Since my post last week, OI shares have clearly outperformed PTC shares (14.3% vs. 7%). As some readers commented, OI shares would have been the even better alternative so far. OI was actually the best performing Brazlian stock last week.
Maybe one additional remark to the issue if PTC trades at a premium or not:
Read more
BeyondProxy,a blog I read frequently, had a big post about investing in Europe which seems to become more popular by the day.
What really caught my eye and made my somehow angry at first was the following quote:
Philip Best, Founding Partner, Argos Managers: “One of the things we really believe in is that there is too much investment that goes on from people who are basically just sitting behind a Bloomberg screen and who are doing arm chair investing. They are sitting there and they are waiting for ideas to come to them. And Marc [Saint John Webb] and I believe a great deal in getting out there. In getting out there and meeting companies and talking with managers and we spend a lot of time traveling around France. And “A” we like that and “B” that is what we think brings the most to the job…We try and read as much of the local press as we can. Whether it’s in France or the UK, Switzerland or whatever and also a bit of the trade press. Plus, it is classic value investor stuff. A lot of the ideas have come from this idea of ‘idea clumping.’ You know you find one cheap software company in Germany and suddenly you find a bunch of others.”
Very interesting post from Prof Damodaran on the differences between (value-)investing and trading
Bloomberg story about Eike Batista, the guy who lost ~ 35 bn USD in one year
Nate from Oddball muses about patience, simplicity and retail stocks
Good post about the implosion of Albermarle, the UK pawnbroker
Plus 2 interesting blogs I discovered just recently, both highly recommended:
– Valuevista from the UK
– AlphaVulture , a poker player and value investor
Finally, an interesting small cap “pump and dump” from Warren Buffet himself in 2000 (via Alphavulture comment section):
– Buffet buys privately a company called Bell Industries in Dec 1999
– in Jan 2000 he sells it after it has jumped 80% because of the disclosure
– in November 2000, he then bought again after the stock collapsed
It seems like that many PIIGS companies with significant international business operations try to transform their companies in some way or another in order to get rid of the “PIIGS” discount. Basically a first mover was Hellenic Botteling, which delisted in Greece and relisted as Swiss based company in the UK market in 2012. A second, very succesful attempt was made by Autogrill, spinning off the international business.
Now, a few days ago, Portugal Telecom (PTC), the Portuguese TelCo with a large Brazilian subsidiary, came up with a potential new way:
They want to merge with the Brazilian TelCo OI and effectively become a Brazilian Telecom company with a Portuguese subsidiary.
This alone is in my opinion already an interesting special situation. But it gets even more interesting. The structure of the merger is quite complicated, but in general, there will be a merger plus capital increase.
For Portugal Telecom shareholders, it looks like the following:
Each Oi common share will be exchanged for 1 share in CorpCo, and each Oi preferred share will be swapped for 0.9211 CorpCo stock. Each Portugal Telecom share will be the equivalent of 2.2911 euros in CorpCo shares to be issued at the price of the capital hike, plus 0.6330 CorpCo shares.
So on a first look, this looks interesting for Portugal Telecom shareholders. The lower the price of the capital increase, the higher the share in the combined company. Clever Hedge funds might even be able to construct a short OI long PTC trade. Although there is a corridor where either PTC or OI can step back from the transaction if prices would move too strongly in one or the other direction.
Some figures / ratios:
PTC:
Market cap 3.1 bn EUR
P/E 7.4
P/B 1.5
EV/EBITDA 5.5
OI:
Market Cap 6.5 bn BRL (~2.1 bn EUR)
P/E 11
P/B 0.6
EV/EBITDA 4.5
Both companies carry significant debt.
The share prices of both companies reacted at first positively, but in the recent days, OI shares dropped quite significantly and PTC is back to where it was before (after hitting +30% in the first day):
This might be the reaction to the large cash capital increase undertaken by OI in the course of the deal:
As part of the merger, Oi proposes to undertake a cash capital increase of a minimum of R$ 7.0 billion (Euro 2.3 billion), and with a target of R$ 8.0 billion (Euro 2.7 billion) to improve the balance sheet flexibility of CorpCo. Shareholders of Telemar Participações S.A. (“Tpart”) and an investment vehicle managed by Banco BTG Pactual S.A. (“BTG Pactual”), will subscribe approximately R$ 2.0 billion (Euro 0.7 billion) of the cash capital increase
So from an OI shareholder point of view, one could argue that this exercise is somehow quite dilutive.
For some PTC shareholders, the problem might be that the suddenly do not hold a Portuguese/European stock but a Brazilian one. According to the official announcement, the new stock will be listed in Brazil, US and on NYSE Euronext, so technically it should be not a problem for shareholders.
On the “plus side” for this transaction one could argue with the following points
+ A Portuguese company with a potential “PIIGS” discount will be “transformed” into a potential BRIC growth story.
+ The valuation of the overall group might improve as well, as the OI pref shares will cease to exist
+ As PTC shareholder, there is an additional opportunity with regard to the OI share capital increase. The lower the price for the new shares, the higher will be the percentage in the new company
+ it is very likely that the deal will go through. The CEO of both companies is the same guy and regulators will have no reason to object
+ part of the synergies (i.e. lower refinancing costs) might be relatively easy to achieve.
On the other hand, there are also some clear issues:
– Brazil itself is not in the “sweet spot” anymore
– OI itself is struggling. Being only the number 4 mobile operator, especially ROA and ROE is far below the competition
– in the presentation, the CEO committed to pay 500 mn BRL p.a. in dividends. Including the new shares, this will result in a much lower dividend yield going forward from the current 7-8%. As they want to grow, this makes sense, but for some investors this could be an issue
– debt will be relatively high, further capital increase in combination with acquisitions are not unlikely
At the moment, I need to dig a little bit more deeply into this, but in order to keep me motivated and interested, I take a 0.5 % position at current prices (3.40 EUR per share) in Portugal Telecom for my “special situation” bucket.
DISCLAIMER: As always, do your own research. This is not meant to be any kind of investment advise. When publishing this, the author will most likely own the stock already. Do not blindly follow any tips etc. Use your own brain. The author will also most likely sell the stock before posting this on his website.
Sometimes, the good old-fashioned simple ideas still work very well. One very recent example, which for some reasons I totally missed, was the recent spin-off of Word Duty Free from the parent Autogrill in the beginning of October.
The remaining business is the well-known restaurant business along Freeways, the duty-free business is the international business in most of the world’s airports.
If one looks at the Autogrill stock, the spin-off was a fantastic success:
A more than 50% outperformance against the index. The spun off stock World Duty Free now trades at a P/E of around 20, reflecting the assumed growth potential, the market cap is with 2 bn EUR higher than the parent (~1.5 bn). The CEO of the parent by the way is now CEO of the spin-off company.
I remember having read about the spin-off some months ago but I didn’t really follow-up. It is very interesting to see, how in this case this has unlocked value so quickly. It clearly shows also in my opinion, that some PIIGS companies with international exposure might still be heavily discounted by the market.
Unfortunately, I think the Autogrill spin-off is rather an exception than the rule for PIIGS companies, but I think it still makes sense to look for similar deals in the future.
Performance
September was a very strong month in most markets. The Benchmark (50% Eurostoxx, 30% Dax, 20% MDAX) gained 5.6%, this is the best month for the market since January 2012, where the BM started into the year with an 8.4% gain. Interestingly in September, the Eurostoxx outperformed both, DAX and MDAX.
The portfolio gained 4.9%, an underperformance of -0.7%. As discussed many times, I expect the portfolio to underperform in these markets, especially now when I own around 25% cash.
On a year-to-date basis, the portfolio is still ahead the benchmark with a gain of 26.6% against 17.5%.
The September performance was boosted significantly by two special events: The new buy out attempt for Rhoen Klinikum (+8.6%) and the minority buy out of EGIS (+30%). Other outperformers were Sol (+9.1%), Tonnelerie (+9.7%) G. Perrier (+9.5%), IGE (+7.1%). Underperformers were April (-1.3%) and Miko (+1.6%).
Nevertheless it is also important in my opinion to assess the own performance as objectively as possible with regard to skill and luck. Yes, 26.6% YTD sounds like a lot of skill. But in reality, there is a huge percentage of luck (in the form of BM performance) involved as well. European small and mid cap indices are performing like crazy (MDAX +30% YTDT, French mdi/small caps +22%, Italian Small/midcaps +31% and +37)%. As I am investing mostly into those small and midcaps, my performance doesn’t really look so good compared to those benchmarks. Yes, the decision to invest half of the portfolio in French and Italian small and midcaps was a good one, but the stock selection was rather mediocre and the cash allocation so far value destroying.
Portfolio activity
Portfolio activity was rather high with 3 transactions. I sold Pharmstandard after a few days because I overlooked an important aspect (record date). I increased the Rhoen Position and I added Trilogiq as a new “half” position. I am actually considering putting a “hard” limit on portfolio transactions per month in place (maybe 2 or 3)
Portfolio as of 30.09.2013:
| Name | Weight | Perf. Incl. Div |
|---|---|---|
| CORE VALUE | ||
| Hornbach Baumarkt | 3.9% | 8.8% |
| Miko | 2.5% | 4.3% |
| Tonnellerie Frere Paris | 5.9% | 99.9% |
| Vetropack | 3.8% | 7.3% |
| Installux | 2.8% | 24.5% |
| Poujoulat | 0.8% | 11.4% |
| Cranswick | 5.5% | 44.7% |
| April SA | 3.8% | 33.0% |
| SOL Spa | 2.9% | 54.9% |
| Gronlandsbanken | 1.8% | 12.3% |
| G. Perrier | 3.7% | 50.3% |
| IGE & XAO | 2.1% | 18.5% |
| EGIS | 3.2% | 35.0% |
| Thermador | 2.6% | 8.2% |
| Trilogiq | 2.4% | 8.4% |
| OPPORTUNITY | ||
| KAS Bank NV | 4.9% | 45.7% |
| SIAS | 5.1% | 75.1% |
| Drägerwerk Genüsse D | 8.2% | 169.2% |
| DEPFA LT2 2015 | 2.6% | 67.3% |
| HT1 Funding | 4.1% | 49.9% |
| EMAK SPA | 4.6% | 54.2% |
| Rhoen Klinikum | 4.6% | 12.1% |
| Short: Prada | -0.9% | -17.5% |
| Short Lyxor Cac40 | -1.1% | -17.5% |
| Short Ishares FTSE MIB | -1.9% | -15.4% |
| Short CHF EUR | 0.2% | 6.4% |
| Cash | 21.9% | |
| Core Value | 48.0% | |
| Opportunity | 33.9% | |
| Short+ Hedges | -3.8% | |
| Cash | 21.9% | |
| 100.0% |
MUST SEE: 30 minute video with and from Ray Delio about the “economic machine”.
Damodaran with a 4 item checklist in order to identify potential value traps
The Brooklyn Investor explains, why one should concentrate on businesses, not on stock market levels, tapering etc.
A potential arbitrage opportunity with US “forever stamps” ahead of an announced price increase
Punchcradblog on Blackbaud, a software company with an interesting business model, which nevertheless is too expensive. Very nice write-up and way of analyzing a company.
Only 4 months after I bought EGIS for the portfolio, majority owner Servier has offered (for me totally unexpected) 28.000 HUF per share to minority shareholders.
This is roughly a 40% gain in 4 months, so quite oK, although in my opinion, the stock should be worth more especially compared to peers. The current offer is around 8.3 x 2013 earnings (ex net cash) and 1.1 x book value.
That’s what I wrote back then:
I think one doesn’t need to be to sophisticated here. A decent company like EGIS with a solid, non cyclical business should not trade at a P/E of 5 and P/B of 0.8. A fair price in my opinion, taking into account some issues from above should be a P/E of 10 or 1.5 times book, which would be still significantly below western peer companies.
Now the problem is the following: Acceppt the offer (and/or sell) or wait for a better offer ?
In most German cases I had so far, the first offer was ususally followed by a better offer and/or much higher stock prices, such as AIRE KgAA and Draegerwerke Genußschein.
In the EGIS case, Servier communicated the following:
– there will be no second offer
– they will ask the AGM to delist the company after the offer is settled
After googling a little bit, I found this from Lawfirm Weil (written in 2005):
In general, a simple majority of the votes is required to adopt a decision at a shareholders’ meeting. However, certain fundamental decisions (eg changes to the charter, merger or winding-up of the company, listing/delisting of shares) require a three-quarters majority of the votes. The charter may also impose supermajority voting requirements for decisions which, by law, could be adopted by a simple majority.
A 75% majority of votes is most likely relatively easy to achieve, unless an activist fund steps in and buys a large anough stake. I don’t have any clue how likely that is and how chances are in Hungarian courts.
So all in all, I guess the best will be to accept the offer and try to find another place to invest in. Somehow the number of cheap shares seem to become smaller and smaller….
DISCLAIMER: The author might own the stock already before the release of this post. The stock discussed is very illiquid. Please do your own research. This is not a recommendation to buy or sell or anything.
As many readers might have figured out, I am currently looking a lot at French stocks. I already had mentioned in my August review that I am building up a stake in a company which I didn’t disclose back then. Well: here is the company: Trilogiq SA.
If one looks at Bloomberg, the description is quite short and meaningless:
Trilogiq SA manufactures a wide range of flow racks.
However, looking at the Corporate Website is much more revealing:
Trilogiq is manufacturing a modular system of flexible components which supports the material handling at an assembly line. The underlying philosophy is based on the Japanese “Kaizen”. More on that later.
The company went public in late 2006 at a price of EUR 28.59 per share, a level the share hasn’t seen since as the stock chart clearly shows:
Valuation:
Traditional value metrics look OK, but not super cheap (at 18,15 EUR) :
Market Cap: 68 mn EUR
P/B 1.46
P/E 12.0
P/S 1.1
Div. yield 0%
EV/EBITDA 6.0
Debt: Net cash of ~5 EUR per share
So why do I think the company is interesting ? Well, if we look into the last annual report, they seem to do something right:
Net Margin 8.6%
ROE of 12.2% BUT: ROIC (ex cash) is 20%
ROE was higher in previous years, but adjusted for Cash, ROICs are relatively constant at 20%.
| EPS | DIV | ROE | ROIC | |
|---|---|---|---|---|
| 29.12.2006 | 0.87 | #N/A N/A | 25.6% | 25.7% |
| 31.12.2007 | 1.48 | #N/A N/A | 29.0% | #WERT! |
| 31.12.2008 | 1.45 | #N/A N/A | 22.1% | 19.7% |
| 31.12.2009 | 1.64 | 0.50 | 20.7% | 19.9% |
| 31.12.2010 | 1.75 | 0.50 | 18.3% | 18.7% |
| 30.12.2011 | 1.50 | 0.50 | 12.6% | 23.7% |
| 31.12.2012 | 1.68 | 0.00 | 12.4% | 20.7% |
So this now gets interesting: We get a company with a (cash adjusted) PE of 8 and an ROIC over the last 7 years of around 20% and the company is growing. This is very good and hard to find these days. On top of that, the company is growing quite nicely and : only around 15% of the business is in France, 85% is “Export”.
So in current times, this definitely is a good reason to investigate the company further.
Business model:
In such a case as Trilogiq, where I do not know the company really well, I usually try to figure out what they are doing in more detail in the next step. Here, fortunately, we can still find the (French) IPO prospectus on Trilogiq’s web site
General Remark: IPO prospectuses are always a very good source for information about the business model, competitors etc. So if one can get hold of it and it is not too old and outdated, this is usually the single best source for such information. Much better than annual reports, because the risks are usually disclosed quite extensively.
The founder of the company worked as an engineer at Renault and had the task to study Japanese car manufacturing. He then started out on his own, producing equipment to improve manufacturing efficiency for Renault and Peugeot.
The basic “philosophy” is to have a lean flexible production process which avoids unnecessary material, handling steps, heavy machinery, large quantities etc. Among others, it is advised to transport small amounts only within the assembly lines, avoid unnecessary distances etc etc.
Now comes the interesting part: Trilogiq itself does not only provide the tools, but is offering the full consulting service as well. So a company calls Trilogiq and they start with simulating the production process on a computer (CAD) and then optimize it using their various tools. They will then go on site and then implement the stuff including full project management etc.
So in essence, Trilogiq rather seems to be a specialised consulting company with a physical product than your typical car parts supplier. This in my opinion also could explain the rather high margins which are quite unusual in the automobile industry.
A few videos which explain the principles:
(company movie)
Some product presentations
In order explore this thesis a little bit more, let’s look at two ratios:
– What amount of raw material etc in relation to sales does Trilogiq show against other companies ?
– What amount of sales do they generate per employee ?
Lets look at some companies, I have chosen 2 car parts companies + 3 of my portfolio companies as comparison:
| material cost/Sales | Sales per Employee (K EUR) | |
|---|---|---|
| Trilogiq | 43% | 350 |
| PWO | 55% | 33 |
| Sogefi | 56% | 15 |
| Poujoulat | 59% | 73 |
| Installux | 48% | 198 |
| Thermador | 60% | 389 |
| G. Perrier | 26% | 90 |
| Accenture | 295 | |
| IGE | 22% | 284 |
The result is quite interesting. PWO and Sogefi are 2 “typical” car parts manufacturers. Material cost is more than 50% of sales, sales per employee are relatively small, so implicitly this is rather pretty “low tech” work.
If we look at my Portfolio companies, only Thermador has a similar per employee sales number but this is normal as it is primarily a trading and logistics company. Poujoulat for instance needs more material than Trilogiq as well as Installux and even Installux only manages 2/3 of Trilogiq’s sales per employee.
Just for fun, i also listed software company IGE + Xao and Accenture. Interestingly those companies generate similar sales per employee volume.
While this is clearly no scientific proof, I think it is however fair to say that Trilogiq is not your typical “manufacturer” but rather something different. It is no trading company either so I think my thesis that it is a kind of consulting company with a physical product might not be unrealistic.
Another interesting aspect shown on page 33 of the IPO prospectus is the aspect that they do create significant recurring revenues out of their products. According to this, they have a 4 year cycle. If they sell an amount of 100 in the first year, they will expect 20 maintenance revenue in year 2 and 3 and then (if renewed) another 40 in year 4.
Competitors:
They only consider 2 companies as direct competitors: Fastube in the US and Yakazi from Japan, both privately owned. As Trilogiq is currently expanding quickly in the US it seems like Fastube is maybe not the strongest competitor. They don’t seem to be active in Asia, maybe too much respect versus the Japanese “master” like STarbucks and Italy ? Of course, the “traditional way” is a competitor too.
Why is the stock cheap ?
– One reason is clearly the non-existent financial communication. Minimalistic reports in French only, only a few small research houses cover the stock (5 according to Bloomberg, only 2 in 2013). Interestingly, in 2007 and 2008 they still made some additional press releases about large new orders, but from 2009 on they only released their reports and nothing else
– they only paid a dividend once (50 cent in 2009). Since then they are accumulating cash.
– data for the company for instance in Bloomberg is not very accurate, 2011 and 2012 numbers are not updated. TheyWon’t show up in many screeners
– it is a French company and sentiment is still bad for France
– they are viewed as an “average” car parts producer
Now it gets interesting: Shareholders
No reliable data in Bloomberg. According to them, French value fund Amiral Gestion owns 2.13%.
According to this research report however, the founder still owns 77%, but Amiral Gestion owns 13%. Leaving a tiny free float of 10%. Amiral in my opinion is one of the better European Value companies and maybe the best in France.
Shareholder activism:
AMIRAL, actually has increased its stake to 13,55%. On the general assembly a few days ago they went kind of activist and demanded a special dividend of 3.75 EUR per share.
As the owner most likely seems to have been present at the AGM, I guess this was voted down, but nevertheless it clearly shows the strategy Amiral is running here. They are in for the long run and will press for some form of payout, be it dividend or share buy back.
In my opinion this is also an interesting kind of “insurance” against any unfriendly behaviour from the CEO and majority owner, as Amiral is not a small fund. With their 13% stake (which is more 56% of the free float) Amiral is automatically committed for the long-term as it will be extremely hard to get out of this stake via the rather illiquid market.
I found this interview with the founder and CEO (in French), where he explains the company and mentions that taking the company private would be worth a consideration….
There is a quite active discussion (in French) on Boursorama about Trilogiq and someone is even claiming that the special dividend was approved, however I am not sure that this is the case.
France / Portfolio concentration
As some readers might recall, I sold my Bouygues stocks when I bought Thermador because I thought that my exposure to France is big enough. With Trilogiq, I don’t have this problem. trilogiq has only 15% of its sales in France and is currently expanding rapidly outside France, especially in the US. So I don’t see an issue here.
Interestingly, french sales haven’t improved much over the past years, the growth came almost exclusively from outside France.
Summary:
In my opinion, Trilogiq is a very interesting company and might even be a true “Hidden champion”. For me it looks more like a consulting company with a physical product than a manufacturer which helps to explain the good margins and 20% ROICs.
There are clear reasons why the company is cheap compared to the quality of the business, especially the negligence of shareholders so far. However, with Amiral having built up a 13% stake, this could improve.
Nevertheless it shares many characteristics I like in a stock:
– founder/owner majority owned
– relatively illiquid and negelected from investors/analysts
– business model not too easy to understand
– negative headline news for home country
In my opinion, the company is worth much more than its current price. Conservatively I think if this would be a German or UK company, People would pay 15x earning plus the cash which would be 25 EUR +5 EUR or 30 EUR per share.
Trilogiq is therefore a clear “buy”. For the portfolio I assume that I was able to build up a position of 20000 shares at 18,27 EUR per share which is roughly 50% of the trading volume since July 1st and represents a 2.3% allocation of the portfolio.
value and opportunity 