Search Results for: check list

Special situation quick check: Rhoen Klinikum (ISIN DE0007042301) – “Listed transferable tender rights”

Yesterday, Rhoen Klinikum released the details how they will buy back shares following the sale of most of their business to Fresenius (Rhoen was a very successful “busted M&A” special situation, previous posts can be found here)

They way they do it looks interesting and seems to be like a “reverse rights issue”. The instrument is called “Listed transferable tender right” and seems to work as follows:

– as of tomorrow, October 16th, each shareholder gets automatically one “tender right” per share
– those “tender rights” are traded separately at the stock exchange
– you need to have 21 tender rights in order to sell 10 shares
– the tender price is 25,18 per share
– the exercise period runs until November 12th, until then, the tender rights are traded
– already tendered shares will trade under a separate ISIN until November 14th
– the cash for tendered shares will be paid out on November 19th

As of today, the shares are trading at around 23,85 EUR. Following the logic of the subscription rights, one right should be worth

Edit: in the first version, I had the wrong formula. Thanks to a friendly reader, this is the correct formula:

(25,18-23,85)/((21/10)-1)= 1,21 EUR.

So tomorrow, the Rhoen shares should open (all other things equal) -1,21 EUR lower and the rights should trade at 1,21 EUR. Let’s see if there is a chance to find a little arbitrage here and there.

One strategy could be to buy the stock at the open, hoping that the “discount” will be eliminated quickly. A second one could be an arbitrage between the rights and the stocks. Finally, it could be worthwhile to look at the tendered shares as well.

Don’t ask me why they are doing it that way. I think it most likely optimizes the tax position of the large shareholders, especially for the founder Eugen Muench, who wanted to cash in his remaining 10%.

A final comment for clarification: No, this does not mean that Rhoen shares should trade at 25,18. The price chosen by Rhoen is relatively “arbitrary”, they could have used any other price as well.

Checking the checklist: Maison France Confort (ISIN FR0004159473)

Looking at other good investors is one of the simplest way to generate investment ideas. I had linked to Ennismore already, which is a very interesting European small cap manager.

In their monthly updates, they always feature one stock. In the most recent December Newsletter, they write about Maisons France Confort (highlights are mine):

Maison France Confort – French housebuilder (1.2% NAV)
Maison France Confort (MFC) is a construction company that designs and builds family homes in France. Unlike many other markets, in France there is virtually no development risk for the company because land is purchased separately by the customer and the house will only be built once it is fully financed. MFC’s model is to provide a service designing the building and sub-contracting its construction. This ties up little capital and has allowed them to generate post-tax returns on net operating assets of 30% over the last 10 years. The company was founded by the Vandromme family five generations ago and they still own over 30%. It is run by brothers Philippe and Patrick Vandromme who have built MFC into the largest player in what remains a very fragmented market, with a 6.6% share of the self-build market in the regions that it operates in (4.0% for France as a whole). MFC has consistently taken share over the last 15 years through organic growth and acquisitions, a trend we expect to continue. MFC benefits from its greater scale: its large number of architects give it a more extensive range of houses (particularly energy efficient homes), it has a more professional and bigger sales force, a strong brand name, greater capabilities to deal with regulations and bargaining power with subcontractors and raw materials suppliers. As a result, revenue grew at a compound annual rate of 15% from 2000 to 2011, of which over half was organic, while the market for single homes was broadly flat in volume terms.

MFC primarily serves the lower end of the market, particularly first time buyers, with the average house costing EUR 100,000 to build (excluding VAT). With general economic weakness in France, tighter lending conditions and uncertainty around the new government’s incentives for homebuyers, housing starts are down 14% year on year for the nine months to September 2012 and MFC’s order book is down a similar percentage on a like for like basis. However the cost base is highly flexible, we estimate around 90% is variable with demand, and this allowed the company to remain profitable even in very weak markets from 2007 to 2010 (we also like the fact that Philippe and Patrick waived their bonuses in each of these years). With net cash of EUR 59m (equivalent to a third of its EUR 174m market cap) MFC is in a good position to take advantage of the weak market and has a proven record of strong capital allocation, buying back shares at depressed levels and making small bolt-on acquisitions that typically have a 3-4 year payback. At the current share price of EUR 25.10 the historic dividend yield is more than 5% and MFC has an enterprise value that is 3.2 times its operating profit over the last year and only six times the trough profit achieved in 2009. This is far too low for a business that has consistently generated a high return on capital and we think the shares have at least 80% upside.

As I am considering France one of the most attractive stock markets (for small caps) anyway, and the write-up is really interesting, lets test my new checklist for Maison France Confort:

1. Market cap between 25-250 mn
market cap 175.7 mn –> Score +1

2. less than 3 analysts following on Bloomberg or very bad sentiment
no, 7 analysts follow, mostly positive outlook, however only small cos. –> Score 0

3. No English annual reports, short quarterly updates etc., no share price on company homepage
I didn’t find recent English reports, only relatively slim intra year updates –> Score +1

4 . Potential special circumstances like Euro crisis, very diverse business activities, complex structure, Spin off etc.
Not really, although “france bashing” seems to increase –> Score 0

5 . Low historical beta /volatility
Beta of 1.0 –> Score 0

6. Dividend yield > 3%
Div. Yield 5.13% –> Score +1

7. P/E < 10
Trailing P/E of 8.7 –> Score +1

8. P/B < 1.2
P/B 1.5 –> neutral

9. EV/EBITDA <= 6
EV/EBITDA = 2.2 !!! –> Score +1

10. 10 Year mean reversion potential > 50%
Yes, Based on EV/EBITDA, mean reversion potential would be 200%

11. Positive 10 year FCF yield
Very solid FCF generation (~10% p.a.) –> Score +1

12. Large acquisitions in the past ?
neutral, no big acquisitions, but series of small ones –> score 0

13. Large share Intangible assets ?
40% of book value intangible —-> Score 0

14. Pension liabilities, operating lease ?
Nothing discovered at first glance —> Score +1

15. Low debt (net debt/equity <0.5)
Significant net cash —> Score +1

16. Family owned / run
Yes, 5th generation —> Score +1

17. Treatment of shareholders in the past ?
looks fair, share buy backs —> Score +1

18. Sharecount stable or decreasing ?
Decreasing —> Score +1

19. Alignment of management and shareholders
Good, CEOs skipped bonuses etc. —> Score +1

20. Insider Share purchases/sales last 12 months ?
No —> Score 0

21. Subjective impression of company management (pictures, speeches, comments)
Good —> Score +1

22. 10 Years of history available ?
Yes, Score +1

23. Industry attractiveness
neutral (“discretionary consumer”) —> Score 0

24. Positive/neutral price momentum ?
positive —-> Score +1

25. high quality investors as share holders ?
Yes, Ennismore, Amiral —> Score +1

26. Do I understand the business model ? Is it attractive
looks like a very capital efficient, attractive business model —> Score +1

27. Potential short/medium catalyst ?
Not really —> Score 0

28. 10 year sales growth above inflation ?
Yes, 10 year growth 11.8% p.a –> Score +1

All in all, this results in a quite good score of 19 (out of 28), which compared to my other stocks looks quite good. So this is definitely a stock to follow up more closely.

I am still considering if I might implement either a higher range (like -3 to +3) or decimals to further differentiate. Like for instance at the moment I would give a +1 score to an entity with 30% debt as well as to one with net cash etc. However I am not sure if this makes the “first step check” to complicated.

Based on my checklist, Maison France Confort looks very interesting and definitely a stock to follow up. Cheap on many metrics combined with a very capital efficient business model makes it interesting. Only drawback is the focus on the currently dwindling domestic French housing market, where the portfolio is already exposed to via Poujoulat (chimneys), Installux and even Bouygues.

Investment checklist v 0.1 (beta)

One of my “secondary” goals for 2013 is trying to develop a more “formal” checklist especially for my “boring stock” strategy. As the “Boss Score” is only ment to be a starting point, I usually try to “quick check” certain points in order to find out if a deeper analysis makes sense.

One of the first thing one has to decide is: “what kind of stocks am I looking for” ? I don’t believe that a single check list for all kind of different stocks exists. So please keep in mind, the purpose of this checklist wil be to find stocks that:

– perform consistently well over time but not spectacularily so (no “wide moat” companies)
– have little fundamental downside (low debt, “hard” assets, stable sector)
– can be “left alone” if necessary for a long time because management is trustworthy (“low maintenance”)
– are nevertheless “mispriced” by the market

So far I have come up with the following list and the first 27 items (beta version):

1 . Market cap between 25-250 mn
“sweet spot”, large enough to invest, small enough to deter “large professional” investors

2. Less than 3 analysts following on Bloomberg or very bad sentiment
Unfollowed or “hated” stocks have larger potential to be mispriced

3. “low key” IR. E.g. no English annual reports, short quarterly updates etc., no share price on company homepage
Many investors skip such stocks

4. Potential special circumstances like Euro crisis, very diverse business activities, complex structure, Spin off etc.
increases chance of mispricing

5. Low historical beta /volatility
Good for my nerves, bad for any index oriented investors

6. Dividend yield > 3%
subjective criteria based on experience

7. P/E < 10
For some reasons I prefer “single digits” P/E

8. P/B < 1.2
Maybe anchoring effect, but in my opinion limtis downside risk

9. EV/EBITDA <= 6
in order to detect “special effects”

10. 10 Year mean reversion potential > 50%
Mean reversion potential based on P/E- net margin & EV/EBITDA, EBITDA margin

11. Positive 10 year FCF yield
no FCF generation normally indicates issues with capital allocation efficiency

12. Large acquisitions in the past or serial “acquirer” ?
might severly impact quality of reported numbers

13. Large share of intangible assets ?
again, quality of reported numbers

14. Significant pension liabilities, operating leases ?
Adjust for them accordingly to see if total leverage still acceptable

15. Low financial debt (net debt/equity <0.5)
again to minimize downside risk

16. Family owned / run
better chance for long term strategic management, best with founder still in charge and not too old

17. Treatment of shareholders in the past ?
Any indications of screwing shareholders in the past ?

18. Sharecount stable or decreasing ?
Does company dilute shareholders e.g. via options to management ?

19. Alignment of management and shareholders ?
Does management earn comparably much more than their shareholdings ? Outsized & unwarranted bonuses ?

20. Subjective impression of company management (pictures, speeches, comments)
Might sound stupid, but sometimes a picture says more than 500 pages …. Avoid jet set, sleazy looking guys

21. 10 Years of comparable history available ?
preferably companies with a long term track record as listed companies without major restructurings etc.

22. Industry in general decline
avoid value traps or make sure to understand whats going on

23. Positive/neutral short term (6m-1 year) price momentum ?
only catch the falling knife if you are very very sure

24. high quality investors as share holders ?
Preferable less known but good investors

25. Do I understand the business model ?
Why is the company succesful over the long run ?

26. Potential short/medium catalyst ?
i.e. sale of loss making division, change in shareholder structure etc.

27. 10 year sales growth above inflation
Don’t pay for growth, but if you get it cheap…also trade off with FCF

For each item I will give a score which is either:

+1 for a very positive answer
0 for a neutral position
-1 for a negative aspect

I will then add all the scores, the maximum is then logically the total number of checklist items. Anything which scores above 50% or more will be analysed deeper. In order to “callibrate” the list, I will also calculate scores for all my current holdings.

For a first test I calculated the “sores” for the following positions:

Installux: 18
Total Produce: 16
Hornbach: 16
Tonnelerie: 22
AS Creation: 20
Vetropack: 18
Buzzi: 10

As with any checklist or other “Model”, I don’t think one should follow this like a slave. Rather it should help to look more structured at a stock and also being able to review such a stock periodically on a structured basis.

I would be highly interested if any of the readers has comparable checklists and suggestions for the list.

Spin off check: Getinge / Arjo AB (ISIN SE0010468116)

One upfront comment: I promise to use the auto correct feature of in 2018 as often as possible. However, as  I do not have unlimited time to “polish” my posts, there will be always bad grammar and bad spelling as I try to focus my available time on analyis and actual content.

Already some week ago, Swedish based “Med tech” company Getinge AB spun off Arjo AB.


Read more

Quick check: Australian Vintage Ltd. (ISIN AU000000AVG6) – Deep Value Pearl or risky turn around Gamble ?

A very persistent commentator asked me about my opinion on Australian Vintage, an Australian Wine producer. In between, Nate from Oddball covered the stock and seemed to like it as an asset play .

Optically, the company looks dirt cheap (Bloomberg):

P/E 7
P/B 0,3
P/S 0,3
Dividend yield 10,5%

When I look at such “cheap” companies, I start reading the only annual report and concentrate only on problems. I tend to avoid company presentations as they usually only show the positive stuff. A 30 minutes “speed” read of the 2013 annual report shows already some issues:

– goodwill, brand values and DTAs make up ~100 mn AUD of the book value plus another 50 mn AUD or so for biological assets and water rights
– the 2013 profit includes a significant “one-off” reserve release. without that, 2013 profit would have been some 40% lower or the P/E well into “double digits”
– the company carries significant debt and lease obligations, overall around 240 mn AUD in the 2013 annual report
– the directors salary is at ~ 3 mn AUD a significant portion of the profit
– on the other hand, directors own only insignificant amounts of shares (AUD amount of shares ~20% of total annual salary)
– operating cashflow has been negative in 2013, so the dividend has not been “earned”
– Depreciation is around 7 mn AUD per year, investments only 4-5 mn in 2012, 2013. This looks like “underinvestment”.
– most “hard” assets (inventory, property etc.) are pledged for the loans
– all subsidiaries are explicitly guaranteed by the Holdco, so all loans are fully recourse against any asset
– bank loan covenants exist, but are not clearly reported:

The Group is also subject to bank covenants with its primary financier as follows:
– Equity must be above $210 million.
– Gross profit and earnings before interest and tax must exceed pre-defined levels

– the bank loan facilites mature in 2015 and will have to be renegotiated
– there are “related party dealings” with companies of the CEO (purchase of grapes etc.)

In October / November 2013, they did a massive capital increase (42 mn AUD) in order to pay back debt. Some might argue this is a good thing, but paying large dividends and in parallel doing large capital increases is a very bad sign and very bad capital management (among others, they had to pay around 5% fees on the raised capital).

One observation with regard to the capital increase proespectus: On page 35 they show that the capital increase will increase earnings per share due to lower interest rate expenses. However they use a pretty obvious “trick” here: they use an “average amount” of outstanding shares, not the relevant final amount of shares. With the full amount of shares (232 mn) instead of the “average”, the capital increase would of course be “dilutive”.

The first 6 months of fiscal 2014 looked better on the bottom line, but again includes a big reserve release. Operationally, the first 6 months of 2014 were a lot worse than the year before, especially the US turned from an operating profit to a loss.

Some additional thoughts:

– As an Australian asset play, the Australian Dollar plays a big role. As a non Australian investor, I might have a operational upside if the AUD goes lower, but asset value as a EUR investor will be lower as well
– the UK supermarkets who are the major non Australian clients, are under a lot of preassure themselves. They will squeeze their suppliers as hard as they can and will demand lower prices if the AUD becomes weaker
– return on assets is very low. If the 10 Year treasuries yield 3.7% and Return on assets is far below that than the value of the assets ist most likely overstated by a large margin
– moving “upscale” is not easy. This needs even more capital (oak barrels, longer ageing = higher inventory etc.) and time.
– from the main brand “McGuigan”, you can buy in Germany only the Shiraz which is currently on sale (4,95 EUR vs. 5,99 EUR) and a “Sparkling Shiraz” at 12,95 EUR. To upgrade from that level will be hard…..
– finally, the Australian wine industry seems to be one of the clearest victims of climate change. Water will become much more expensive and many grapes might not grow so well in the future. This could for instance seveely reduce the value both, of the land and teh biological assets. This study for instance shows that Australie is hit hardest globally. If this will realize, everything, land, machinery and “Biological assets” would loose most of their value.

Overall I think the main issue is that the interests of the Management and shareholders are not really aligned in this case. Especially the CEO, whose max target bonus has by the way doubled for next year, seems to be far more interested in his salary than the shares and it looks like that the majority of his own investments seem to be outside the listed companies. Combined with the relatively risky financial profile, this is clearly a “deep value” case with a significant risk especially close to the 2015 maturity of the loans.

Opposite to Nate, I can see a lot of things that could go wrong here and either trigger another massive capital increase or even a bankruptcy. As I do not know a lot about the Australian Wine industry either, I think I would pass on this investment as it is extremely difficult for me to handicap the probabilities and would therefore be a quite “risky turn around gamble”. As I don’t have any experience with Australian liquidation rules, I would also be really careful to expect meaningful recovery rates for shareholders in case of a bankruptcy / restructuring. If for instance the loans would get into the hand of aggressive “vultures” like Oaktree, I would bet that stated book values would not be worth a lot.

However for “deep value” specialists, this could be interesting if they are able to estimate the “survival probability” to a certain extent.

A side note: “Moving up the value chain” in wine usually means oak barrels. So despite the much higher valuation, I still think that Tonnelerie Francois Freres is the better (and safer) long term investment in the wine industry.

Quick check: Astaldi SpA (ISIN IT0003261069)

Astaldi SPA was now mentioned by at least 2 commentators as an interesting stock, so let’s look at this Italian stock.

Looking at the “Normal” fundamentals, it seems clear why:

P/E 7.1 (2012)
P/B 1.0
P/S 0.2
dvd. yield 3.1%

So at the first look, a single digit P/E and P/B of 1.0 look attractive.

On top of that, Astaldi has increased earnings each year in the last 10 years at an impressive rate:

31.12.2003 0.23 0.05 10.0%
31.12.2004 0.27 0.07 12.1%
30.12.2005 0.28 0.08 13.1%
29.12.2006 0.31 0.09 11.2%
31.12.2007 0.39 0.09 12.9%
31.12.2008 0.43 0.10 13.2%
31.12.2009 0.57 0.10 16.0%
31.12.2010 0.64 0.13 15.8%
30.12.2011 0.73 0.15 16.0%
31.12.2012 0.76 0.17 15.2%

Well, what is not to like ? Even my Boss Score says that they are attractive, indicating ~100% upside.

First, Astaldi is primarily a construction company. As a construction company, a large part of the balance sheet is either “work in progress” or “receivables”. The problem with that is that you never really know how at what stage profit will booked and if this is really earned or if there is some nasty surprise at the end. To illustrate this point, look at this table from page 179 of the 2012 annual report:

2012 2011 Change 2012 2011 2011+2012 In % of sales
– Revenue from sales and services 879,025.00 292,875.00 1,171,900.00 26%
– Plant maintenance services 12,544.00   12,544.00 0%
– Concessions construction and management phase 95,740.00 91,186.00 186,926.00 4%
– Changes in contract work in progress 1,330,781.00 1,881,223.00 3,212,004.00 70%
– Final inventories of assets and plant under construction 7,209.00 0.00 7,209.00 0%
Total 2,325,299.00 2,265,284.00 4,590,583.00

So this table shows that around 70% of Astaldi’s sales were unfinished projects accounted for as “percentage of completion”. This is the respective passage of their accounting principles (page 285):

Long-term contracts
Contract work in progress is recognised in accordance with the percentage of completion method, calculated by applying the cost to cost criterion.
285. This measurement reflects the best estimate of works performed at the reporting date. Assumptions, underlying measurements, are periodically updated. Any income statement effects deriving therefrom are accounted for in the year in which such update is made.

This is a big problem for me. I don’t know if their “best estimate” is cautious or aggressive. I have no evidence that they are doing anything wrong, but for my personal investment style, I do not like companies with a large share of “percentage of completion” business because that introduces a lot of uncertainty into the stated results.

The second problem I see here is the high amount of (gross) debt funding. Astaldi had around 1.25 bn EUR gross financial debt at the end of 2012. For construction companies, a combination of external debt with long term projects can be quite dangerous. Normally, one would expect that most of the projects would be funded via prepayments but Astaldi only manages to get around 400 mn EUR in prepayments.

The big risk here is that one big busted project or problems with one subsidiary can trigger loan covenants and then there is “game over” or at least a large dilutive capital increase.

Loan covenants:

Let’s look shortly at their loan covenants (page 223):

Covenants and negative pledges
The levels of financial covenants operating on all the committed loans the Group has taken out with banks are listed below:
(The present document is a translation from the Italian original, which remains the definitive version)
– Ratio between net financial position and equity attributable to owners of the parent: less than or equal to 1.60x at year end and 1.75x at half year end;
– Ratio between net financial position and gross operating profit: less than or equal to 3.50x at year end and 3.75x at half year end.

Lets do a quick calculation of the ratios in 2012 (based on their own “net financial debt calculations on page 32):

YE 2012: Net financial deb 812 mn, Equity 468 mn –> this would be already 1.73 times, so clearly above the threshold. Only if they include some “non current financial receivables” in an amount of 186 mn, the come down to 622/486 = 1.27 times.

In my opnion, their financial position looks clearly stretched. Maybe this is the reason why they had to issue a quite expensive 100 mn EUR convertible bond early this year. Issuing convertible bonds is ALWAYS a big warning sign that a company cannot fund its operations with “normal” debt.

For me, this is already a BIG RED FLAG. In my opinion, there is no margin of safety in a company with such a high debt load and such tight situation in terms of covenants.

Other more superficial observations after reading thorough the last annual report:

. unfocused concession portfolio (car parks, motorway, airports, hydroelectric plant, hospitals)
– comprehensive income in the last 4 years was always lower than stated eps

SIAS in comparison, my Italian “infrastructure” stock is a much easier story. Less debt, no “percentage of completion”, clear focus on motorway concessions.


Despite the nominally cheap valuation, I don’t really like Astaldi. The high amount of “percentage of completion” assets combined with a rather large debt load make the stock quite risky in my eyes. If things work out well, there is clearly upside, however if one project goes wrong, the company will be in big trouble. So no real “Margin of safety” here in my opinion.

And no, I don’t think that concession business has a bright future. As an Italian company one has a clear competitive disadvantage with higher funding costs and in my opinion it is impossible to run so many different types of concessions in different countries really effectively. I am afraid that they will overpay and/or get the stuff the specialists don’t want.

Quick check: CIR Spa (ISIN IT0000080447) – HoldCo sum of part play with “special situation” catalyst ?

This is an idea I read recently on the beyondproxy blog/site.

As my first attempt at this post somehow disappeared, I will now just copy the introduction from the beyond proxy post:

CIR Group is a company whose story is an intricate all-Italian tale of family ownership, corruption and dirty politics. This unique combination of factors seems to be frightening investors away from the company thereby causing its shares to become substantially undervalued. Within the next two quarters however, the Italian courts will decide on a legal dispute that will put an end to the tale and, most likely, a higher valuation on the stock.

CIR is structured as a holding company. It owns controlling interest in four businesses (Sorgenia, Espresso, Sogefi and KOS) and has substantial investments in alternative assets such as hedge funds and other financial instruments. Its liabilities consist mainly of €300mm of publicly traded bonds and €564 million of legal reserves.

and this is the “kicker”:

CIR carries a €564 million liability that has been booked as “Borrowings”. In reality, this is not borrowed money – it is a legal reserve for an infamous legal proceeding that has been making headlines in Italy for the past twenty years: the so-called ‘Lodo Mondadori’.

The author (a Italian grad student by the way) then values the company with a simple sum of part model, using share prices for the listed subsidiaries (Espresso, SOGEFI) and NAVs (P/B=1) for the unlisted shares (utility Sorgenia, hospital KOS). As a result, the author sees an upside of at least 20% in any case or up to 135% in case of a positive outcome of the “Berlusconi situation”

I think this is a good starting point, but I would adjust the approach slightly:

1. add control premiums to the participations
2. adjust NAVs for unlisted participations if appropriate (and comparables are available)
3. deduct finally a control premium for the CIR share

One could ask: Why add control premiums and then deduct them again ? Well, clearly, being a minority shareholder in the middle of an Italian shareholding chain is not the best position to be in. The main effect of this approach is to deduct a control premium from the expected Berlusconi settlement. This should be done as one does not know what happens with the money. I assume it will not be paid out as a dividend.


1. For a control premiums in both cases I assume 30%
2. For the unlisted utility, I will use a P/B valuation not at nAV but at 0.5 times NAV. This is in line with similar Italian utilities like Iren (0.58) and Enel (0.6). I use 0.5 because the others are even profitable, Sorgenia is not.

First step: Sum of parts ex “Berlusconi”

CIR Spa 12/2012          
    mn EUR MTM Control premium MTM + prem
Participations 1,192        
– Sorgenia   197.7 186 30% 241.8
– Espresso   341.7 178 30% 231.6
– Sogefi   106.9 172 30% 223.7
– KOS   99.2 99.2   69
– CIR Investimenti   421 421   421
– others   25.5 25.5   25.5
Receivables (group) 320   320   320
Cash, securities 291   291   291
other 67   67   67
Total 1,870   1,760   1,891
LT debt -299   -299   -299
“Berlusconi liability” -564   -564   -564
Other -68   -68   -68
Total -931   -931   -931
NAV 939   829   960
shares 793.3   793.3   793.3
NAV per share 1.18   1.05   1.21

This rather simple table shows how i moved from the current “carrying values” in the HoldCo balance sheet of CIR Spa Holding to my mark-to-market valuation BEFORE applying the overall control discount. Remark: Using consolidated numbers for a company consisting of mostly 50% participations does not make a lot of sense.

Step 2: Berlusconi scenarios and control discount

before tax After Tax Per sh NAV Upside -30% control Upside
Base case       1.21 27% 0.85 -11%
Berlusconi min 150.0 97.5 0.12 1.33 40% 0.93 -2%
berlusconi max 564.0 366.6 0.46 1.67 76% 1.17 23%
Belusconi Mid 357.0 232.1 0.29 1.50 58% 1.05 11%
last news -15% 479.4 311.6 0.39 1.60 69% 1.12 18%

Here you can see the base case (as is) and 4 potential scenarios for the payment, assuming that 150 mn before tax is the minimum. The upside is calculated based on a current share price of 0.95 EUR per CIR SpA share

We can see that after applying the -30% control discount on the sum of part, without the Berlsuconi settlement, the shares look rather expensive. The max. upside with around +28% is rather limited at this price.

So it looks like that some of the expected Berlusconi payments are already priced in. At that price, I don’t think CIR SpA is attractive if one applies a 30% control discount.

Legal disputes /court cases as special situationss

In general, legal disputes are often quite interesting special situations. This is a quote from the 1951 edition of Ben Graham’s 1951 edition of “security analysis” (via CS Investing):

Class D Litigated Matters.

There are fairly numerous cases in which the value of a security depends largely on the outcome of litigation. This may involve a damage or subordination suit (e.g., International Hydro Electric, Inland Gas Co.); disputed income tax liability (e.g., Gold and Stock Telegraph, Pittsburgh Incline Plane); an appeal from a reorganization plan wiping out stock issues (e.g., St Louis Southwestern Ry., New Haven R.R.). In general, the market undervalues a litigated claim as an asset and overvalues it as a liability. Hence the students of these situations often have an opportunity to buy into them at less than their true value, to realize attractive profits—on the average—when the litigation is disposed of.

What kind of holding company is CIR SpA ?

A few months ago, I had a post about how I distinguish Holding companies:

For myself, I distinguish between 3 forms of holding companies:

A) Value adding HoldCos
B) Value neutral HoldCos
C) Value destroying HoldCos

Back then, we saw that even for a “value neutral” holding like Pargesa, a 30% discount applied. So implicitly I assume CIR SpA is value neutral as well. At least the reporting is quite transparent. In the past, CIR was involved in many typical Italian Feuds like Olivetti and Mondadori, but I haven’t read anything that they try to screw minority shareholders of their own group.

Although Benedetti Junior looks a little bit like someone who enjoys doing shady deals 😉

According to the last annual report, Benedetti Senior has ceded control of CIR SpA to his sons.


Although I like the unique aspect of this special situation, the potential upside is NOT attractive enough to justify an investment at current prices.

I will keep this on the radar but I would not invest above ~0.70 EUR. I would need 50% upside in order to justify the risk of the underlying companies which are clearly struggling.

Listed German utility companies – part 1: Overview and E.on (ISIN DE000ENAG999)

In my small series about utility companies, it might make sense to start with those companies which are at least geographically in my “circle of competence”, Germany.

There are currently 8 listed companies which qualifiy one way or the other as “utilities” which are:

Ticker Name Mkt Cap EV/EBITDA T12M P/B P/E Dvd Yld
EOAN GR Equity E.ON SE 28,194 7.5 0.7   7.8
RWE GR Equity RWE AG 19,099 4.7 1.2 8.3 6.3
EBK GR Equity ENBW ENERGIE BADEN-WUERTTEMB 8,340 5.6 1.4 31.0 2.7
MVV1 GR Equity MVV ENERGIE AG 1,549 8.3 1.4 25.3 3.8
FHW GR Equity FERNHEIZWERK NEUKOELLN AG 72 6.8 2.1 15.6 4.5
MNV6 GR Equity MAINOVA AG 2,031 22.9 2.2 20.8 2.5
WWG GR Equity GELSENWASSER AG 1,887 17.8 2.3 19.3 3.2
LEC GR Equity LECHWERKE AG 2,198 20.0 2.7 22.6 3.2

Obviously, the large companies look the cheapest. Most of the smaller companies are in fact subsidiaries of the large players or owned by the Government such as:

– Lechwerke is owned ~90% by RWE
– Mainova is part of EON (91.3%)
– Gelsenwasser is owned by the government (92%)
– MVV is majority owned by the city of Mannheim (50.1%)
– EnbW is majority owned by the Government (85-90%)
– Fernheizwerk Neukölln is owned by Sweidish Vattenfall (80.1%)

RWE is de facto controlled by the regional government as well, only E.On to my knowledge does not have a controlling shareholder or significant Government influence.
s one could read in the press, the regulatory environment in Germany is supposed to be quite ugly, among others, the major issues are:

– unpredictable politics (close down of Nuclear power plants following Fukushima), the utilities are actually trying to sue the Governemnt for this
– heavily subsidized renewable energy (costs are added to the electricity bill for retail customers)
– relative low allowed yields on infrastructure which led the major players to shed electricity grids and gas pipelines
– heavy competition for instance for electricity. I just checked, where I am living (Munich), I got ~44 different offers for electricity

Going back to the “Buffet on utilities” approach, especially suing the Government (i.e. regulator) is maybe not a ver good long-term strategy if you then want to negotiate your next investment.

Another interesting aspect in my opinion is the fact, that especially the subsidiaries with purely local (regulated) focus show quite satisfying longterm ROEs.

10Y ROE 5Y ROE Debt/Equity
LECHWERKE AG 24.5% 13.9% 0.2%
GELSENWASSER AG 17.7% 12.5% 2.1%
MAINOVA AG 17.1% 9.1% 70.3%
MVV ENERGIE AG 10.3% 11.3% 107.6%
RWE AG 17.4% 15.4% 122.4%
E.ON AG 10.2% 1.8% 79.2%

I find especially Lechwerke, Fernheizwerk and Gelsenwasser fascinating. Without any leverage they manage to produce solid double-digit ROE’s over long periods of time. So looking at this one might think that both, for RWE and EON, the German regulator is maybe not the real reason for their current problems.

Rather bad management and failed international expansion are the drivers between the rather bad performance in the last few years. Eon for instance lost lot of money with gas contracts outside Germany.

This is also the major issue I have with E.on. For some reason, they believe that they must grow outside Germany, just recently they swapped German Hydro plants with Austrian Verbund against a 50% stake in a Turkish utility group. Earlier in 2012 they teamed up with Brazil’s Eike Batista to invest in Brazil. Some people might like this exposure to “growth markets”, but personally I think this is a quite risky strategy.

Again, if we look at the comparable performance between E.on and its listed German subsidiary Mainova, we can see that at least this German business performs quite well and consistent despite E.on’s claims of bad German regulation:

Some additional thoughts about E.on based on the 2011 annual report:

– Nuclear is not coming back, that was more than 1 bn of EBIT which is missing going forward
– 60% of sales are actually energy trading revenues. The results of this “sector” look quite volatile
– they show huge swings in the net results of financial derivatives. In 2010 for instance, E.on showed a net gain of 2.5 bn against a 2011 loss of -1 bn .
– E.on has around 17 bn liabilities for nuclear waste etc. This liability is hard to analyse and could be grossly over-/understated. In the notes they state that the discount rate they use is 5.2%. I think this is a rather high rate. Combined with the long duration of those liabilities, there could lurk a potential multi billion hole there as well as in the 14 bn pension liabilities
– another “whopper” are the 325 bn EUR (yes that’s three hundred twenty five billion) of outstanding fossil fuel purchase commitments. Disclosure is rather limited here but I guess this is one of the big problem areas where they have locked in Russian NatGas purchases at too high rates

On the plus side we could add:

+ maybe earnings were understated to put pressure on regulators and trade unions
+ positive effect from future reduction in interest rates

All in all, EON in the current form looks like a big black box to me. mostly due to the large trading activities which are not transparent at all. I would be not able to value the company. I also don’t think it is particularly well-managed. As there is no dominant shareholder, the major “upside catalyst” could come from an activist investor. In contrast, I think current management will most likely waste the cash flow in stupid “growth investments”.

Another issue, and that goes for most of the German utilities is the fact, that the combination of Nuclear exit and strongly subsidised local renewal energy production might have altered the business model going forward. So betting on a “reversion to the mean” might not necessarily work here, at least not in the short run.

Last but not least, I don’t see how I could have any “edge” in valueing E.on. It is a liquid large cap stock, with plenty of analyst coverage. True, sentiment is quite bad which is maybe a chance at some point in time but as a private investor with a small portfolio, this is not the first place to look for “value”.

Yes I know, for many “value investors”, a P/B of 0.77 and dividend yield of 7.6% would already be enough and maybe yield starved investors will bid up E.On stocks for the dividend, but looking 3.5 years ahead, I don’t see a real “Margin of safety” at current prices with the current management and strategy plus taking into account the fundamental issues mentioned above.

Boss score harvest part 6: Reply SpA (ISIN IT0001499679) – Quick check

Cheap Italian companies are ” a dime for a dozen” at the moment. Cheap Italian companies with rising sales, improving margins and solid balance sheets are however as common as the common “black swan”.

One Italian company which looks good under my Boss Score model is Reply SPA from Italy.

Reply SPA looks relatively cheap based on traditional metrics, especially P/E and EV/EBITDA

Market Cap: 160 mn EUR
P/B 1
P/E Trailing 5.9
Div. yield 2.85%

What really raised my interest was their half year update, which shows nicely improving figures:

The Board of Directors approves the Half-yearly Report as at 30 June 2012
2 August 2012

“Double digits” growth for all economic and financial indicators:

Consolidated turnover of 244.2 million Euros (+11.6% compared with H1 2011);
EBITDA of 30.7 million Euros (+15.9% compared with H1 2011);
EBIT at 27.6 million Euros (+19.8% compared with H1 2011);
Earnings before taxes of 26.8 million Euros (+18.9% compared with H1 2011)

This is even more astonishing, as they have 3/4 of their activities in Italy. So how are they doing it and what are they doing anyway ? Bloomberg says the following:

Reply S.p.A. specializes in the design and implementation of solutions based on new communication channels and digital media. The Company’s services include consultancy, system integration, application management, and business process outsourcing. Reply S.p.A. provides services to business groups within Telco & Media, Industry & Services, and Banking & Insurance sectors.

If I understand correctly, they seem to be a kind of IT systems integration company. In their annual report, they use all the “buzzwords”, like cloud computing, mobile payments, big date business security etc.

Similar to German IT company Bechtle, Reply seems to have grown through acquisitions in the past and is more a “collection” of smaller IT companies than one monolithic company.

Balance Sheet

A quick look into the balance sheet:

Reply has relatively low debt (they had zero debt in 2010) which is good. However we can see a significant amount of Goodwill. This is a problem if profitability would go down.

So far it looks OK. With ROE of 16.5% and ROIC in the double digits (including Goodwill, 13.7%) it looks like they did not overpay for acquisitions.

One thing which caught my attention was the high amount of receivables, with almost 50% receivables compared to sales. However looking at the past, this seems a “normal” amount for reply. If we look at historic numbers, they were always in that range:

Receivables Sales  
2007 121 230 52.6%
2008 144 277 52.0%
2008 144 330 43.6%
2009 153.7 340 45.2%
2010 189.1 384.2 49.2%
2011 219.0 440.3 49.7%

German IT company Bechtle AG, which seems to have a similar business model however has only 10-15% receivables compared to sales. So this is definitely something to explore further.

Stock price, shareholders etc.

Although the stock is clearly below 2007 highs, the stock has clearly outperformed the Italian index as one can see in the following chart:

Typically for Italian companies, the majority yof the company is is controlled by a family, in this case by Mario Rizzante through his Alika Srl holding. Hi daughter Tatian is CEO of the company.

Among the other shareholders, I found the “Franfurter Aktionfonds für Stiftungen” very interesting. I am not sure how succesful they are but in their portfolio are many stocks I find interesting as well. For them, the 4.83% stacke is one of the largest fund positions.

Special stuff

I overlooked almost one very interesting detail about Reply: Reply owns 78.6% of German listed “Reply Germany”, the former Syskoplan AG (ISIN DE0005501456).

Reply Germany is interestingly valued much much higher, at around 11.7x EV(EBITDA and 1.6x P/B. and a P/E of 13. A quick back of the envelope calculation shows the following

– value of the stake 37 mn EUR
– trailing 12 m earnings 0.72 cents per share or 3.5 mn EUR

If we deduct this from Reply’s 140 mn market cap and Reply’s profit, we can see that Reply’s business ex Syskoplan is actually valued at a P/E below 5.

Quick summary:

Reply SpA looks like a really interesting stock. However I do not have a lot of experience with investing in IT service companies, despite having started by professional carreer in one. So I will have some more work to do with Reply, especially a comparison with companies like Bechtle. The one thing to watch out is clearly the receivables issue.

Quick check: Cairo Communication (ISIN IT0004329733) – 12% dividend “wonder” or liquidation ?

A reader pointed out that Italian company Cairo Communciations might be an interesting investment.

Company description per Bloomberg:

Cairo Communication S.p.A. carries out its activities in the communication field as an advertising broker for a variety of media, such as commercial television, analog and digital pay television, press, and the Internet. The Company also publishes magazines and books and operates an Internet portal through its own search engine, Il Trovatore.

Cairo looks relatively cheap on an earnings basis (2011):

P/E 8.5
P/S 0.7
P/B 3.13

The company doesn’t have any debt but significant net cash (0.70 EUR per share against a share price of 2.56 EUR).

ROCE and ROE are both above 30%, so is this a value investor’s wet dream ?

Cairo is listed since 2000, so let’s look at some figures from the past:

BV Sh EPS DPS NI Margin Sales pS ROIC
29.12.2000 1.62 0.09 0 5.6% 1.5348 3.03%
31.12.2001 1.70 0.08 0 4.8% 1.7509 2.84%
31.12.2002 1.73 0.07 0.04 4.7% 1.5929 1.93%
31.12.2003 1.72 0.07 0.24 3.8% 1.7299 2.74%
31.12.2004 1.65 0.09 0.16 3.6% 2.3745 3.54%
30.12.2005 1.58 0.08 0.16 3.5% 2.3161 3.81%
29.12.2006 1.19 0.15 0.30 0.0% 2.7983 7.74%
31.12.2007 1.11 0.15 0.25 5.4% 2.9956 11.34%
31.12.2008 0.91 0.17 0.40 5.6% 2.9527 14.22%
31.12.2009 0.86 0.16 0.20 5.3% 2.9259 15.12%
31.12.2010 0.90 0.27 0.20 8.3% 3.2273 27.67%
30.12.2011 0.82 0.30 0.40 8.3% 3.6192 31.81%
Total   1.67 2.35    

The numbers look really interesting. On the one side, it looks like a liquidation, with dividends being constantly higher than earnings. On the other hand, Cairo managed to more than double their sales with almost half of the equity and at the same time increase their margins to a healthy 8%.

Together, this of course leads to a dramaticv increase in ROE and ROIC.

Interestingly the stock price hovers only slightly above the post internet bubble prices:


I think this really looks interesting and worth a deeper look into the drivers of the sales increase and profitability development. If this would be “sustainable” then Cairo might indeed be an attractive opportunity.

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