Category Archives: Fundamentalanalyse

Listed German utility companies – part 1: Overview and E.on (ISIN DE000ENAG999)

Posted on by 5 comments

In my small series about utility companies, it might make sense to start with those companies which are at least geographically in my “circle of competence”, Germany.

There are currently 8 listed companies which qualifiy one way or the other as “utilities” which are:

Ticker Name Mkt Cap EV/EBITDA T12M P/B P/E Dvd Yld
 
EOAN GR Equity E.ON SE 28,194 7.5 0.7   7.8
RWE GR Equity RWE AG 19,099 4.7 1.2 8.3 6.3
EBK GR Equity ENBW ENERGIE BADEN-WUERTTEMB 8,340 5.6 1.4 31.0 2.7
MVV1 GR Equity MVV ENERGIE AG 1,549 8.3 1.4 25.3 3.8
FHW GR Equity FERNHEIZWERK NEUKOELLN AG 72 6.8 2.1 15.6 4.5
MNV6 GR Equity MAINOVA AG 2,031 22.9 2.2 20.8 2.5
WWG GR Equity GELSENWASSER AG 1,887 17.8 2.3 19.3 3.2
LEC GR Equity LECHWERKE AG 2,198 20.0 2.7 22.6 3.2

Obviously, the large companies look the cheapest. Most of the smaller companies are in fact subsidiaries of the large players or owned by the Government such as:

– Lechwerke is owned ~90% by RWE
– Mainova is part of EON (91.3%)
– Gelsenwasser is owned by the government (92%)
– MVV is majority owned by the city of Mannheim (50.1%)
– EnbW is majority owned by the Government (85-90%)
– Fernheizwerk Neukölln is owned by Sweidish Vattenfall (80.1%)

RWE is de facto controlled by the regional government as well, only E.On to my knowledge does not have a controlling shareholder or significant Government influence.
A
s one could read in the press, the regulatory environment in Germany is supposed to be quite ugly, among others, the major issues are:

– unpredictable politics (close down of Nuclear power plants following Fukushima), the utilities are actually trying to sue the Governemnt for this
– heavily subsidized renewable energy (costs are added to the electricity bill for retail customers)
– relative low allowed yields on infrastructure which led the major players to shed electricity grids and gas pipelines
– heavy competition for instance for electricity. I just checked, where I am living (Munich), I got ~44 different offers for electricity

Going back to the “Buffet on utilities” approach, especially suing the Government (i.e. regulator) is maybe not a ver good long-term strategy if you then want to negotiate your next investment.

Another interesting aspect in my opinion is the fact, that especially the subsidiaries with purely local (regulated) focus show quite satisfying longterm ROEs.

10Y ROE 5Y ROE Debt/Equity
FERNHEIZWERK NEUKOELLN AG 18.6% 19.6% 0.0%
LECHWERKE AG 24.5% 13.9% 0.2%
GELSENWASSER AG 17.7% 12.5% 2.1%
MAINOVA AG 17.1% 9.1% 70.3%
ENBW ENERGIE BADEN-WUERTTEMB 21.0% 12.8% 94.1%
MVV ENERGIE AG 10.3% 11.3% 107.6%
       
 
RWE AG 17.4% 15.4% 122.4%
E.ON AG 10.2% 1.8% 79.2%

I find especially Lechwerke, Fernheizwerk and Gelsenwasser fascinating. Without any leverage they manage to produce solid double-digit ROE’s over long periods of time. So looking at this one might think that both, for RWE and EON, the German regulator is maybe not the real reason for their current problems.

Rather bad management and failed international expansion are the drivers between the rather bad performance in the last few years. Eon for instance lost lot of money with gas contracts outside Germany.

This is also the major issue I have with E.on. For some reason, they believe that they must grow outside Germany, just recently they swapped German Hydro plants with Austrian Verbund against a 50% stake in a Turkish utility group. Earlier in 2012 they teamed up with Brazil’s Eike Batista to invest in Brazil. Some people might like this exposure to “growth markets”, but personally I think this is a quite risky strategy.

Again, if we look at the comparable performance between E.on and its listed German subsidiary Mainova, we can see that at least this German business performs quite well and consistent despite E.on’s claims of bad German regulation:

Some additional thoughts about E.on based on the 2011 annual report:

– Nuclear is not coming back, that was more than 1 bn of EBIT which is missing going forward
– 60% of sales are actually energy trading revenues. The results of this “sector” look quite volatile
– they show huge swings in the net results of financial derivatives. In 2010 for instance, E.on showed a net gain of 2.5 bn against a 2011 loss of -1 bn .
– E.on has around 17 bn liabilities for nuclear waste etc. This liability is hard to analyse and could be grossly over-/understated. In the notes they state that the discount rate they use is 5.2%. I think this is a rather high rate. Combined with the long duration of those liabilities, there could lurk a potential multi billion hole there as well as in the 14 bn pension liabilities
– another “whopper” are the 325 bn EUR (yes that’s three hundred twenty five billion) of outstanding fossil fuel purchase commitments. Disclosure is rather limited here but I guess this is one of the big problem areas where they have locked in Russian NatGas purchases at too high rates
–

On the plus side we could add:

+ maybe earnings were understated to put pressure on regulators and trade unions
+ positive effect from future reduction in interest rates

All in all, EON in the current form looks like a big black box to me. mostly due to the large trading activities which are not transparent at all. I would be not able to value the company. I also don’t think it is particularly well-managed. As there is no dominant shareholder, the major “upside catalyst” could come from an activist investor. In contrast, I think current management will most likely waste the cash flow in stupid “growth investments”.

Another issue, and that goes for most of the German utilities is the fact, that the combination of Nuclear exit and strongly subsidised local renewal energy production might have altered the business model going forward. So betting on a “reversion to the mean” might not necessarily work here, at least not in the short run.

Last but not least, I don’t see how I could have any “edge” in valueing E.on. It is a liquid large cap stock, with plenty of analyst coverage. True, sentiment is quite bad which is maybe a chance at some point in time but as a private investor with a small portfolio, this is not the first place to look for “value”.

Yes I know, for many “value investors”, a P/B of 0.77 and dividend yield of 7.6% would already be enough and maybe yield starved investors will bid up E.On stocks for the dividend, but looking 3.5 years ahead, I don’t see a real “Margin of safety” at current prices with the current management and strategy plus taking into account the fundamental issues mentioned above.

Utility companies – The Warren Buffet perspective

Posted on by 33 comments

In 2012, I sold my two utility stocks EVN and Fortum because I realised that I didn’t really understand the business model. I looked a little bit more general into utilities here, but with no real results. However,at least in Europe, the utility sector looks like one of the few remaining “cheap” sector.

If you don’t know a lot about a sector but need to start somewhere,it is always a good idea to look ifWarren Buffet has something to say about it

Although mostly his well-known consumer good investments like Coca Cola and Gilette are mentioned, Buffet runs a quite sizable utility operation called MidAmerican Energy.

Starting with the Berkshire 2011 annual report, let us look how the “sage” describes the business:

We have two very large businesses, BNSF and MidAmerican Energy, that have important common characteristics distinguishing them from our many other businesses. Consequently, we assign them their own sector in this letter and also split out their combined financial statistics in our GAAP balance sheet and income statement.
A key characteristic of both companies is the huge investment they have in very long-lived, regulated assets, with these partially funded by large amounts of long-term debt that is not guaranteed by Berkshire. Our credit is not needed: Both businesses have earning power that even under terrible business conditions amply covers their interest requirements.

So let’s note here first: Buffet uses “large amounts” of debt for his utility company.

Just below we find the following statement:

At MidAmerican, meanwhile, two key factors ensure its ability to service debt under all circumstances: The stability of earnings that is inherent in our exclusively offering an essential service and a diversity of earnings streams, which shield it from the actions of any single regulatory body.

I would argue he second point is interesting: Diversification in utilities works across regulators, not necessarily geographic location.

What I found extremely interesting is that Buffet is allocating a lot of capital to the utility sector. Out of the 19 bn USD Capex in Berkies operating businesses from 2009-2011, MidAmerican Capex summed up to ~9 bn USD, so almost half of Berkies total Capex.

One can assume that Buffet is not making all share investment decisions nowadays, but I think capital allocation to operating companies will be still made by him personally.

Buffet seems also quite interested in renewable energy, as the following comment from the annual report shows:

MidAmerican will have 3,316 megawatts of wind generation in operation by the end of 2012, far more than any other regulated electric utility in the country. The total amount that we have invested or committed to wind is a staggering $6 billion. We can make this sort of investment because MidAmerican retains all of its earnings, unlike other utilities that generally pay out most of what they earn. In addition, late last year we took on two solar projects – one 100%-owned in California and the other 49%-owned in Arizona – that will cost about $3 billion to construct. Many more wind and solar projects will almost certainly follow.

Here, he also mentions that he doesn’t extract any dividends out of his utility group. He considers it a growth opportunity rather than a cash cow. I think this is also worth keeping in mind, as many investors would judge utility stocks mainly by dividend yield.

From the 2009 report we learn the following:

Our regulated electric utilities, offering monopoly service in most cases, operate in a symbiotic manner with the customers in their service areas, with those users depending on us to provide first-class service and invest for their future needs. Permitting and construction periods for generation and major transmission facilities stretch way out, so it is incumbent on us to be far-sighted. We, in turn, look to our utilities’ regulators (acting on behalf of our customers) to allow us an appropriate return on the huge amounts of capital we must deploy to meet future needs. We shouldn’t expect our regulators to live up to their end of the bargain unless we live up to ours.

This is as clear as it gets. Utilities are a “natural” monopoly. If you play by the rules (at least in the US), you are guaranteed a decent return.

In the same report Buffet once more explains why he is suddenly more interested in utilities:

In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. Indeed, the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. We are fortunate to own a number of such businesses, and we would love to buy more. Anticipating, however, that Berkshire will generate ever-increasing amounts of cash, we are today quite
willing to enter businesses that regularly require large capital expenditures.

From the 2008 report, this sentence is reinforcing Buffets strategy:

Indeed, MidAmerican has not paid a dividend since Berkshire bought into the company in early 2000. Its earnings have instead been reinvested to develop the utility systems our customers require and deserve. In exchange, we have been allowed to earn a fair return on the huge sums we have invested. It’s a great partnership for all concerned.

On acquisition of utilities, we can also find his thoughts in that report:

In the regulated utility field there are no large family owned businesses. Here, Berkshire hopes to be the “buyer of choice” of regulators. It is they, rather than selling shareholders, who judge the fitness of purchasers when transactions are proposed.

There is no hiding your history when you stand before these regulators. They can – and do – call their counterparts in other states where you operate and ask how you have behaved in respect to all aspects of the business, including a willingness to commit adequate equity capital.

When MidAmerican proposed its purchase of PacifiCorp in 2005, regulators in the six new states we would be serving immediately checked our record in Iowa. They also carefully evaluated our financing plans and capabilities. We passed this examination, just as we expect to pass future ones.

So being nice and trustworthy to the regulator is what counts in this business.

Finally let’s look at some “hard numbers” from MidAmerican, in order to be able to compare this to other utilities. I will use the MidAmerican 2011 annual report for this.

  2011 2010 2009 2008
Total Assets   47.7 45.7 44.7 41.4
Shareholders Equity   14.1 13.2 12.6 10.2
total financial debt   17.8 18.2 19.3 18.2
Sales   11.2 11.1 11.2 12.7
EBIT   2.684 2.502 2.465 2.828
Net Income   1.331 1.238 1.157 1.85
Int. Exp   1.196 1.225 1.257 1.333
Op. CF   3.220 2.759 3.572 2.587
Capex   2.684 2.593 3.413 3.937
 
ROE   9.8% 9.6% 10.2%  
NI margin   11.9% 11.2% 10.3% 14.6%
EBIT Margin   24.0% 22.5% 22.0% 22.3%
Debt/equity   126.2% 137.9% 153.5% 178.4%
EBIT/Int exp   2.24 2.04 1.96 2.12
ROA   2.9% 2.7% 2.7%

We can clearly see that this is low ROA business. Only the significant leverage allows Buffet to have ~10% ROE on average. Additionally, he seems to provide some “contingent” capital to MidAmercian, i.e. to promise a capital contribution of 2 bn USD if required. I think this keeps down the cost of debt without explicitly guaranteeing it. MidAmerican has a credit rating of “only” A- against Berkshire’s AA+. Also one can see that he reduced leverage over the last few years since taking over MidAmerican.

Nevertheless he seems to prefer this vs. returning cash to shareholders. Interesting.

So let’s quickly summarize Warren Buffet’s perspective on utilities as far as I understood it:

– he only started to invest into utilities relatively lately because he needs something where to invest his growing cashflows from the other operations
– he prefers regulated utility business, diversified over different regulators
– he invests a lot of money into renewable energy
– he uses significant leverage to achieve 10% ROE
– he is not looking at the busienss as a cash cow but a long term growth business and therefore does not extract any dividends

Viel et Cie (ISIN FR FR0000050049) – “sum-of-parts” or long/short opportunity ?

Posted on by 5 comments

Viel et Compagnie SAis one of the many French companies with a good Boss score. According to Bloomberg they are active in the following areas:

Viel et Compagnie is a broker of financial products for the French interbank market. The Company deals in money market instruments, and offers clients a range of derivatives.

Traditional valuation metrics look OK but not extremely exciting:

Market Cap: 194 mn EUR
P/B: 0.62
Div. Yield 6.0%
Trailing P/E 12

However looking into the companies’ annual report, one can easily see that the Bloomberg description in this case is actually not very good.

The company describes itself the following way:

VIEL & Cie comprises three core businesses in the financial sector: Compagnie Financière Tradition SA, an interdealer broker with a presence in 27 countries, Bourse Direct, a major player in the online trading sector in France, and a 40% equity accounted stake in SwissLife Banque, present in the private banking sector in France.

Now it gets interesting, Compagnie Financiere Tradition SA itself is a Swiss listed company (ISIN CH0014345117) with a market cap of currently 320 mn CHF or 267 mn EUR. Viel & Cie owns 63.54% of the company, so that should be worth 170 mn EUR.

So again, we have here a holding company, which seems to become one of my specialties…

According to the annual report (pages 85 and following), the holding company had 70 mn in cash and 25 mn liquid securities and 150 mn in debt, leaving net debt of ~65 mn EUR.

The holding company owns on top of the participations:

– 29 mn EUR “other” securities
– 89 mn receivables

If we assume a “haircut” of 50% on those assets, we are left with around 55 mn EUR “extra assets” at holding level which I would net out against the debt.

So a first sum of parts analysis would get us.

Market cap: 194 mn EUR
+ net debt 65 mn EUR
– own shares (9.4%) 20 mn EUR
= EV 239 mn EUR

Assets:

63.5% of Cie Fin. Tradition : 167 mn EUR
+ other holding assets at 50%: 55 mn EUR
= 225 mn EUR

So we have 27 mn EUR left which should cover

a) 100% in the French online broker “Bourse en ligne”
b) 40% in Swiss Life Banque Privee

According to Viel’s annual report, the online broker earned 3.5 mn EUR in 2011, so with a 10 P/E, this company would be worth 35 mn EUR

The 40% Stake in the French Swiss Life Banque Privee seems to be the result of a 2007 transaction with Swiss Life.

However, this 40% stake only generates “at Equity” profits of 2 mn EUR, even optimistically I would not attach more than 25 mn EUR valuation for this minority stake.

So bringing it together, the Sum of Parts looks as follows:

a) Cie Fin tradition 167 mn
b) holding assets 55 mn
c) Online broking 35 mn
d) 40% Banque 25 mn

Sum 282 mn EUR

Against an “EV” of 239 mn EUR, so only a slight 16% “discount”. So not really something to follow up and let’s move on with some other stock ?

Not so fast: It is quite interesting to look at the relative performance of Viel &Cie against its main participation over the past 2 years:

For some reason which I don’t understand, the two stocks completely “decoupled” in January 2011. Since then, Viel & Cie remained constant and Compagnie Financiere tradition lost ~54%. Or put it another way: In January 2011, Viel was trading at a very large discount (50% or more) to sum of parts whereas now it trades almost without any discount.

I found this very strange. Most of the value of Viel comes from its stake in the Swiss company and for some reason, Viel shareholders do not care that the major stake looses 55% ?

I don’t know if one could short Viel, but a “long CFT / short VIL” trade might be a very interesting market neutral opportunity.

Another potential idea out of this is Compagnie Financier Tradition. This could be a very interesting situation in its own.

Edit: I had originally written this post 2 weeks ago, since then Viel already lost 10% relative to Compagnie Tradition

Holding companies – Solvac SA (ISIN BE0003545531)

Posted on by Leave a comment

This is a quick follow-up on the Porsche SE post and the Holding company post.

Solvac SA (Had tip to reader G.) is the Belgian Holding company for 30% of the shares of Solvay SA, the Belgium based Chemical company. Majority shareholders of Solvac are the heirs of the founding Solvay family.

The holding company shares some interesting similarities with Porsche, for instance they hold also a 30% stake and account for the stake at equity.
Read more

Some thoughts on discounts for Holding structures (Porsche SE, Pargesa, Autostrade Torino)

Posted on by 13 comments

In my post about Porsche SE, I concluded the following:

However on a relative basis I don’t think that there is a lot of upside in the Porsche shares, as I don’t see a quick “real” catalyst and a certain structural discount (20-30%) is justified due to holding structure and non-voting status of the traded shares.

Geoff Gannon used this summary to come up with his view on holding company discounts:

I do know something about holding companies that trade at a discount to their parts. And I don’t agree with that part of the post. If the underlying assets are compounding nicely – you shouldn’t assume a holding company discount is correct just because the market applies one to the stock.

So he is basically saying one should ignore the holding structure and look at the underlying only.

Interestingly, we had such a discussion on the blog about the same topic in the Bouygues post. Reader Martin commented that “one usually applies a 20-30% holding/conglomerate discount” which I didn’t apply in my sum-of-parts valuation.

So far this seems to be quite inconsistent from my side, isn’t it ?

I have to confess that especially for Porsche, I did not mention all my thoughts about why I applied a discount there. However maybe I can shed some light on how I look at “holding structures” and when and how to discount them.

For myself, I distinguish between 3 forms of holding companies:

A) Value adding HoldCos
B) Value neutral HoldCos
C) Value destroying HoldCos

A) Value adding HoldCos

This is in my opinion the rarest breed of HoldCos. Clearly, Berkshire Hathaway is an example or Leucadia. Those HoldCo’s add value through superior capital allocation capabilities of their management. In those cases I would not apply any discount on the underlying assets, however I would be hesitant to pay extra.

B) Value neutral HoldCos

Those are holding structures which exist for some reason, but most importantly are transparent and do nothing stupid or evil to hurt the shareholder. Ideally, they are passing returns from underlying assets to shareholders.

A typical example of such a company would be Pargesa, the Swiss HoldCo of Belgian Billionaire Albert Frère. They are quite transparent and even report their economic NAV on a weekly basisandpass most of the dividends received to the shareholders. Nevertheless, the share trades at significant discount to NAV as their own chart shows:

At the moment, we see a 30% discount for Pargessa. So one should ask oneself, why such a discount exists for such a transparent “fair” holding co ? I can think of maybe 3 reasons:

– The stock is less liquid than the underlying shares
– people do not really trust Albert Frere despite being treated Ok so far
– no one wants to invest into this specific basket of stocks

Nevertheless, one has to notice that even for such a transparent company like Pargesa, a 30% discount does not seem to be the exception.

C) Value destroying HoldCos

Here I have the privilege to have documented such a case in quite some detail, Autostrada Torina, the Italian Holding company for toll road operator SIAS SpA.

As I liked the underlying business, I thought buying at a discount, following Geoff Gannon thoughts that a nice compounding business at a discount is an ever nicer business.

However, I had then to find out the hard way that the discount of the holding company was clearly a risk premium. In this case, the controlling Gavio family “abused” the holding to buy an interest in another company (Imprgilo far above the market price. They couldn’t do this in the operating subsidiary, as the sub was subject to regulation. The Holding co stock recovered to a certain extent but in this case the underlying OpCo was clearly the better and safer investment

My lesson in this was the following: Stay away as far as possible from such “value destroying” HoldCos. They are totally unpredictable and doe not have any margin of safety.

So going back to our Porsche example, what kind of Holding company is Porsche ?

Well, it is definitely not a “value adding” holding. The question now would be if it is a “neutral” or potentially even “value destroying” hold co ?

In my opinion there are already some warning signs:

– Porsche SE already communicated that they will not distribute the cash, but build up an additional portfolio of “strategic participations”
– Porsche only issues detailed reports twice a year, accounting is rather “opaque”
– in my opinion, Volkswagen has a lot of incentives to achieve a weak Porsche SE share price in order to then acquire their own shares at a discount (and swap them into VW pref shares if possible) at a later stage. Common shareholders (Porsche & Piech family might get a better deal. Under German law it is possible to treat pref holders differently

Compared to Pargesa for example, I would definitely prefer Pargesa with a 30% discount to a Porsche pref share at 35% discount.

So to summarize the whole post:

– With holding companies, it is very important to determine the intention and risks of the holding structure
– neglecting or even “evil” holding management can quickly turn a “discount” into a real loss
– better err on the safe side in such situations
– in doubt, assume there is a reason for the discount if you cannot prove the opposite
– however for skilled activist investors, those situations might create potential. So maybe Chris Hohn has a different game plan.But don’t forget that a lot of famous Hedgefund managers (incl. David Einhorn lost a lot of money with Porsche/Volkswagen already in the past.

Update: Porsche SE Holding (ISIN DE000PAH0038)

Posted on by 16 comments

In June 2011 and July 2011, I looked at Porsche Holding SE.

To summarize the German language posts in a few points:

– Porsche is basically a holding company for 32% of Volkswagen at a discount
– they do not have any operational business left
– at that point in time (end of June 2011), the then prevailing calculated discount of ~33% wasn’t that exciting, considering the legal risks, corporate governance etc.

So what happened in the meantime ?

Volkswagen “cleaned” up the structure to a certain extent that the rest of the operating business was transferred to Volkswagen against 4.5 bn cash (and one share for tax reasons).

Then, a few days ago, Chris Hohn from TCI presented Porsche as one of his best ideas. As Chris Hohn in my opinion is one of the few guys one should really pay attention to, let’s look quickly at his main arguments (via Marketfolly):

Long Porsche

– Concerns about the impact of the litigation surrounding Porsche’s Volkswagen (VW) short in 2008 have depressed the price
– Hohn thinks the market has overreacted and Porsche will settle for less than is expected
– Porsche trades at a 40% discount to NAV
– It’s stock has traded sideways for many years
– Porsche owns 32% of VW
– VW is also cheap so there is a double discount
– VW is perceived as a budget brand but a substantial amount of its earnings come from the premium market where there is more pricing power: Audi and Porsche
– VW and Porsche have good emerging market exposure
– VW grew its volume even during the financial crisis
– It is steadily destroying other European carmakers

Hohn believes there’s 4 big ways to win by investing in Porsche:

1. VW appreciates
2. The discount to NAV narrows as the litigation is resolved
3. The discount narrows due to a higher dividend
4. A merger of Porsche and VW

Personally, I don’t buy the argument of Volkswagen as undervalued. For me, Volkswagen is much more like an accident waiting to happen, but anyway, based on his analysis, the discount is now 40%. According to his latest report, he seems to be short Fiat, so maybe he has set this up as a kind of “pair trade”.

However, let’s try to verify the discount first, starting with the last available half-year accounts:

30.06.2012  
At Equity Part 29.8 VOW + Porsche Holding
other receivables etc 4.1  
 
short-term assets 0.3  
Cash 0.5  
 
Total assets 34.7  
 
Hybrid debt 0.3  
Financial debt 5.9  
Other liabilities 6.7 Option VW
     
Net Assets 21.8  
Per share 71.2  
Market Price 54  
 
P/B 0.76  
“Discount” 24.1%

Now we can transform this into a “market value” balance sheet including the reported transaction:

Current  
At Equity Part 22.8 VOW at market
other receivables etc 4.1  
 
short term assets 0.3  
Cash 3 +4.5 minus 2 debt
 
Total assets 30.2  
 
Hybrid debt 0  
other liabilities 3.9  
Other liabilities 0 Option exercised
Plc loan 0.3 Formerly cons.
Net Assets 26.0  
Per share 85.0  
Market Price 54.0  
 
P/B 0.64  
“Discount” 36.4%

So we end up with a discount of ~36% based on a share price of EUR 54.

In my opinion, a 36% discount is nice but not a screaming buy for the following reasons:

– without a clear catalyst, a holding Co. will always trade at a certain discount. Even transparent Holdings like GBL trade at something like 15-20% discount
– additionally, the traded Porsche shares are non-voting pref shares, so an additional discount might be applied here
– the discoutn does also have to take into account potential litigation payments

So without a clear catalyst, I don’t think Porsche is a “must” buy but rather “fairly” valued. So let’s look at Chris Hohn’s catalysts:

1. VW appreciates
2. The discount to NAV narrows as the litigation is resolved
3. The discount narrows due to a higher dividend
4. A merger of Porsche and VW

I have to admit, I don’t buy any of these.

1. With regard to Volkswagen, I have to admit that I find it really hard to understand how much they are actually earn. Both with the MAN and Porsche acquisition, they booked so many special effects that the balance sheet is more or less incomprehensible. Alone the treatment of the “Porsche option” would be worth 2 extra posts and reminds me of a certain US energy company now bankrupt…

2. Ok, if they pay nothing, than the discount might shrink a little bit, but personally I think a 25% discount on NAV might be justified in any case

3. Unlikely. Volkswagen just revealed a 50 bn investment program over 3 years

4. Nope. Just as a reminder: Volkswagen for unknown reasons keeps their subsidiary Audi AG listed since many many years despite they could legally squeeze out any time. I do not see the big advantage of a merger.

Summary:

I still don’t think that Porsche is such a great investment. There might be a certain upside if the litigation ends quickly and without large payments. If one believes in Volkswagen as a great investment, it might be interesting as well.

However on a relative basis I don’t think that there is a lot of upside in the Porsche shares, as I don’t see a quick “real” catalyst and a certain structural discount (20-30%) is justified due to holding structure and non-voting status of the traded shares.

Some reader recommendations: M6, Bongrain, Banknordik

Posted on by 20 comments

First of all, thank you to anyone who recommends investments on the blog. It is always great to get new ideas. So let’s quickly check some of them if they would be interesting from my point of view:

Bongrain (ISIN FR0000120107)

Bongrain is a company I have been looking into quite often over the last view years. For some reason it always appears to be cheap.
Currently it trades at quite low multiples:

P/B 0.6
P/S 0.2
P/E Trailing 15, P/E 2012 ~8
Div. yield 2.7%.

However, despite the significant discount to book, Bongrain does not score well in my Boss Score. My model only calculates a fair value close to current prices.

The reason is mainly that ROE is simply relatively low. Over 10 years they managed 8.5% ROE over the last 5 years only 6.5%. They were always profitable but profitability is not really stable. L.D.C for instance shows better ROEs with less volatility. There would be clearly some “mean reversion” potential but I think that there are more interesting stocks in France at the moment.

For my investment philosophy, it is vital that a company earns at least its Cost of capital to make it a worthwhile investment. Bongrain seems to struggle with that. Unless there are dramatic changes in management or shareholder structure, I would prefer L.D.C. against Bongrain, but maybe I manage to have a more detailed look at Bongrain at some point in time.

M6 Metropole Television

M6 looks great from a free cashflow perspective and ROE, ROA and ROIC. The company has net cash (~2-3 EUR per share). In my model, it scores Ok, but due to the fact that it already trades at 2.2x book, the upside is limited.

Additionally, M6 is one of the shares where stated EPS do not correspond well with my own calculated “total return”. Especially in 2010, my model actually shows a loss:

EPS BV per share Dividend Tot Return Delta EPS
31.12.2007 1.29 6.07 0.95    
31.12.2008 1.07 6.17 1.00 1.05 -2.4%
31.12.2009 1.08 6.37 0.85 1.20 11.7%
31.12.2010 1.22 5.32 0.85 -0.19 -141.7%
30.12.2011 1.17 5.50 1.00 1.03 -13.9%

Instead of the expected increase in Book value based on the stated EPS, book value per share decreased in this year significantly. One would have to check what the reason is for this, but it doesn’t seem to be the result of a share repurchase.

In general, I do have also reservation against TV stations. There is a clear underlying shift going on, away from traditional media to internet media. I do not have a really good insight how far this would go but one can see the “classical” patterns which were mentioned in the book “The innovators dilemma”:

– there seem to be a series of “disruptive innovations” rather than a sustaining innovation
– traditional companies struggle hard, after ignoring this they now seem to overpay for access
– truly disruptive innovations are quite unpredictable and established companies have only a very small chance to prosper in such an environment

In those cases, in my opinion, it would be very dangerous to rely on past numbers and assume mean reversion. For the time being I would be very uncomfortable with “traditional” media company, unless it would be a “hard asset play”.

So again, M6 would not be one of my favourite French stocks at the moment.

Banknordik

Banknordik came up in the Gronlandsbanken analysis as the only other bank being active in Greenland.

Banknordik interestingly is the major bank in the Faeroe Islands, another one of those “Denmark related” islands.

Other than Groenlandsbanken, Banknordik seems to do 50% of their business in Denmark and only 50% in Faeroer. They seem to have taken over parts of a no bankrupt Danish bank But nevertheless, the stock looks appealing to me as I start to “warm up” for “specialist” financial stocks.

Banknordik looks like a very interesting stock and might be a “complimentary” position to Groenlandsbanken. So I will definitely look deeper into that one.

A few more thoughts on TNT Express – Implied probability of deal happening is only 19%

Posted on by 9 comments

Yesterday’s post was of course only a first step towards a potential “special situation” investment.

In order to decide if this is actually an interesting investment, one would need to come up with

A) some more considerations with regard to timing
B) at least a rough idea about intrinsic value

With regard to timing, I think it makes sense to look at Rhoen Klinikum, where there was a similar situation:

On April 26th, Fresenius offered 22,50 EUR per share from an “undisturbed” level of 14.76 EUR the day before. Then, when doubts came up, the stock went down to around 16 EUR before once again climbing to around 20 EUR, before then the deal fell apart. Interestingly, the current share price seems to have a floor at the previous undisturbed level.

For TNT Express, the truly “undisturbed” price the day before the offer was 6,34 EUR, so the current price is around 10% higher than that level.

Just as a side remark:

There were a couple of articles which said that there is now a 50/50 chance of the deal happening, like here.

However at current prices(6.95 EUR) we can relatively easily calculate the implied probability of the deal happening:

Undisturbed price: 6.34 EUR
Current prcie: 6.95 EUR
Offer price: 9,50 EUR

So the implied probabality of the deal happening can be calculated the following way:

(6.95-6.34) / (9.50-6.34) = 19.3%.

Anyone who thinks that there is really a 50/50 chance of the deal happening should buy now as the expected share price under this assumption should be 7.92 EUR (6.34 + (9.5-6.34)/2).

Going back to timing: What we haven’t seen here is a upmove of the stock like we have seen with Rhoen. So far we only saw the price going doen and the implied probability of the deal happening decreasing.

B) intrinsic value

This is somwhow difficult. The 9,50 EUR is a “private market” value, maybe including a premium for synergies.

TNT Express since its spin off has yet to prove that they can achieve margins like their competitors. Based on Q3 numbers, they are curently heading to something like 220 mn “operating income” or EBITDA for 2012 which equals an “operating margin” of only 3%.

UPS for example has an operating margin of 11.4%, FedEx of 7.8%. Deutsche Post has an ~9% EBIT Margin in the Express segment. So TNT has definitely some room to improve.

If we assume 8% operating margin, TNT would show ~600 mn EBITDA. Current EV is 3.5 bn, potential EV/EBITDA ~6.

This is much lower than UPS (10x EV/EBITDA) but higher than Fedex (4.9x). Deutsche Post is at 5 times EV/EBITDA.

So at current prices and assuming quite a turn around, TNT Express is not really cheap. So any investment would be a pure “Merger arbitrage” or “control premium” inevstment which might or not work out.

No action yet.

Edit: During writing this post, the share price jumped some 3.5% compared to yesterday, is this the first leg of the rebound ?…..

« Older Entries Recent Entries »