Disclaimer: This is not investment Advice. Never trust any anonymous dude on the internet. DO YOUR OWN RESEARCH!!!
IMPORTANT UPDATE: Due to a formula error, I double counted the Net cash in the SOP calculation. Kindly check out the updated numbers ! Fair value is now ~14 EUR per share compared to 17 EUR. Still attractive but a little bit less then initially thought.
Due to time restrictions, I am not so active in special situations anymore, as the “return on time invested” is often not so great. However if a Special Situation basically “jumps at me”, I won’t say no. In this case some starts aligned: Two people I respect a lot (M. and C.) both independently mentioned this sitation.
In addition, I have a certain weakness for Belgian special situations since my SAPEC investment some years ago and at first sight, a lot of aspects “clicked” with what I am looking for in a special situation.
Just as a reminder for newer readers (and myself): A special situation in my definition is an investment where I am looking at shorter time horizons and where there are some kind of catalysts that could help to realize a significant undervaluation of a security. I have different requirements for special situations, for instance, the long term quality of the business or the management are less important.
Exmar NV is a Belgian holding company that comprises a couple of maritime activities. The major activities are LPG shipping, the operation of “maritime infrastructure” and other activities, among them interestingly a travel agency and a Yachting service.
Disclaimer: This is not investment advise but some rather incoherent ramblings of an extremely incompetent former value investor. DO YOUR OWN RESEARCH AND NEVER TRUST ANONYMOUS DUDES ON THE INTERNET!!
On “re-underwriting” an existing position
While writing part 1 of the UK Insurance update and even earlier, during the analysis of Naked Wines, I realized that my investment process has (among other issues) one serious gap: I have no systematic way to reassess or “re-underwrite” a position, especially for those who are in the portfolio for a longer time.
I do a short review every year in my “xx stocks for 20xx” series, but I do not seriously analyse my longer term holdings unless there is a problem.
In some cases that works well, but in other cases, I have been missing things or the case goes far away from the original case. Due to time constraints, doing this every year is not realistic, but going forward, I plan to do this on a 3 year rolling basis for each long term holding.
Review of my initial Admiral case
My original Admiral investment case was from 2014 and can be read here. The initial “underwritten business case” was as follows:
Spoiler: Readers only looking for “actionable investment advice” might skip this post as this is about the basics. The short summary is: Inflation is not good for P&C insurers.
Background: Inflation is back
Last week, especially UK insurance stocks were rattled by news from Sabre Insurance that inflation was hurting them both, through rising claims but also rising reinsurance costs.
Sabre lost -40% that day Admiral and DirectLine were down double digits. On Monday, DirectLine, another UK direct insurer issued a very cautious Trading Update which again led to further losses. The whole disaster can be seen in this chart:
Inflation and Insurance
In the first 6 months of 2022, the Value & Opportunity portfolio lost -14,4% (including dividends, no taxes) against a loss of -20,2% for the Benchmark (Eurostoxx50 (25%), EuroStoxx small 200 (25%), DAX (30%), MDAX (20%), all TR indices).
Links to previous Performance reviews can be found on the Performance Page of the blog. Some other funds that I follow have performed as follows in the first 6M 2022:
Partners Fund TGV: -33,5%
Profitlich/Schmidlin: -18,1 %
Squad European Convictions -13,1%
Ennismore European Smaller Cos -2,5% (in EUR)
Frankfurter Aktienfonds für Stiftungen -14,1%
Greiff Special Situation -2,5%
Squad Aguja Special Situation -12,7%
Paladin One -17,0%
Overall, the portfolio was more or less in the middle of my peer group. Looking at the monthly returns, it is clear that June was one of the worst months in the 11 1/2 years of the blog in absolute terms:
And on we go, another 10 randomly selected Danish stocks. In the current batch, there are some very interesting and unique business models, however only one made it onto the “watch list”. We are now at ~50% coverage of the universe. Once again a quick reminder: Thank you for any requests to look at a specific company, but the random generator determines in what order I look at companies.
81. Scandinavian Medical Solution A/S
Scandinavian Medical is a 17 mn EUR market cap company that seems to be active in trading second-hand medical equipment that was IPOed in late 2021. Not my area of expertise. “pass”.
82. ChemoMetec A/S
ChemoMetec is a 1,9 bn EUR market cap MedTech company that offers Equipment to count cells which, among others is used for Advanced Cell Analysis, Counting of Mammalian Cells, Yeast Cells, and Sperm Cells.
The stock has performed very well over the last 5 years:
Disclaimer: this s not investment advice. PLEASE DO YOUR OWN RESEARCH !!!
Naked Wines released their full earnings last week and the result was a full disaster with the share price down a whopping -43% despite the fact that the headline numbers were already known. It is a good reminder that even being down more than -60% from its top, a stock can still fall another -40% on one day. Although the stock was only a 2,9% position prior to that drop, it still warrants a deeper dive than usual.
The signs were already obvious
Before moving to the actual numbers and the report, I have to criticize myself for not acting on the stock despite the following issues that I had identified already some time ago:
Disclaimer: This is not investment advice. PLEASE DO YOUR OWN RESEARCH !!!!
Inflation & Pricing power
One of the obvious strategies for for investors in an inflationary environment is to pick companies that have “Pricing power”. Pricing power means that companies should be able to raise prices at least as quickly as costs rise.
Now one could try to do some deep thinking if and how different business models react to inflation. As I am a more “hands on” guy, my solution is to look at actual numbers and then try to draw my conclusion.
For any company that is producing material goods, the best indicator for pricing power in my opinion is Gross profit, i.e. the difference between selling price of a product minus the direct costs to produce them.
A company with pricing power should keep the gross margin or ideally even improve gross margins in an inflationary environment.
Long time readers know that I have a soft spot for insurance companies. Some weeks ago, I started looking into Insurtech companies and then I looked into Lemonade’s 2021 earnings. Since my first post, Lemonade has lost another 1/3 of its value and is now significantly below its IPO price.
What I like about Lemonade is that they indeed created a “fresh” insurance brand, however the numbers were clearly challenging. My main takeaways from last time were as following:
- Growth is slowing
- marketing cost is increasing (per new dollar premium)
- The business is not really scaling
Already a week ago, Lemonade issued its Q1 earnings. This time, I have compiled a few line items that I find interesting on a quarterly basis in order to analyze things more deeply:
As inflation is something that we haven’t seen for a few decades, I am still trying to get my head around this trying to understand how this could influence investments going forward. In this posts I just wanted to touch three areas: Inflation linked bonds, pension liabilities and highly indebted countries.
- Inflation linkers
When looking for assets that gain or at least compensate for inflation, one should not forget Inflation linked bonds. Per construction, they compensate at least fully for the officially measured inflation.
In addition, Inflation linked bonds function also as an instrument to observe “implied” inflation rates, I.e. the market price of an inflation linked bond contains the investor’s expectation for future inflation rate.
The German agency for debt has a good page (in German) that explains how these securities work. One thing to mention is that most bonds are linked to Eurozone inflation, not German inflation.
Looking at the detail page of the 2033 linker we can see that this bond carries a 0,10% coupon and trades at a yield of -1,73%. Comparing this with the 2032 fixed rate bond (there is no 2033 fixed rate Bund) that yields around 1%, we can estimate that the difference between the two yields (1-1,73%)= 2,73% is the market’s current estimate for the inflation in the Eurozone for the next 10 years or so. (Remark: in reality, this is more complex, see for instance here, but for this exercise it is good enough).
And another batch of 10 randomly selected Danish shares, this time, none of them made it onto the watch list. We have now covered almost 1/3 of all Danish stocks.
51. Ringkjøbing Landbobank A/S
Ringkjøbing Landbobank is a 3,3 bn EUR market cap bank active only in Denmark, that is surprisingly profitable with a ROE of ~15%. This is reflected in a very good share price performance and a rather high valuation at 20x trailing P/E.