Category Archives: Emerging Markets

Australian stocks: Contrarian opportunity or too early ?

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kaenguruh2

Up until now, I only looked at one single Australian stock: Australian Vintage two years ago. I didn’t like it mainly because I thought the interests between Management and shareholders were not aligned. Interestingly the stock jumped in the last weeks after doing nothing for 2 years.

Australian stock market facts

Let’s start with some facts about the Australian stock market. According to Bloomberg, there are 2.059 Australian companies listed on the Australian stock exchange, total market cap is 1.59 tn AUD.

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Koc Holding & few thoughts on Turkey

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Koc Holding

On Monday, Koc Holding released 2015 results. As always, they have a very decent presentation which nicely summarizes what happened.

Consolidated net income went up +32% in 2015 in local currency. Even including the 2015 depreciation of around -12%, for me as EUR based shareholders, profits increased significantly.

Based on 2015, Koc now trades at around 8,5 times P/E. The discount to a “sum of part” calculation is around 20%, a value which has been relatively stable over the last 2-3 years.

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The “Watch Series”: Hengdeli Group (ISIN KYG450481083) – Chinese market leader in watch retailing

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No analysis of Swatch (part 1 and part 2) would be complete without a look at Hong Kong listed company Hengdeli.

Hengdeli claims to be the largest luxury watch retailer in the world and sells mostly in Hong Kong and Mainland China. According to several sources, Hengdeli has a 35% market share in selling Swiss Watches in China, so they are of course important for Swatch. How important they are, shows another fact. According to the 2014 annual report, Hengedeli’s largest supplier is responsible for 71% (!!!) of all watches sold. The two largest suppliers account for 88% of all watches sold.

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The Watch Series: Swatch (UHR.VX) part 2 – Capital allocation, Management & Valuation

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It is time to finish the Swatch case. Let’s start with summarizing the first post on Swatch and the post on smart watches:

– I do believe that luxury watches have “staying power” and will not replaced or significantly impacted by smart watches as the main buyers are Emerging Market consumers and collectors
– If we accept that Swatch is in fact a luxury product company, there would be a clear valuation upside compared to other luxury companies
– However the lower range of their products (Swatch, Tissot, Rado, Hamilton etc.) clearly has problems which could become worse over time as the moat here is small to non-existent

So let’s look at some more aspects of how Swatch is run:

Capital allocation:

The company is run like a “family company”, very conservative and “Swiss” and a big contrast to Fossil. As mentioned in my post about the Hayek book, Hayek senior hated banks and Swatch therefore always kept a big cash buffer.

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Romania update: Electrica (great !!). Romgaz (so so) & new Prime Minister

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Romania new Prime Minister

A few days ago, following the fatal fire in a Bucharest nightclub, prime minister Ponta surprisingly resigned following massive protests on the streets.

Interestingly, instead of quick new elections, a “technocrat” Government was nominated, lead by a former EU commission member.

He has nominated young and independent experts for the key portfolios of the economy, justice, foreign office and health.

Ciolos selected Anca Paliu Dragu, an economic analyst at the European Commission, to take over the Finance Ministry and Cristina Guseth, chief of Freedom House Romania, as Justice Minister.

On the other hand, experienced diplomat Lazar Comanescu was proposed as Foreign Affairs Minister, while Mihnea Motoc, Romania’s ambassador to Britain, was nominated as Defence Minister.

The Economy Minister will be businessman Costin Borc, and sociologist Vasile Dancu will have the role of Minister of Regional Development.

Political commentators saw the proposed government as pro-reform.

Up until now there was a political deadlock between the newly elected president Johannes and Socialist Ponta.

It reminds me a little bit of Mario Monti’s technocrat government in Italy which came into power after Berlusconi was forced out in 2011. Most of the Italian reforms were made in that short period of time. Before and after, not much has happened there. So from an outside view I would consider this whole episode as a step into the right direction.

Now to my 2 Romanian holdings:

Romgaz

Romgaz released 9 month numbers already some days ago. The good news was that the presentation looks more professional than before, the bad news is that sales and profits went down by slightly more than -10% against 9M 2014. Additionally they had exceptional write-offs on receivables and exploration assets.

Interestingly, margins remained pretty stable, helped by the underlying price increases that will bring the local prices up to market prices over several years.

They also made a regulatory filing which already contains a detailed projection for the 2015 profits and dividends. Based on that projection, the 2015 profit will be 1.032 mn Lei or ~ 2,67 Lei per share, significantly lower than the ~3,60 lei for 2014.  However in my opinion, this sounds worse than it actually is. It seems to be that current Nat Gas consumption in Romania has declined, I honestly don’t know why. But as the local Nat Gas prices at the moment are still very low and supposed to rise, that means that the gas which has stayed in the ground and not sold is getting more valuable. So I think the issue of the lower sales volume has only a limited effect on the value of the company as those reserves then can be sold higher in the future. So my initial valuation of Romgaz from a year ago is still valid.

The share price clearly has suffered but less than other energy stocks. Interestingly, Fondul Propritatea dumped 4% of Romgaz a few days prior to the release which, looking back now seems to have been “very fortunate” for them.

Anyway, for me Romgaz is still in the early phase of the investment period and for me there is no reason to change anything

Electrica

Electrica also released Q3 numbers a couple of days ago. In contrast to Romgaz, Electrica’s numbers were excellent. The 9 month profit is already higher than the total 2015 profit I estimated last year in my initial case. The increase came exclusively from the distribution side which is very positive.

Additionally, Fondul Propritatae seems to have reopened negotiations on the minority stakes in the three operating companies. If Electrica could buy them at a valuation close to their own stock, this could create a lot of value for shareholders.

Overall, I think Electrica is one of my “highest conviction” ideas, the stock is extremely cheap and developing much better than I thought. It might take time until this get reflected in the stock price but I don’t have any reason to hurry.

One interesting detail: One of the supervisory board members had to resign because he became the new energy minister. Maybe this helps a little bit for better relationships with the regulator….

 

Vetoquinol SA – It’s a family affair

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Vetoquinol is A French company specialized in “Animal health”, i.e. pharmaceuticals for animals. I came across the company more or less by random. The company went public in 2006 but the majority (~62%) is owned by the founding family, the current CEO is the 3rd generation of the founders. Some key figures:

Market Cap 450 mn EUR
P/B 1,6
P/E 16
EV/EBITDA 8
EV/EBIT 11
Operating Margin (11 year avg) 11,0%
ROCE (11 year avg): 10,8%
EPS CAGR 8 year +4,0%
Debt: ~ 3 EUR net cash per share

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BMPS update & Quick look at Turkey (Koc Holding, Depfa TRY Zero bond)

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BMPS

Today I sold my BMPS “special situation” position at 1,80 EUR per share, a small loss compared to my 1,80 EUR entry price when I factor in transaction costs. The subscription rights stopped trading already yesterday. Overall, the case did not work out very well. The stock was volatile only the very first day and didn’t do a lot ever since as the chart shows:

bmps 11 close

It seems to be that the regulator has been quite succesful this time to warn market participants against any kind of option based short squeezes. So no “Italian Job” this time. As I have mentioned in the comments of the last post, I do not consider BMPS as a longer term investment. I do think the risk/reward profile of this special situation was good but it just didn’t work out. For the record, I consider the whole transaction as one trade so I still have one potential transaction open or June 😉

Quick look at Turkey

The Turkish Lira and the stock market got hit hard this week as the ruling party did not get the majority of votes.

Politically, one might say that this was actually good news because it clearly enforced democracy in Turkey. Or how the linked Reuters article said:

Erdogan loses his chance to become Turkey’s Vladimir Putin

Financial markets in the short-term however seem to prefer potential dictators to democracy. Although I really like the FT guys, this video shows clearly the opinion of many “pundits”. Especially the currency got clobbered and is almost back (in EUR levels) to early last year’s levels:

In the long run I do believe that a functioning democracy is positive, both for the country and business despite “uncertainties” due to elections. Especially as a public shareholder it is very important that the institutions in a country are properly working. With Erdogan gaining more and more power, I did have my doubts. I don’t know that many positive examples that stock markets with dictators in charge do really well.

Koc

My Turkish stock investment Koc Holding is still doing well. In EUR Term, I am still up around +50%. This is mostly due to a quite lucky entry point back in February last year. I still could not motivate myself to increase the position as Q1 results haven been operationally good but net income was lower yoy because of one-offs.

For Koc, a weaker Erdogan/AKP should be clearly positive in the long run as it reduces risk.

Depfa “Kebap bond”

My second “Turkish” investment is the 2020 Depfa TRY Zerobond which I bought almost exactly one year ago. Again I was lucky with the purchase timing. Although I bought at a more expensive exchange rate (2,85 TRY/EUR), I made some money on the bond price so that I am only slightly down.

The interesting thing is the following: Relatively speaking, the bond has become more attractive. This is what I wrote back then:

At a current yield of ~13% p.a., the bond trades around 4% p.a. wider than a 2 year longer EIB Zero bond and around 3% wider than similar Turkish Government (coupon) bonds.

Well, one year later, the bond actually trades 4,2% wider than Turkish Govies and 4,3% wider than the EIB bond. I still believe that there is very little credit risk in a senior Depfa Bond and that at around 50% and a yield of 13,8%, the bond is good value at an Exchange rate of 3,10 TRY/EUR. I might increase the position slightly in the next few days.

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