Eurokai KGaA (ISIN DE0005706535) – Playing the “Time arbitrage game” with the possibly cheapest Port Stock in the World
Disclaimer: This is not investment advice. PLEASE DO YOUR OWN RESEARCH !!!!
Some reason for not reading this post:
- You have already posted YTD Performance numbers on FinTwit
- You don’t like capital intensive stocks
- You don’t like cyclical stocks
- You prefer stocks that have positive share price and/or fundamental momentum
- You require short term catalysts/Share buy backs/activists etc.
- You like simple businesses with simple structures
- You think Germany/Italy/Europe is going down the drain anyway
In such a case, do yourself and myself a favor and move on.
For anyone still reading, please find here the “Elevator Pitch”, the “Pros & Cons” section as well as the summary. All the gory details are available in this 21 page PDF file:
- Elevator Pitch:
Hamburg based Eurokai is a 6th generation family owned & managed Container Port owner and operator. The company is ultra conservatively financed (significant net cash and “extra assets”) and ridiculously cheap compared to peers and recent M&A transactions, although TIKR and Bloomberg incorrectly show much more expensive multiples.
Based on my calculation. Eurokai trades at ¼ or ⅓ of the valuation compared even to the cheapest Peer group stock and M&A multiples.
Although there is no explicit catalyst and 2023 was a difficult year, both for container trade and also for infrastructure in general, Eurokai represents a very attractive, contrarian opportunity to partner with a family on great assets at a really low price.
In the mid-term there are some developments (Generational change, new port projects) that could help to get the valuation of Eurokai closer to its peers which in my opinion outweigh the general risks and a few more specific ones. Therefore I think Eurokai is an interesting deep value play for the patient investor who does not need to beat any short term market benchmarks but who has the luxury of engaging in “time arbitrage”.
L) Pro’s & Con’s
As always, before coming to a conclusion, here is a collection of Pro’s and Con’s
- Extremely cheap but well run infrastructure asset
- 6th generation family owned/managed, long term orientation
- financially extremely conservative
- Decentralized organization
- 5% dividend yield for waiting
- several potential “soft catalysts” in the next few years
- only covered by 1 analyst, TIKR/Bloomberg numbers misleading, very hard to understand
+/- Change to 6th generation happened in 2023
+/. Larger Capex projects planned
- No hard catalysts, potential for a “value trap” kind of situation
- high complexity for a small cap
- some fundamental risks (China/Taiwan, Hamburg vs Rotterdam)
M) Summary, Return expectation & “time arbitrage”
I have to admit that my decision process for Eurokai took a lot longer than usual. I have been looking at Eurokai many times in the past 15-20 years and never got comfortable until yet.
Part of my motivation might not be 100% rational, for instance I just like ports which was the initial motivation to go really deep. There is clearly a non-zero probability that the stock will not be “discovered” over the next 3-5 years and I will “only” be able to collect dividends. Investor consent at the moment seems to be that a cheap stock without a catalyst is like dead wood and will always stay cheap. David Einhorn for instance has mentioned often that the capital market is broken for value investors and that the only alternative is to look at catalysts like share buy backs or take overs..
On the other hand, I do think that the valuation is so absurdly low, that even if we assume a significant discount to the cheapest competitors, the stock could easily double or triple and it would still be modestly valued.
In my opinion, maybe also driven by the incorrect data in tools like TIKR or Bloomberg, few people understand the undervaluation and even fewer think that it is a suitable investment. Eurokai is illiquid, has a low Beta (0,6) and for anyone managing against a benchmark is almost guaranteed to underperform for some extended time.
However, as my only real “edge” is a longer time horizon as the typical market participant and an above average capacity to suffer underperformance, I find the stock very interesting. I think this is something that I would call “time arbitrage”: As a private investor who is not in a hurry, I do have to luxury to invest in something where there is no clear exit or catalyst. The arbitrage here is that I think over time there is an increasing possibility that something happens that might lead to a re-valuation.
My worst case scenario over 4-5 years in this case is the current dividend yield of 5%. I think over 3-5 years there is a good chance that at some point the market discovers (again) this gem and then the share price could easily go up by +100% or +200% and the stock would be undervalued.
If I assume a 50/50 chance of this event happening, my expected return would be north of 10% p.a. over 5 years with in my opinion very little real downside. Often, stocks that are as cheap as Eurokai are often in some kind of existential trouble, which in my opinion is not the case here. That’s good enough for me.
As I want to retain some flexibility, I allocated 3% of the portfolio into Eurokai pref shares at around 26 € per share and will monitor closely how the market will take up 2023 numbers going forward. I also plan to attend the AGM in Hamburg this year to get a better feeling for the company.
Bonus track (for all Time Arbitrageurs):
value and opportunity 
At least a ship destroying a bridge is not a risk for Eurokai, because there is no bridge before the container terminal in Hamburg. Wilhelmshaven/Bremerhaven not at risk.
Some small German ports (unrelated to Eurokai) cannot be reached via ship, because a ship rammed a bridge on the Hunte river. I did not think about such a risk at all.
https://www.ndr.de/nachrichten/niedersachsen/oldenburg_ostfriesland/Schiff-rammt-Eisenbahnbruecke-in-Elsfleth-Wann-kommt-Ersatz,huntebruecke184.html
Schöne Analyse!
Wenn noch nicht bekannt, hier findest du meine Analyse zu Eurokai von Anfang 2023:
Wir kommen am Ende bzgl. der Bewertung zum gleichen Ergebnis, nur dass die VZ-Aktie damals noch über EUR 30 stand. Wie du sagst: Man muss bei dieser Aktie Zeit mitbringen.
https://www.youtube.com/watch?v=hG5kG5J1wOY
Auf unserem YT-Kanal findest du, wenn du möchstest, auch die Updates zu den laufenden Quartalen sowie zur HV 2023.
https://www.youtube.com/channel/@vermoegenlernen
Wir sehen uns dann auf der HV 24 🙂
Gruß aus Köln
Thorbjörn
Thanks for a great investment thesis again! (and also in my hometown… 🙂
Regarding EV calculation: How about debt and Lease liabilities at the level of the operating companies, esp. Eurogate?
In my view these liabilities at least make the whole company less conservative financed and less resilient in downturns and in case of ever declining volumes in german ports.
Or put the other way round, how safe is the 1,30€ dividend?
Side note
Lt Bundesanzeiger Eurogate made a 250 mn EUR impairment in 2020 on Wilhelmshaven assests, due to longterm underutilisation.
From a pure financial debt viewpoint, Eurogate also had a net cash position as of 2022. If I remember correctly, around +100 mn EUR. The Wilhelmshaven write down indeed hapoened in 2020.
However, in 2022 Hapag Lloyd purchased a 30% stake from Maersk and since then things are improving. So let’s see, the terminal business is really a long term business.
Thank you for presenting an old favorite of mine. I invested some 10 years ago, and I got tired of it, especially with some of the infos in mind which you present. But if no one else participates, it is tough, and there is no movement of the share. Your article is a wonderful inspiration to give this investment a second chance.
One possible catalyst is to report the numbers issues to TIKR (or some other platform with the same numbers), if they get it and manage to convince their data vendor it’s wrong it might be fixed upstream and everyone gets new number (as there is only a handful of upstream vendors). 😉
When MSC made a deal with the larger competitor Hamburger Hafen (HHFA) in 2023, Thomas Eckelmann was quoted that even if MSC would leave the Eurogate terminals, it could be a net positive for them.
Are you sure? Why does he then call this a ‚catastrophy‘?
I have no access to this article, but it says:
„„Katastrophe“: Eurokai-Chef erwägt Gegenangebot für HHLA“
https://www.abendblatt.de/hamburg/hamburg-wirtschaft/article239561281/Katastrophe-Eurokai-Chef-erwaegt-Gegenangebot-fuer-HHLA.html
Sorry, can’t read the article. It’s behind a paywall
Unwalled here https://archive.ph/HrO5e
Thank you.
If you read the full article, Eckelmann ist again quoted that it would be bad for Hamburg but actually great for Eurokai (“sieht Eckelmann die Situation ohne Sorge: „Für Hamburg ist der Deal schlecht, für uns könnte er sich aber als Glücksfall erweisen“). Remember, Eurokai also has Terminals in Bremen and Wilhelmshaven.
Thanks. I didn’t had access to the full text before, either.
Something else.
According to https://de.wikipedia.org/wiki/Containerterminal the volume in Hamburg and Bremerhaven has been shrinking over the years, in all other ports in Europe (Rotterdam, Antwerpen, Piräus, Valencia, etc) not. Is there a particular reason for that?
I don’t know exactly why the German ports are loosing out.
My guess is Hamburg has the disadvantage of the Elbe. Wilhelmshaven would make more sense, because you do not need to watch the tide. Bremerhaven in comparison to Hamburg has no natural customers in the vicinity as it is a rather poor area. Bremerhaven is good for Ro-Ro. Although a Ro/Ro terminal is planned for Wilehlmshaven, too. At the moment it is just the Mosolf group importing Chinese EVs via Wilhelmshaven. Poland has its own ports. ARA ports also have a shorter shipping route to Asia compared to the German ports.
Thanks for the write-up. Had a quick read and got stuck at the golden share: it gets a “15%-Vorzugsdividende”, which name doesn’t match the amounts of earnings deducted: roughly 3,4% in 2022; 2,5% in 2021. Why are you multiplying the share count with 1,15? Going by the name “15%-Vz.div” I would divide the share count by 0,85 – even then it doesn’t match the actual deducted earnings, which is much lower than 15%: in the range of 3%. What am I missing?
The “Vorzugsdividende” is directly linked to the local Gaap result of the Holdco only, not the Group IFRS result. If you assume that over the very long term, all Group earnings would show up in the HoldCo results, the 15% is the worst case scenario and does not take into account time lag and compounding of non-distributed earnings. I think you are right, I should have divided by 0,85, but the difference is small.
Shouldn’t you include a Fair Value of the minorities in you EV calculation?!
No, I have adjusted the “look through” Sales and EBITDA instead. You can either use 100% of sales and EBITDA and then add Minorities to EV or adjuste EBITDA and Sales, but not both.