Category Archives: Anlage Philosophie

A quick look at the Stockopedia Screening tool + Quantitative value investing & Data quality

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It seems that I begin to harvest my successes as an investment blogger. After getting a free book, I now received already for the second time (temporary) free access to a stock screening tool. I wonder what comes next……maybe someone offering me 100 mn EUR to manage ?? 😉

A year and a half ago, I checked Tim Du Toit’s Eurosharelab screener which looked like a fair deal and a good tool

Now I checked the Stockopedia tool. I did only check the screening tool, they offer a lot of other stuff but I am not really interested in that.

From the beginning, I found their tool very easy to use. I don’t know the current status of Eurosharelab, but for me the biggest plus of the stockopedia screener is the fact that one can set up custom screens based on a large number of different variables. I was able to create my custom screens without reading any manuals etc. The navigation is very good, I liked especially the “Bloomberg” like selecting of fields for the queries.

The results are presented very well, it is very easy and convenient to drill down into the stocks or to check the fundamental data. This is even better than in Bloomberg and a big advantage of the fully web based technology. The speed of the queries was OK, could be a little bit faster.

I also liked the existing “Guru” screens, especially the “Screen of Screens” which kind of aggregates all existing screens. (Note: EGIS is the second best stock there after Dart. It looks like that my Boss model is not totally useless…..)-

The list of “in and outs” is interesting, too, where one can see which stocks newly qualified for the top positions and which stocks dropped out. The single stock monitor also looks very comprehensive, with a good data history. Up until now they offer only Europe but including many exotic countries like Bulgaria etc.

All in all it is a very good tool which is a lot of fun to work with. They told me that they would charge normally 499 GBP p.a. but if someone is interested, they would offer a “special rate” of 399 GBP. If I recollect correctly, Eurosharelab had also 3 month access which could be interesting for people who don’t need such a tool permanently.

For small investors, they should consider if the really need this. If you for example have a 50 K GBP portfolio, the 500 GBP full rate would eat up already a full 100 bps of annual returns or depending on what you expect at least 1/10th of your total return if you make on average 10% p.a.

Quantitative investing & Data issues. Example “Magic Sixes”

As I have written many times, I like using screeners as a basis, but I do not think that quantitative value investing, especially in the small cap sector, makes a lot of sense. The major issue is data quality.

In order to test the data quality of the Stockopedia screener, I did the following:

I set up a custom “Magic Sixes” screen (P/E lower than 6, P/B lower than 0.6, Div Yield higher than 6%, Europe) both, in Stockopedia and Bloomberg and compared the results. The results were quite surprising for me. Stockopedia returned 28 stocks, Bloomberg 19 stocks, but only 2 stocks showed up in both lists.

Here you find the results:

Stockopedia Magic Sixes   Bloomberg Magic Sixes  
 
    C21 21ST CENTURY TEC
AIRC Air China    
AURG Aurskog Sparebank    
    BTT BABCOCK-BSH AG
BQRE Banque de la Reunion SA    
BTG4 Bertelsmann SE Co KGaA    
ELMU Budapesti Elektromos Muvek Nyr… ELMU ELMU NYRT
CAT31 Caisse Regionale de Credit Agr…    
CCN Caisse Regionale de Credit Agr…    
6C4 Chimimport AD Sofia    
CICG Cinkarna Celje dd    
CSFG CSF    
CTC Cyprus Trading    
DOM Domstein ASA    
    DIOD DIOD
    MLDYN DYNAFOND SA
    MLEDS EDITIONS SIGNE
ERME Ermes Department Stores    
EMASZ Eszak Magyarorszagi Aramszolga…    
    MLEVE EVERSET
RAM F Ramada Investimentos SGPS SA    
    BSG GERMANIA-EPE AG
HJH H.J. Heinz Co    
HF HF SA    
HGM Highland Gold Mining HGM HIGHLAND GOLD MI
HSPG Holand og Setskog Sparebank    
    INOX INOX
MELG Melhus Sparebank  
    KYTH K KYTHREOTIS HOL
    KDHR KMECKA DRUZBA
    OAB OAB OSNABRUECKER
    PVA PESCANOVA
PVL Plastiques du Val de Loire SA  
    1PL POWERLAND AG
5BU Real Estate Fund Bulgaria ADSI…    
    ALRIC RICHEL SERRES DE
SALB Salling Bank A/S    
    SHFT SHAFT SINKERS HO
SPOG Sparebanken Ost    
PLUG Sparebanken Pluss    
SVEG Sparebanken Vest    
SHL Stademos Hotels    
    SZI1 STOLBERGER TEL
TOTA Totalbanken A/S    
    59X UNIPHARM AD-SOFI

Only Highland Gold Mining and Budapesti Elektromos showed up in both tools. When I digged into the detailed data, I was even more surprised. In total, I had 43 “diverging” entries. From those, 7 stocks were stocks where there were large bid/ask spreads and depending on the price the stock would either have 0.59 as P/B or 0.61 for instance, so this is a pure technical issue.

On the other hand, 20 diverging stocks were clearly mistakes in the data of Stockopedia (either wrong, outdated or missing data) and still 16 stocks were clear data mistakes by Bloomberg.

I emailed a little bit back and forth and it seems that they get their data from Reuters and are working hard on improving data quality. But nevertheless it is for me highly revealing that based on two different data sources, you get 2 almost completely different set of stocks with a few relatively basic filters.

Clearly, the Magic Sixes filter at the moment only throws out micro cap deep value stocks, where data is always an issue, but still, I wouldn’t have expected such a result. Also rankings might help to a certain extent. Nevertheless that mae me highly suspicious of any “automated” Value trading strategies no matter how good they look in backtests.

Summary:

I really liked the Stockopedia tool. If I would not have access to Bloomberg, I would seriously consider their tool . Although I would always use it as a screener only, not as a basis for a trading strategy,

Maybe it is not representative, but my Magic Sixes example clearly shows that data sources alone can have a huge impact how portfolios look like even if you use the exactly same criteria.

If one really digs deep into data like I had to for my boss model, one would detect even more disturbing data issues, but that is a topic for another post.

DISCLOSURE: I got free access to the tool but I do NOT get any referal fees etc.

Performance review August 2013 – Comment: “Circle of Competence”

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Performance

The portfolio lost -0.6% in August, compared with -1.1% in the BM (50% Eurostoxx, 30% Dax, 20% MDAX). YTD the portfolio is up 21.4% against 12.5% for the benchmark.

The major driver was of course the 25% cash allocation in a down month, the single stocks were all within low single digit perfomance in either direction, so nothing special here.

Portfolio transactions

August was a rather active month with 4 relevant transaction:

1. AS Creation was sold out
2. MIKO came in as new “Core Value” investment (half position)
3. A 1% position in Pharmstandard as potential special situation was established
4. In parallel, I am building up a position in a yet undisclosed French company where I did not yet manage to write a post but I include it “anonymously” in the portfolio

Portfolio as of August 31st 2013

Name Weight Perf. Incl. Div
CORE VALUE    
Hornbach Baumarkt 4.0% 5.0%
Miko 2.6% 2.6%
Tonnellerie Frere Paris 5.7% 82.6%
Vetropack 4.0% 6.8%
Installux 2.6% 14.2%
Poujoulat 0.9% 11.4%
Cranswick 5.4% 33.0%
April SA 4.1% 34.7%
SOL Spa 2.8% 42.3%
Gronlandsbanken 1.9% 12.3%
G. Perrier 3.6% 37.8%
IGE & XAO 2.1% 10.6%
EGIS 2.6% 2.5%
Thermador 2.6% 3.0%
Not yet disclosed 0.6% -1.9%
     
OPPORTUNITY    
KAS Bank NV 4.9% 37.0%
SIAS 5.1% 49.6%
Drägerwerk Genüsse D 8.5% 168.9%
DEPFA LT2 2015 2.6% 61.4%
HT1 Funding 4.2% 48.3%
EMAK SPA 4.8% 53.3%
Rhoen Klinikum 2.3% 17.0%
Pharmstandard 1.1% -0.6%
     
     
Short: Prada -1.0% -20.7%
     
Short Lyxor Cac40 -1.1% -13.0%
Short Ishares FTSE MIB -1.9% -11.5%
     
Short CHF EUR 0.2% 6.9%
     
Cash 24.8%  
     
     
     
Core Value 45.5%  
Opportunity 33.6%  
Short+ Hedges -3.8%  
Cash 24.8%  
  100.0%

Comment: Circle of Competence

For most value investors, Warren Buffet’s concept of “Circle of Competence” is a very important guideline.

Here is a video of the Oracle himself explaining the concept.

Most famously, he avoided the Dotcom bubble by staying within his circle of competence and not investing in tech companies. Many people therefore take this advice as granted and tend to stay in an area which they know best, like German small caps etc.

However I have a serious problem with this concept or at least with the interpretation of it.

First of all, in reality, each of us is born without any circle of competence with regard to investments. So whatever you consider as your CoC now, has been outside your initial CoC. So at one point in time one had to step out this “zero CoC” to build up any kind of competence.

It is also funny to listen to Warren Buffet explaining this concept. His CoC is HUGE. Clearly, his most well-known investments are Coca Cola, Gilette etc. But if your really follow his investment career, you can clearly see that he continuously expanded his circle of competence..

I mean he started with delivering newspapers and putting pinball machines into Barber shops, but then over his career he almost did everything. Starting with buying department stores, newspapers, he invested in commodities (Silver) Chinese companies, Israeli companies, sold CDS, S&P 500 puts, bought reinsurance companies, provided LBO financing etc. etc.

Expanding one’s CoC however only works if you step outside your CoC a least a little bit at one point in time. Clearly, jumping blindly without any knowledge for instance into US listed Chinese stocks normally does not end well.

I think the best way to expand one’s circle of competence is along the following dimensions:

a) Geographically
So if one has a lot of knowledge in one sector like for instance car manufacturers, it is not that difficult to look at those companies in other countries in order to gain experience. Due to the fact that many companies today are very international, this kind of knowledge in my opinion is extremely important anyway. Just looking at the 3 German car manufacturers for instance is a quite useless task. Usually it is easier to look at “familiar” countries first before going to more exotic places. In that way it is easier to learn about specific issues in other countries if you know the sector well.

b) Sector wise
Similar to geographically, it is also relatively easy to move from a sector one knows well to a sector which is in some way connected. So if you are strong in chemicals, to their direct suppliers (Oil companies) or customers should be easier if not necessary. If you know a lot about consumer staples, retailers would be logical next step etc. etc. For me for instance, it was much easier to understand IGE & XAO, the Electro Cad software company after I had analysed what their client G. Perrier is actually doing

c) Along the capital structure
A more unusual way to expand one’s circle of competence is along the capital structure of a company. Usually many people buy stocks and then maybe some bonds. However if you want to more systematically improve your knowledge, start with a company with a more complicated capital structure, including, bonds, loans, Hybrid debt, convertibles and work your way thorough. You will be rewarded with a much better understanding how the financial side of a company works and you might dicover some interesting opportunities along the way.

There are clealry many ways to expand one’s circle of competence, but the three mentioned have worked quite well for me. I think it is important to move in relatively small steps and be patient. Whenever you step out, you will most likely experience a set back, but one should consider this as an investment.

So to sum it up: Don’t let you fool you by Uncle Warren. If he would have stayed with delivering newspapers and putting pinball machines into Barber shops, he most likely would not be one of the richest people of the world. Only if you expand your circle of competence continuously, you will reap the reward over time. However make sure not to jump too far…..

Short cuts: IVG, KPN, ThyssenKrupp

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IVG

Friday night or Saturday is always a good time for another “breaking” news item about the IVG restructuring. This time they came out with an outline of the restructuring plan.

As expected, equity and hybrid capital are effectively wiped out. What I found highly surprising however is this part:

Further, it is, inter alia, envisaged that SynLoan I and the convertible bond will both be transferred to the company by way of a contribution in kind with 100% of their respective face amounts (so-called debt-to-equity swap), which would lead to a quota-ratio of these two creditor groups’ share in the stated share capital of 80% (SynLoan I) to 20% (convertible bond).

This is a great surprise that although collateralized, the Syn loan I is treated “pari passu” with the convertible. I do not fully understand this, but maybe the collateralization has happened to late (and too close to potential bankruptcy) and would have been invalid in case of bankruptcy. This explains the price jump in the convertible this morning I guess.

As usual in such cases, I am surprised that the equity is still valued at 35 mn EUR.

KPN

Interesting development at KPN: After KPN decided to sell its German Eplus subsidiary, Carlos Slim canceled the “stand still” agreement and is now bidding for KPN. I think this will be interesting to watch, as KPN surely doesn’t want to be acquired. I am pretty sure, they will come up with some defences like poison pills etc. Nevertheless I clearly sold out too early . I think I underestimated the “calros Slim” angle here.

ThyssenKrupp

ThyssenKrupp might be an interestign “special situation in the making”. Last week, Berthold Beitz, the 99 year old industrialist who efefctively controlled ThyssenKrupp via the Krupp foundation, passed away. Rumours about an accelerated capital increase are emerging.

It is interesting to see in the shareholder structure that a lot of German inevstors got out (Deka, Union) and Anglos Saxon investors got in in the last few months. This could become really interesting.

Short cuts: Installux, Maisons France, SIAS, EMAK

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Installux

Installux reported 6m numbers. As they have already indicated, sales were down -10%. Interestingly, they managed to keep their EBIT margin at a constant 11%, despite higher depreciations.

This is very remarkable. The net result went down ~-11% mostly because taxes remained unchanged on absolute terms. At the end of the day, EPS for the first 6m was 13.80 EUR. If history is any guide, I would expect an additional 5 EUR EPS or so in the second 6m, resulting in 19 EUR EPs. Net cash went slightly down to around 16 mn EUR or ~53 EUR per share due to higher receivables which is normal for Installux in the first six months.

All in all, Installux is still one of the cheapest stocks around and the business seems to be surprisingly resilient and their cost base quite flexible.

Maisons France Confort

As expected, MFC is experiencing an even deeper decline in sales than Insatllux. Maybe it was also the weather, but sales are down -10.5%, excluding M&A by -15.4%. However they will publish results only in beginning of September. So lets wait and see. The stock price remained surprisingly resilient.

SIAS

SIAS released 6M numbers as well. Numbers were Ok. Traffic seemed to have picked up later in Q2. Overall, as now the “special” is gone, one of my lower conviction ideas. Good dividend and still below book value but that’s it.

EMAK

Finally, EMAK released the 6M report. Despite unchanged topline sales, they managed to significantly increase profitability which I find remarkable (profit margin 6.2% vs. 4.4%). Even moreinteresting, their European sales increased nicely despite the unfavourable weather and sales decreased mostly in Turkey. One more data point for my “gorilla theory”…. This is what they say:

In the “Asia, Africa and Oceania” the decline in sales is mostly due to the decrease in shipments to Turkey, tied to a moment of weakness of the local market.

They lowered slightly their guidance for 2013, but still the expect 38-40 mn EBITDA which would transale in somethin like 0.10 EUR profit per share.

Overall, EMAK in my opinion is on a very good way and has significant recovery potential from here.

Performance review July 2013 – Comment “Did you see the Gorilla ?”

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Performance:

July was a strong months for equities. The Benchmark (50% Eurostoxx, 30% Dax, 20% MDAX) increased by +5.0%, resulting in a YTD performance of 12.5%. The portfolio in comparison gained “only” 3.1%, YTD it is up 21.4%.

The underperformance in July is to be expected. 25% of the portfolio is now in cash, a further 7% in bonds. Most of the stocks have betas significantly below 1. So underperformance in a strong market should be expected.

Best performers were some of the French stocks, G. Perrier +18.6%, April +16.0%, plus Dart Group at a whopping +25.2%. Losers were AS Creation -8.7% and EGIS -4.6%.

The only 2 transactions in July were the complete sale of Drat Group, with a gain of total +226 and my add ons to the Hornbach position. Due to low trading volume, I only got up to 4% from 3.7%, so I will continue to buy in August.

Portfolio as of July 31st 2013

Name Weight Perf. Incl. Div
Hornbach Baumarkt 4.0% 6.1%
AS Creation Tapeten 3.6% 27.7%
Tonnellerie Frere Paris 6.1% 96.8%
Vetropack 3.9% 5.8%
Installux 2.6% 14.2%
Poujoulat 0.9% 11.4%
Cranswick 5.3% 33.4%
April SA 3.9% 30.5%
SOL Spa 2.7% 35.3%
Gronlandsbanken 1.9% 12.3%
G. Perrier 3.6% 40.2%
IGE & XAO 2.0% 7.6%
EGIS 2.5% 1.3%
Thermador 2.6% 3.9%
     
KAS Bank NV 4.7% 31.9%
SIAS 4.9% 43.0%
Drägerwerk Genüsse D 8.9% 181.3%
DEPFA LT2 2015 2.6% 63.5%
HT1 Funding 4.2% 49.4%
EMAK SPA 4.8% 54.5%
Rhoen Klinikum 2.3% 21.4%
     
     
     
Short: Prada -0.9% -15.8%
     
Short Lyxor Cac40 -1.1% -14.2%
Short Ishares FTSE MIB -1.9% -10.4%
     
Terminverkauf CHF EUR 0.2% 7.1%
     
Cash 25.5%  
     
     
     
Value 45.7%  
Opportunity 32.5%  
Short+ Hedges -3.8%  
Cash 25.5%  
  100.0%

Comment: “Did you see the Gorilla ?”

There is a classic psychological experiment being done in many seminars which goes the following way:

A video is shown with two 3 person basketball teams, one with white shirts and one with black shirts. Both teams in a somehow chaotic fashion pass the ball to each other. The viewer gets the task to count the passes between the white shirt players over a time period of around 90 seconds.

You can try this yourself for instance here:

http://www.theinvisiblegorilla.com/gorilla_experiment.html

Participants get then asked how many passes were played. Most participants get the number right. The second question then is unexpected: Did you see the gorilla ?

I have to admit that when I did this experiment the first time in a seminar, I didn’t see the gorilla. I had the exact amount of passes, but no, I didn’t really see that a guy in a gorilla costume was walking slowly through the picture.

In my opinion, the current situation in the financial markets is very similar. Everyone (and his grandmother) is looking at Ben Benanke. Every single speech gets analysed down to the last word and market react violently on any interpreted change etc. Every speech, minutes etc. get analyzed over and over. For me, watching every word of Bernake is like counting the passes of the white shirt basketball team.

Yes, the FED does impact certain things but real business activity depends on a lot of other things. If you are a Bavarian “Mittleständler”, you do not build a new production hall because Ben Bernanke is saying this or that. You expand if you expect more orders from China, Brazil, Australia etc.

And this is in my opinion the big gorilla dancing in front of our noses: The slow down of the BRIC (and associated) economies. Despite any faked official numbers it is clear, that the high time of BRIC/EM growth is over. I watch closely many companies which are active in China and all of them are reporting problems. Interestingly, very few people seem concerned about this. One can now read many articles which talk about “soft landing” in China or “decoupling” of the US. Yes, both of those things could happen, but my experience tells me whenever you here “soft landing” and “decoupling” you should actually prepare for the worst case.

So what does that mean for the portfolio and investment strategy ?

For me, it doesn’t mean to get out of the stock market right now. Market timing is an art I do not understand. Nevertheless I will follow (further) some general guidelines:

– be extra careful with companies with EM market exposure
– rather err on the conservative side when analyzing companies. Take less risk, not more.
– focus more on special situations
– do not rely on stock momentum for existing position. Sell when too expensive
– be patient, don’t invest just because cash is piling up
– expect and prepare for significant underperformance in the next few months
– Don’t count the passes, but focus on the Gorilla …..

Short cuts: IVG, CIR SpA, Osram

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IVG

After a few days of calm, it seems to get interesting again. A few days ago, an American hedge fund, claiming to own 30% of the convertible, came out with an interesting statement.

It seems to be that IVG treated the on-loan from its Dutch issuing vehicle as structurally subordinated in the calculations issued a few weeks ago. In my opinion this would be a clear mistake.

Yesterday evening, IVG increased the pressure as it declared that no agreed restructuring plan has been achieved yet. I assume that this is not the end of the story yet, but it clealry shows that this will not be an easy walk in the park.

Edit: The subordinated bond lost further and is trading at 5%. As I have repeatedly mentioned, this will most likely result in zero recovery both, for the stock and the hybrid.

CIR SpA

CIR SpA reported results yesterday. Operating results were mediocre, the “Highlight” was a 160 mn EUR write down at Sorgenia. So using 0.5 as P/B multiplier for Sorgenia was the right thing to do in my valuation exercise.

Interestingly, the market seems to have anticipated this already. There also doesn’t seem to be any decision about “lodo Mondadori”. The current trial is only about tax evasion at Mediaset. I didn’t find anything about the Mondadori settlement.

Osram

Osram shares jumped 4% today after the quarterly earnings release.

“The market” seemed to have expected worse numbers. To a certain extent, i find the press release irritating.

The headline reads:

Osram records profitable growth in the 3rd quarter

However, in the real world:

– Sales dropped by 2% (in EUR)
– the positive net income of 14 mn EUR was the result of a one time gain due to a disposal

In the press release, you see a lot of adjusted numbers. Free cashflow looked strong but I guess at the moment they do not invest a lot. Overall a mixed bag. But I do not like the communication style.

Short cuts: Praktiker/Hornbach, Thermador, Portfolio transactions

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Praktiker/Hornbach:

Yesterday, Praktiker gave notice that also the “healthy” subsidiary Max Bahr is insolvent and will seek creditor protection. In my opinion this coul simply the following:

1. an even lower recovery for the Praktiker Bonds. I had read a couple of analysis where people thought that Max Bahr could be sold for hundreds of millions with the proceeds covering the bond partly. Under current circumstances, Praktiker Bond holders in my opinion would be lucky if they get even 5% of nominal back. There will be nothing left.

2. It will be much harder to keep Max Bahr as a fully functional competitive entity. So this improves the outlook a lot for the other DIY chains. If for instance Hornbach could get 10-20% of Praktikers business, this might turn into nice growth. I am therefore quite surprised that the Hornbach shares didn’t react on this news. I personally think that there is a good chance to see a “Schlecker” effect. Schlecker had a higher market share compared to Praktiker, but according to this article, competitors DM and Rossmann saw sales jumping +14 to +16%. A lot of this increase is sales per existing square meter, so I assume with a nice profitability.

I think Hornbach at the moment provides a good risk/return relationship. The had a rather bad last quarter due to the ugly weather. Based on personal observations, I assume that the made up for that in the current quarter plus tailwinds from the Praktiker bancruptcy make me positive about the shares.

Thermador

Thermador issued half year numbers a few days ago, here and here.

Clearly, 2013 will be a difficult year for them. But as the already mentioned after Q1, Q2 was already relatively seen much better than Q1 (sales down -5.2% against 2012 vs. -8.7% in Q1). Profitability is clearly lower, but all in all I think they are still doing quite well. I would have hoped that the stock price might go down a little bit in order to add to my half position, but it seems not to be the case right now.

Portfolio transactions

I sold the second half of the Dart position today at ~2.45 GBP. On the other side, I am adding to Hornbach Baumarkt as I think there is a very good chance for a positive medium term surprise despite all the issues. I will increase from currently 3.7% of the portfolio to a “full” 5%.

Quick check: Astaldi SpA (ISIN IT0003261069)

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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
EV/EBITDA 6.2
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:

EPS DIV ROE
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.

Summary:

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.

Dart Group – When to sell / Skill & Luck in investing

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Today, Dart Group issued preliminary 2012/2013 figures which were excellent.

The stock price jumped another 10%, making Dart my first triple in the 2.5 year history of the blog portfolio:

For me, two questions are now interesting:

1) Should I sell ?
2) Was this skill, luck or both ?

Re 1)

The nice thing about the blog is that you can always go back and look what you have written back then.

Dart was actually the first tangible result of my “Boss Score “model back in June last year. Additionally, at that point in time, the stock was very cheap by any standards.

That’s what i wrote about valuation:

Valuation

A few simple thoughts about valuation:

Dart Group will never be a P/E 15 company, but it could easily be a P/B 1 company. At the moment, you get a company which increases shareholder equity by something close to 20% p.a. at 0.6 times equity. If we assume for instance they manage to generate 15% ROE in the next 3 years and the company would trade at book at that time, we would have a fair value of 1.7 GBP per share or an upside of 150% over 3 years. More than enough for me.

Looking back, under my metrics, Dart increased equity by 8% in 2011/12 and 18% for 2012/13, on average 13%. So slightly below my expectations but still very good. However the share price has shot way beyond my expectations.

Compared to back then, Dart now looks quite expensive as this table shows:

at purchase now Easyjet Ryanair Vueling
P/E: 4.7 11.0 24.6 18.3 11
P/B: 0.6 0.6 1.8 3.33 3.2 1.17
P/S: 0.1 0.1 0.4 1.4 2.1 0.2
Div. Yield 2% 0.87% 1.70% n.a. n.a.
Market Cap 97 mn 348 5558 10290 275
Debt/Assets 2% 1.70% 22.30% 39% 4.50%
EV/EBITDA 0.02 1.8 10.2 8.2

I have included some other discount carriers in the table. Compared to Easyjet and Ryanair, Dart looks rather cheap, but honestly I do not really understand why Ryanair and Easyjet trade so high. Vueling from Spain in comparison does look cheaper than Dart on that basis.

All in all, Dart performed according to my expectations, but the multiple expansion was clearly above expectations.

Personally, I don’t believe that a business like Dart will trade at 2 times book in the long run, nevertheless, momentum and comparable valuations could carry the stock even higher.

As a compromise, I will sell half of my position as of today.

2) Skill or luck

A second question one should always ask oneself: Was this just luck or was some skill involved.

With Dart, I actually try to improve my process compared to the past. I looked quite deeply for instance into fuel hedging as well as into the business model.

That is what i wrote in the first post about the business model:

Business model

There is an interesting discussion about the business model to be found here.

In essence within the airline business, their main competitive advantages seem to be

– regional focus (not fighting on the crowded London market)
– buying cheaper used airplanes for cash instead of leasing new ones (used aircraft buying seems to be one of the special abilities of the CEO..)
– higher flexibility due to ownership and contracts with Royal Mail
– differentiation with slightly better services as a “family budget” airline

I am not able to judge how this holds against Ryanair and Easyjet going forward, but so far the strategy seems to have worked OK and better than many of the smaller competitors.

Actually, part of that competitive advantage, the Royal Mail contract got lost earlier that year and they earn lower margins. What I clearly didn’t see was the fact that Dart could compensate this by growing quite significantly with their packaged tours. This was luck.

Secondly, the stock got a lot of tailwind by the very good performance eof Ryanair and Easyjet. Over the last 12 months, Ryanair gained 84% and Easyjet 147%. Compared to that, Dart’s 192% look good but not totally out of line. That was luck too.

So overall I would say my dart investment was maybe 50% skill and 50% luck. Clearly, my boss model and the research helped to identify a stock which was undervalued. However the timing and the extent of the share price increase and multiple expansion are more luck than anything else.

Friday night IVG Bombshell

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Friday night, 8 pm seems to be a good time to land a real bombshell. IVG distributed an Adhoc notice with some update information about the upcoming restructuring.

Among other stuff, the comment on potential recovery rates in a liquidation. This is the German original:

ergäbe folgende Befriedigungsquoten: ca. 96% bis ca. 100% für Objektfinanzierungen (Carve out debt), ca. 86% bis ca. 89% für den syndizierten Kredit von 2009 (Syn Loan II), ca. 46% bis ca. 55% für den syndizierten Kredit von 2007 (Syn Loan I) und ca. 27% bis ca. 41% für die Wandelanleihe. Die Gläubiger der Hybridanleihe und die Aktionäre der Gesellschaft würden in diesen Fällen voraussichtlich jeweils keine Befriedigung erhalten.

So nada/niente/rien for Hybrid and Equity and only 27%-41% for the convertible. This is significantly below the latest trade of around 58% as of today.

After all, my summary from May seems to be spot on:

the likelihood of IVG “surviving” long term in my opinion is very small or even zero. So equity and hybrid should be avoided

I am really glad that I sold out:

Overall, for the portfolio I would for the time being sell down the position at current rates and eat the loss. I am pretty sure that I am too early but as I know that I am a rather bad short term speculator, I want to play this safe.

This is by no means over yet but it doesn’t look good.

Interestingly, Third Avenue seemed to have bought into IVG earlier this year. That’s what they say in their last shareholder letter:

Our analysis determined that the IVG Convertible Bond swere most likely the “fulcrum” security in the capital structure. In other words, holders of the IVG Convertible Bonds are likely to participate in a debt-for-equity restructuring, and the subordinated securities(preferred and common) would retain little or no value. IVG Convertible Bonds mature in 2017, but holders have an option to put the bonds to the company in 2014. The Fund purchased approximately 5% of the outstanding IVG Convertible Bonds at an average cost of sixty-eight cents on the dollar. As a larger holder,we anticipate having a seat at the table with the company

Man, that sounds really stupid. Even I had found out that the “fulcrum” security were the loans. it seems to be that Marty Whitman’s successors got a little bit sloppy.

So let’s get some Popcorn and watch what will happen on Monday.

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