share after they announced the sale in Trade Republic shares. The AGM approved the amended dividend in May.
Thanks, that’s correct !!
The Trade Republic is a very interesting business model. However the problem I have as an investor with sino but especially Lang & Schwarz, flatex and the entire German brokerage industry is a little known change in the income tax law (§5 ESTG) that will take effect at the beginning of next year.
My English is probably not good enough to cover the entire problem.
In short, with the beginning of next year, loss offsetting of derivative transactions by private investors for income tax purposes will only be possible to a very limited extent. Gains and losses achieved with derivatives are no longer offset by the banks. Instead, German banks will immediately charge capital gains tax and solidarity surcharge on realized gains. By contrast, realized losses can only be offset via the income tax return. And only up to a maximum of EUR 10,000 per year. In this kind of regime it is possible to pay taxes that are higher than the net gain on these transactions. This will sure not stand in court, but it will take a while to fight this through.
More information on the subject can be found here: https://www.handelsblatt.com/finanzen/steuern-recht/steuern/steuerlast-baerendienst-fuer-deutsche-aktienkultur-anleger-bleiben-durch-neues-gesetz-auf-verlusten-sitzen/25494912.html
Proof, of how little known this change is, was the sino annual meeting last week. None of the speakers asked about the impact of this change. And the CEO Ingo Hillen mentioned it only once, when he said: Ich bin optimistisch, dass wir 260.000 bis 520.000 Euro vor Steuern pro Jahr im Kerngeschäft erreichen können. Aber wir werden das nicht erreichen, wenn die Aktiensteuer oder die Derivatesteuer kommt.
I believe this change in the income tax law will lead to a drastic drop in the trading of futures and certificates (Turbos etc.) by private investors. And this is a very big market in Germany.
Brokers become very taciturn when asked how much trading in such certificates makes up their trading volume. In the past these derivative transactions accounted for almost 50% of all transactions at Flatex and almost 75% of the trading result of Lang & Schwarz. In addition, for brokers the derivate trades by their customers are more profitable than stock trades due to the high kick backs paid by the derivative issuers to the brokers.
An early presentation of Trade Republic to potential investors showed, that the business model of Trade Republic also relies heavily on the kick backs of derivative issuers. It was expected that only 30 % of the trades will be done in derivatives, but that up to 40 % of the revenues would be coming from the kick backs of derivative issuers.
I am not sure how much the business model of Trade Republic an other German brokers will suffer from this change next year.
Thanks a lot for this insights. This is actually a very good point and I need to dig into this a little but further.
Looks as if the Bundesrat has not approved the revised law regarding the treatment of losses in derivative transactions. Seems to be a positive catalyst for Sino AG as the share price has reacted very positively.
Do you have a source ?
Pages 21 and 22. I have to correct myself as this is not a formal decline of the law which was already approved by both Bundestag and Bundesrat in 2019. But obviously they want to correct it before the new rules go into effect in 2021.
Interesting situation at Tiffany’s, thanks for bringing this up. Besides the two outcomes “deal goes though / not through”, it might make sense to include a third scenario “deal goes through at a lower price”, which I personally would regard as the scenario with the highest probability (ok, not an easy one with all contracts signed and approved etc but looks like a fair outcome given the super-bad timing of the deal). My (naive) personal calculation then looks as follows: 50% probability that the deal goes through at for instance 120 USD, 25% probability that it will go through at USD 135 and 25% probability that it will fall apart. As undisturbed price one might assume USD 80, taking for instance Richemont’s share price development after Covid-19 as benchmark (~15% below November levels). Then we have 50% x 120 + 0.25 x 135 + 0.25 x 80 = 114 USD. And all of a sudden, the current share price looks about fair.
Yes of course. Using other assumptions for an undisturbed price or introducing a third scenario like you did changes the picture.
You could also use LVMH’s share price (or Kering’s) as a proxy for the undisturbed price and LVMH is now exactly where it was in November as well as Kering.
If Arnault presses to hard on lowering the price, Tiffany could look (again) to find other buyers such as Richemont or especially Kering:
So yes, you can clearly add scenarios and chnage assumptions and you will get to other results. Personally, for the time I would stick with my very simple approach.
Oh, and I forgot the 0,58 USD dividend for Q2 with record date June 22nd 😉
I like the Tiffany merger as well. The only thing that makes me uneasy is that you are effectively going against Arnault. The guy, kindly referred to as “Wolf of Cashmere”, managed to create a €200bn company and retain almost 50% for himself. Ideally you want to be on his side and not at the opposite of the table…
Good point. That’s why I limit the position to a relatively small size. This is clearly not a “free lunch”.
TIF: This is a pure cash deal I understand from the prospect. But will you be settled with cash for your newly bought shares without any further terms or filings? Even if you buy more shares closely before the effective deal date?
All the best and many thanks for your work, great readings.
TIF: Do you consider that this is a pure cash deal? i.e. this means you will be settled with cash, for your now newly bought shares when the deal happens? Or are there further votes/dates/filings to be considered?
Many thanks for your work, great reads.
Hey, have you ever looked at Lang&Schwarz? Might that company be interesting for you, too?
Good afternoon, how are you accounting for the Sino’s cash burn? How will they use the proceeds from selling the stake? Thanks
Which cash burn do you mean ? When they were still consolidating Trade Republic until June 2019 ? Operating Profit and Cashflow are positive for the first 6M in the 2019/2020 financial year:
Click to access HJBericht_2020.pdf