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Strange stocks part 2: East Asiatic Co. Ltd. – Australian miners meet inflated Venezuelan pigs in Copenhagen

Summertime is always a good time to look at stocks which are to a certain amount “strange”. I started this mini series last year with the two listed National banks of Switzerland and Belgium.

In this second part, I want to look at the Company called “East Asiatic Co Ltd.”, incorporated and listed in Denmark.

Why is this stock strange ? Well, first, for a company called “East Asiatic”, Denmark is not the most natural site to be located. Secondly, the description in Bloomberg is the following:

East Asiatic Company Ltd. A/S processes food and offers moving services. The Company raises and slaughters animals and processes meat in Venezuela; and provides relocation and records management services to corporate and individual clients in Asia.

So Venezuela is not directly in East Asia. According to this website, the name is only related to the historic business of the company:

East Asiatic Company (Ostasiatiske Kompagni, Aktieselskabet Det.), Copenhagen, Denmark. Formed 1897 by Capt. H. N. Andersen and associates. Operated between Denmark and the Far East, trading in rice, oilseed, timber and spices. Operated first commercial ocean-going diesel ship (Selandia (1912)) after which routes expanded to include South Africa, the West Indies, North America and Australia. Survived WWII with a depleted fleet but retained their rank amongst the worlds leading ship operators. Largely divested itself of shipping interests between 1994 and 1997 and diversified into other areas.

So let’s directly look on EACs website to find out what exactly they are doing today.

Subsidiary Santa Fa

If one looks up Santa Fe’s website, this looks like a potentially interesting global business services company. They seem to offer everything, from Visa, moving furniture and finding real estate.

According to EAC’s 2012 annual report, two subsidiaries of Santa Fe (Wridgways, Interdean) were bought in 2010/2011. Overall, Santa Fe made up 31% of EAC’s total sales.

EAC’s annual report by the way is very good. On page 19, they explain Santa Fe’s business model clearly, which looks attractive in a globalized world.

Business is growing strongly, but margins have been reduced, specifically as they feel already the slump in Australian mining activity.

Simple valuation of Santa Fe:

Plan: 5% CAGR until 2016, 300 mn EBITDA. EV/EBITDA of 6-8x realistic ?

Current borrowings 500 mn, growth by 5% in line with sales –> 600 mn debt in 2016

EV of 1.800 -2.400 –> equity value of 1.200 -1.800 in 2016. Discount by 15% for 3 years: NPV of Santa Fee according to this: 790 – 1.180 mn DKK

just for comparison reasons: Current market Cap EAC in total: 1.120 mn DKK

Plumrose:

No comes the fun part. Subsidiary Plumrose ist he leading pork producer in Venezuela, Cranswick of Venezuela so to say. However, other than Cranswick, Plumrose owns the complete vertical value chain. They are growing their animal feed, raising pigs, slaughtering, processing and distribution incl. branded food items.

As we all know, Venezuela has problems and doing business there is at least “challenging”. Among the problems specifically concerning Plumrose are restrictions of money transfers outside Venezuela and Hyperinflation.

Restriction on money transfers

According to the annual report, Venezuelan authorities did not allow to transfer dividends to EAc since 2007. Only one special dividend of 68 mn DNK was allowed in 2012. In parallel, EAC seems also to charge royalties to Plumrose, but again those royalties cannot be paid out.

The theoretical amount of those outstanding amount would be around 60 mn USD at current Bolivar exchange rates.

Inflation /Hyperinflation

Reading the annual report is also an interesting lesson in inflation and IFRS Inflation Accounting I didn’t know for instance that there is a separate IFRS article (IFRS 29) dealing with hyperinflation.

The big issue here in my opinion is the following: In a Hyperinflationary context, one usually is confronted with “official” fixed exchange rate which are subject to transfer restrictions and a black market rate which is usually a lot lower.

In Venezuela, the government devalued th Bolivar in February this year significantly by almost 50% from 4.3 USD/Bolivar to 6.3. Nevertheless, this is far away from the “black market” rate. currently, according to some sources, the “black” rate is around 32 Bolivar per USD, only a fraction of the official price.

Often, the black market rates are maybe too cheap because of the risk involved with “semi legal” transactions, but clearly, the official rate is far off the mark.

So if we look into the 2012 annual report of EAC, we can see that Plumrose is responsible for almost 80% of EAC’s profit as reported with an exchange rate of 4.3. If we look into Q3, we can see that Plumrose at 6.3 Bolivars er USD is responsible for almost all of EACs profits.

No, using the black market exchange rate, one should actually divided those numbers by 4 or 5 to come to a realistic representation. If one does so, then the currently cheap valuation of EAc (P/B 0.46, P/E 7 for 2012) suddenly look at lot different. Calculation with 30 Bolivar per USD, EAc would not have made a profit in 2012 and P/B would be around 1.

So this is an important lesson here: For any company having significant exposures in a hyperinflationary environment, one should not look at the “officially translated” earnings but recalculate at more realistic black market rates.

Other observations:

The company itself seems to be very shareholder friendly. Clearly, many investors would like the Santa Fe business but less the Venezuelan operations. On their website they state the following:

EAC strategy towards 2016

The overriding aim of the EAC Group is in the course of the coming years to develop its two businesses, Santa Fe Group and Plumrose in Venezuela, into strong and independent businesses; each with a size and scale sufficient to attract international investors and to become independent, listed companies.

So this is quite unusual. Many companies just want to become as big as possible. Here, it looks like that they really want to maximise value. This could also be a spin off opportunity at some point in time

Stock price:

The stock price has seen better days:

So it looks like that there is not too much optimism priced in at the moment (or too much optimism in the past). The stock price most likely also reflects that Santa Fe is currently struggling due to the BRIC slow down.

Summary:

All in all, EAC is not only a “strange” stock but also an interesting stock. Although both subsidiaries are struggling, I see some “real option” value here. The Santa Fe business, if the execute as planned, is worth more or less the whole market cap at the moment. Therefore, Plumrose, the Venezuelan pork producer is like a “free” option betting on a better future for Venezuela. This future is highly uncertain, but some positive signs are also visible.

I do not know any other way to invest in Venezuela apart from Government bonds which have their own issues if one wants to bet on some kind of recovery like we have seen in neighbouring Colombia.

On the other hand, Santa Fe is definitely negatively impacted by the slow down in the BRIC and commodities world. So it will need sometime until this potential value could be unlocked.

For the time being, I will however NOT buy the stock but watch developments closely.If Santa Fe really recovers I will establish a position.

Nevertheles, keep in mind that this is not a typical “margin of safety” kind of stock. This is more like “ray Delio style risky but cheap “real option” investment with relatively uncorelated specific risks.

New Series: Strange stocks – Part 1: Swiss National Bank (SNB) and Banque National de Belgique (BNB)

Before Nate at Oddball “discovers” all the <2off the radar" European stocks I thought that I start a series about stocks which are in my opinion are strange or uncommon. A little competition in this area might not hurt…

IMPORTANT: Most of those stocks will not be really investments. This is “just for fun” mostly. So if you are looking for “actionable ideas with a catalyst” you might consider skipping this series. If you are however more liek a “stock collector” feel free to read and comment.

In the internet there is often a lively debate about the fact that the US Fed is in principle privately owned. I don’t want to touch this now as this pretty quickly goes into the racist or religious direction.

So lets look at two other National banks. Not many people know that both the Swiss National Bank (ISIN CH0001319265) and the Belgium National Bank (BE0003008019) are both listed stock companies.

Swiss National Bank (ISIN CH0001319265)

The SNB has 100 thsd shares outstanding giving it a market cap of ~100 mn “Swissies”. Not a lot for a bank who can print one of the hardest currencies in the world and is holding 400 bn CHF foreign reserves ? To make things more interesting, the SNB had a profit of 6.5 bn CHF (!!!) in the first 6 month of the year. So ist his a P/E 0.01 investment ?

Not so fast there are some details to consider.

1. Shareholders do not really have rights as most of the normal shareholder’s rights are capped through a special Swiss law

2. The same law also fixes the maximum dividend amount at 15 CHF. Any profit above goes to the Government

So effectively we do have a perpetual Swiss Frank Bond with a yield of around ~1.5 % at current prices, which for CHF is not unattractive.

As the stock basically trades in line with interest rates the long decline in rates actually led to a very nice and steady performance over the last 10-15 years:

For some strange reason a German professor is the largest private shareholder of SNB with almost 5.6% which caused some raised eyebrows in Switzerland. According to the Economist only ~53% are held by Swiss Government entities.

Summary: If you are bullish on the Swissie it could be a good hedge to buy SNB shares. additionally it might be just fun to be shareholder of the Swiss Nationalbank. If you have some spare time the annual meeting might be good entertainment. However it clearly does not fit into my portfolio.

Belgium National Bank (BE0003008019)

The Belgium National bank is also a listed company. Interestingly tiny weak Belgium National Bank has a market cap of 900 mn EUR ~8 times that of “Mighty” SNB. How comes ?

This might have something to do with the following developement of dividends since 1998:

Dvd/share
31.12.1998 58.67
31.12.1999 59.16
29.12.2000 59.87
31.12.2001 61.47
31.12.2002 63.00
31.12.2003 64.13
31.12.2004 65.33
30.12.2005 66.67
29.12.2006 68.47
31.12.2007 70.00
31.12.2008 72.00
31.12.2009 75.00
31.12.2010 126.48
30.12.2011 166.12

So clearly the BNB is paying out a lot more than the SNB having a nice yield of around 6.2%. The “Mechanics” of the dividend are published unfortunately only in Dutch or French.

If I understood correctly the dividend is determined the following way:

1. A guarantee dividend of EUR 1.5 per share
2. Additionally the National Bank reserves a part of the profit which prevents that all profit is distributed to the Government. The yield on this reserve is then distributed to the shareholders.

In the latest shareholder presentation there are some slides regarding this reserves and average yields etc.

I didn’t fully understand the mechanism but it looks like that BNB shareholders were one of the beneficiaries of expanding central bank balance sheets.

Summary: Although i don’t fully understand the mechanism the BNB profit distribution mechanism looks quite interesting. I am not sure if this is an investment right now but something to keep on the radar screen maybe as an alternative to long term bonds with in implicit Financial crisis option. The stock actually would qualify for the “Exotic security” category as well.

Follow up: East Asiatic Company (DK0010006329) – Sale of Venezuelan Business

East Asiatic was part of my “strange stocks” series almost a year ago.

The stock looked extremely cheap, but the issue was that for their Venezuelan, they had to use the official Bolivar exchange rate. That was my final assessment:

All in all, EAC is not only a “strange” stock but also an interesting stock. Although both subsidiaries are struggling, I see some “real option” value here. The Santa Fe business, if the execute as planned, is worth more or less the whole market cap at the moment. Therefore, Plumrose, the Venezuelan pork producer is like a “free” option betting on a better future for Venezuela. This future is highly uncertain, but some positive signs are also visible.

Now something interesting happened: EAC announced last week that they sold its Venezuelan Business for DKK 390 mn and plan to pay a special dividend of 16 DKK:

• EAC divests Plumrose for a total consideration of approx. DKK 390m
• Due to the requirement under IFRS accounting standards to use the official VEF/USD exchange
rate, the transaction entails a significant accounting loss. However, when measured at the parallel
market VEF/USD exchange rate, the price represents a gain over book value.
• EAC’s Board of Directors considers the price attractive and intends to distribute DKK 200m to
EAC’s shareholders as an interim dividend (DKK 16 per share) once the consideration has been
received in full.

The shareholder friendly approach of the company can be seen via the video they produced, where they are explaining why they sold (very funny, Danish with English subtitles).

With a current market cap of ~1.100 mn DKK, receiving 390 mn DKK in cash is not insignificant. What remains is the Santa Fe subsidiary. That’s what i Wrote back then:

Simple valuation of Santa Fe:

Plan: 5% CAGR until 2016, 300 mn EBITDA. EV/EBITDA of 6-8x realistic ?

Current borrowings 500 mn, growth by 5% in line with sales –> 600 mn debt in 2016

EV of 1.800 -2.400 –> equity value of 1.200 -1.800 in 2016. Discount by 15% for 3 years: NPV of Santa Fee according to this: 790 – 1.180 mn DKK

The problem with that projection is: Santa Fee is not doing well at the moment. Based on the latest Q3 report, Sales for the first 9 months declined by 2% and EBITDA declined even more from 121 mn DKK 9M 2012 to 93 mn DKK 9M 2013. So achieving 300 mn EBITDA in 2016 looks somehow optimistic.

Interestingly, the stock price spiked quickly after the announcement but is now already on the way back down:

If we assume EBITDA for Santa Fe of around 130 mn DKK this year, this business is now implictly valued around 8-9 times EV/EBITDA. Maybe on a depressed level but as I am not a turnaround investor, I will pass on East Asiatic for the time being. Nvertheless, at some point in time, EAC could be a buy if the price stays low and they manage to turn around their remaining operations.

Some links

A deep dive into the strange new world of initial Coin Offerings

Wexboy with a great round up of all listed stocks that have some relationship with Cryptocurrencies

Why machine learning investment strategies fail (so far)

Don’t miss: Today is the last day to sign up for the free “Venture Deals” online course.

It seems that shareholder activism is slowly coming to Japan

A very interesting attempt to value Teva

The interesting case of Home Capital shareholders rejecting a (second) capital injection from Berkshire

 

Amaysim (AU000000AYS5) – The “Freenet of Australia” ?

amaysim_4d61ab0ab2142

Business & Business model:

Amaysim is a 320 mn AUD market cap Australian company which went public in July 2015 and  offers mobile  subscription plans without owning the physical network in Australia. So they are effectively a reseller (like Freenet in Germany). As a specialty, they do not package the plans with “free” phones and long lock in periods,  but offer “clean” and customer friendly  contracts which can be canceled on a monthly basis.

Essentially, this is a distribution / billing service. Their value proposition both, for the networks and end clients is that they can offer this service better and cheaper than the networks. If they can do this, then it is “win win” for both sides.

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Camellia Plc (ISIN GB0001667087) -Exotic assets at a deep discount ?

Background:

Camellia Plc is a pretty odd company for UK standards. It is a conglomerate with interest in plantations around the world, as well as some engineering businesses, a UK cold storage business, a fish trader in the Netherlands and a private bank plus an art collection, a stock portfolio and other stuff.

Some UK blogs have covered Camellia like Richard Beddard and Expecting Value.

Camellia seems to be a favourite among deep value or “assets at a discount” investors and as I do like strange companies (and conglomerates) , I decided to take a deeper look at it. Also as it is in the same sector as ACOMO makes it easier to get “into it”.

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Uniper/E.On Spin-off: Take one ugly duck and transform it into ….. 2 really ugly ducks ?

Background:

Monday, Sep 12th will be the first trading day for Uniper, the E.On spin-off. E.On shareholders will get one Uniper share for each 10 E.On shares they are holding.

Just to recap: Uniper will contain all the (unwanted) power generation assets of E.on, so all the “fossil fuel” power plants, the Russian assets and the Swedish nuclear plants plus some other stuff. The German Nuclear assets (and the corresponding liabilities) will remain at E.on due to the reasons I mentioned in the last post.

Uniper is clearly an ugly Duck, maybe the “most ugliest spin-off” I have seen since I started the blog. If we look into the most recent investor presentation, it is clear that you have a problem when the 3 listed growth projects are a German Hard Coal Power plant, q Russian power plant closed due to an accident which will reopen in 2018 and some strange dealings around the North Stream gas pipeline (page 9.). It doesn’t help either that Uniper had to take a 3,8 bn EUR pre tax write down in the first 6 months of 2016.That makes the duck still uglier.

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Metro Bank Plc – “The Apple of Banking” or “One-trick Pony” ?

Readers of my blog know that I do like “outsider” like financial companies and that I do like UK banking (Handelsbanken Lloyds).

pf-metro_1684191c

Therefore it was highly interesting to read about Metro Bank, a recently listed “UK Challenger bank” in a letter of an investor I greatly respect. I had a look at “online only” UK challenger Bank Aldermore but didn’t like it too much, but as Metro Bank runs a “Branch strategy”, I decided to look into them.

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SportsDirect (SPD) – Bad PR but maybe good Capital Allocation ?

Already some days ago, I linked to an interesting write up from Wertart on UK retailer SportsDirect.

sportsdirect-com_logo

In general, I liked a lot of things at SportsDirect from a share holder perspective:

+ It is kind of “Owner operated” with an experienced management
+ Aldi/Lidl like business model (Some brands, own brands, “hard discount”)
+ good growth track record since IPO
+ very good profitability
+ looks cheap based on past performance

Of course there are a couple of issues as well:

  • it is retail after all
  • Brexit / GBP issues (higher import prices, potential issues with consumer confidence)
  • Bad PR (low wages, zero hour contracts, incidents)
  • some governance issues (related party dealings etc.)

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Fossil (FOSL) – Share buy backs & Management (part 2)

This is a follow-up to my first post on Fossil. The short summary:

Fossil has a good but not great business with some issues, among others the potential success of smart watches. The reason to dig deeper was the unusual combination of CEO/owner with zero salary and capital allocation with a focus on share buy backs.

Share buy backs

There is a great collection of articles on Teledyne and Henry Singleton “available at CS Investing. One absolute gem inside is a classification of stock buy backs in order of usefulness to shareholders from Hedge Fund Honcho Leon Cooperman:

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