Category Archives: Im Focus

Wirecard follow Up – Open questions & some wild guesses

Thanks to a week of vacation I was on “read only” mode since I posted my Wirecard story 11 days ago.

Since then a lot of things happened, such as EY suddenly doubting the existence of 1,9 bn in “cash”, Wirecard releasing a really strange 2 minute video Statement, the CEO resigning, the CEO being arrested and subsequently released on a 5 mn bail, the COO having disappeared somewhere between the Philippines and China and the company finally filing for insolvency.

As mentioned in the earlier post, the insolvency is not really a surprise, but to be honest, the speed of the unraveling was clearly surprising. Equally surprising was today’s share price movement of ~+130% at the time of writing, resulting in a market cap of 360 mn EUR.  With the senior bonds trading at only ~18,6% of notional and falling further, it is pretty clear that shareholder will end up with a zero, but the gamblers and day traders seem to have a lot of fun. Personally, I think even the unsecured borrowers (Hi Softbank !!) will end up with a nice “Donut” due to the weak creditor protection in Germany.

The Book/ The Movie

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Panic Journal (3) – Why Expert Virologists seem to be really bad (or careless) with statistics

Disclaimer: I am an anonymous investment blogger and not a Virologist, so please be aware of this. I also think that Covid-19 is a huge threat and that everyone should contribute to public safety by staying at home and avoiding contact for some time.

The Problem

As mentioned above, I am a “stock guy”, however mostly a fundamental/Behavioural type of investor. If I see a number, I want to know where it comes from and how it is derived.

The current discussion on Covid-19 is, at least in Germany, mostly about numbers. Two numbers stand out and get reported all the time and everywhere:

  1. Number of Covid-19 Infected persons (per day and daily change)
  2. Number of persons that died due to Covdid-19 (again per days and daily change)

The official source for this number is the Robert-Koch Institute (RKI) named after the German scientist who discovered the tubercolosis bacterium more than 100 years ago.

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Short cuts: Praktiker/Hornbach, Thermador, Portfolio transactions

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%.

Praktiker bond – sell on bad news ?

Yesterday, Praktiker held its annual shareholder’s meeting in Hamburg. Unfortunately, I could not attend,but it seems to have been prime time entertainment for everyone who attended.

Some very lively articles about Praktiker can be found here and here.

The story is quite interesting, Austrian shareholders, representing 15% had a majority in the meeting, as less than 30% of shareholders were attending. At first, they opposed the plan of the management to first increase the share capital and then bring in US Investor Anchorage with a “super senior loan” and pledging its most valuable subsidiary, max Bahr against the loan.

As a response, management told shareholders that they will go directly into bankruptcy protection i shareholders don’t agree.

At the end, the shareholders seem to have approved the plan to bring in Anchorage after a capital increase.

Among my many posts about this interesting situation, especially my post about the possible scenarios.

In parallel, I have been doing some background checks on Anchorage and the picture does not look really good. Anchorage as a “distressed debt” specialist was among others involved in the bankruptcy of traditional German car parts manufacturer Honsel.

“Distressed debt” sounds like a very neutral word, but the business model of those “sharks” is relatively “dirty”: they come in via a loan, but they structure the loan though covenants in a way that they can call the loan pretty soon if they want.Once they are in this position, they can then force the company into bankruptcy, wipe out shareholders and senior bond holders.

At praktiker, this look like “Shooting fish in the barrel” for Anchorage: The do not only get the most valuable subsidiary pledged, but the concept includes making the subsidiary even more profitable by taking over the best Praktiker locations, leaving the “rest” for the others.

So this strategy even improves the position of Anchorage to the disadvantage of shareholders and bondholders. In My opinion, the Austrian shareholders are “feather weights” in this fight against Anchorage.

Within my scenario analysis, I would weight the “bankruptcy, zero recovery scenario” within the next few years at 50% probability. From what I have seen, the super senior loan will even expire before the senior bond

As it looks now, the market seems to interpret the result of the annual meeting positively, this opens the opportunity to sell the bonds at a small profit which I will do.

How goes the famous line: “You have to know when to hold ’em, you have to know when to fold ’em”….

Quick news: WMF, Walmart, Praktiker

WMF

According to a Boersenzeitung article, for some reason WMF is considering exchanging the Pref shares into ordinary shares (full article can be found in the W:O Thread)

I do not really understand how Capvis could profit from an exchange, unless they already have bought a lot of Pref shares. Then it would be a good deal for them.

Interestingly, the Pref shares now more or less are back to the level of the regular shares.

Maybe time to sell on good news ? Q1 numbers seem to have been really good. For the time being: no action.

Walmart

Walmart issued unexpected positive Q1 numbers today. Here I will definitely ue the momentum and sell the shares at today’s VWAP.

For some reason I do not believe in the US recovery story, at least not for “physical” retailers. Even if Warren is still buying…..It was never a “high conviction” play anyway, although it made good money.

Praktiker

Praktiker seems to have found an U Hedgefund for its “secured” loan, US Hedgefund Acnhorage. Although it is too early to assess, the downside scenario for the bonds would now be of course more severe, however the proabality of a deafult is lower. No action yet.

Praktiker Bond – catalyst event (sort of…)

Interesting developement for my “special situation” investment, the 2016 Praktiker senior bond. In my analysis I had written the following:

Potential Catalyst:

In my opinion, something with regard to financing has to happen this year. So there might be a good chance that the bond reacts positively within a limited time frame if the refinancing package is hopefully finalized.

So fast forward to this weekend: The CEO and another board member have been fired and one oof the supervisory board members stepped in.

According to this Handelsblatt article, a new restructuring concept was presented by the largest shareholder which requires a lot less capital (120 mn EUR compared to 300 mn EUR) than initially announced.

There seems to be a new loan of 85 mn EUR and a capital increase in the pipeline, however no further details are available.

If one looks at the chart of the bond one can see that this was clearly positive news for the bond:

So where do we stand with regard to the initial scenario analysis ?

With this in mind, I think one can now try to analyse the different possible scenarios for bondholders, which in my opinion are

1) No bankruptcy – (unrealistic) best case: Take over within 1-2 year and early full pay out of bond
2) No bankruptcy – normal case: Bond pays out as scheduled
3) No bankruptcy – bad case: coupon gets reduced in second round of bondholders vote
4) bancruptcy – normal case: bond gets “fair” share of liquidation value 40% in 2016
5) bancruptcy – bad case: “DIP” financing reduces liquidation value significantly , value 10% in 201

I think at the moment, it is too early to fully assess the situation as the details of the financing are not available yet. Due to the bond covenants I asume the loan financing might be tricky.

So for the time being, I will hold the bond despite the quick 30%+ gain in only a few weeks. However if the bond goes above 60% without further news I will most likely sell as the intrinsic value of the negative (and cautious) scenario would have been fully realized.

Edit: On Praktiker’s homepage they issued a press release about this.

They talk of ” Vorrangiges Darlehen” which equals a senior secured loan. It will be interesting to see how they reralize this. As I have mentioned before, the bond contains a “negative pledge” covenant which should prevent any pledging of relevant assets. So this will be really interesting….

Portfolio updates – Praktiker, Nestle, SIAS, Piquadro & TUMI

Just to summarize some recent portfolio transactions:

Praktiker

In the last few days, Praktiker came back below my limit at 41%. So in toatl I bough now 641.000 nominal bonds at a “dirty price” including accrued interest of 41.62%. Clean price would be around 40.50%.

Nestle

As announced yesterday, I sold the Nestle shares at 54.47 CHF. Including 2 dividends, Nestle produced a positive performance of 24.17% for the portfolio.

I kept the CHF hedge, Vetropack is now 100% hedged.

SIAS

Also yesterday, I “pre” invested the SIAS dividend back into SIAS shares. Ex date was April 23rd, however payment date is April 26th.

Piquadro

Piquadro fell back below my buying limit of 1,50 EUR, so I will increase the position of currently 1%. Howver, tarding volume is relatively small. As always, I will sell short 50% of the purchase value with FTSE MIB ETFs.

The TUMI IPO by the way has been a great succes. The stock increased from 18 USD to 26 USD in the frist few trading days. This gives TUMI a valuation of 1.8 bn USD, which translates into P/S of 6 and EV/EBITDA of 30. Cpompared to this, Piquadro is valued at EV/EBITDA of 7 and P/S of 1.

I had hoped that the IPO of TUMI would represent some kind of “catalyst” event for Piquadro, but I think at the moment Piuqadro is overwhelmed by the Euro Crisis 2.0.

Finally, the net cash position of the portfolio after those transactions is currently 11.8%.

Quick updates: Praktiker, Total Produce and Vivendi

Praktiker

Praktiker just announced that they will delay the AGM until mid of June. The claim to be in “advanced talks” with capital providers and that they need some more time to prepare the necessary approvals from the AGM.

I am pretty sure, we will see a massive diluting capital increase exercise presented in the AGM. However, the Bond now is back into buying levels (<= 41%) and I will increase the position if possible to 2.5% of the portfolio.

Total Produce

Total produce has released its annual report. I have to dig deeper into the report at some point in time.

Vivendi

“Caque”, a French blogger has commented on yesterdays post. He has up a very very good post about Vivendi, including his personal experiences as a customer.

Also his original Vivendi post from 2011 is really worth a read. Seems to be a high quality blog to me and the only French one I know so far.

Praktiker Bond (ISIN DE000A1H3JZ8) – Scenario analysis & crazy hedging idea

I already wrote a lot of posts about Praktiker in the past.

My previous summary was something like this : I don’t understand the motivation behind the recent events especially asking senior bond holders for a cut first before shareholders contribute , why they didn’t do any capital increase when the stock price was higher etc. etc.

After thinking about this the most likely possibility in my opinion is the following thesis:

Current Management doesn’t work in the interest of the current shareholders and bondholders but in the interest of potential future investors.

The result of this is relatively clear: It would be suicide to invest into the shares, as you can take a massive dilution at some point in time for granted. However, a new investor might prefer a “non-bancrupt” company, so for the bond things might look better from a risk/return perspective.

With this in mind, I think one can now try to analyse the different possible scenarios for bondholders, which in my opinion are

1) No bankruptcy – (unrealistic) best case: Take over within 1-2 year and early full pay out of bond
2) No bankruptcy – normal case: Bond pays out as scheduled
3) No bankruptcy – bad case: coupon gets reduced in second round of bondholders vote
4) bancruptcy – normal case: bond gets “fair” share of liquidation value 40% in 2016
5) bancruptcy – bad case: “DIP” financing reduces liquidation value significantly , value 10% in 201

Then we have to do 4 more steps:

First, assign probabilities to each scenario and the second, “model” cashflows.In a third steps we then can calculate “weighted” total cashflow and then calculate an internal rate of return based on current market prices.

In the following table, I have made a first try:

Bankrupt Prob. in % 2013 2014 2015 2016
Best Case No 5.00% 5.88 105.88 0.00 0.00
Normal Case No 60.00% 5.88 5.88 5.88 105.88
bad case No 10.00% 1.00 1.00 1.00 101.00
Normal Case Yes 12.50% 0.00 0.00 0.00 40.00
bad case Yes 12.50% 0.00 0.00 0.00 10.00
             
Weighted CF   100% 3.91875 8.91875 3.625 79.875

This scenario would give the bond at the current price of 40% an implicit IRR of 28%, which would be attractive. If we would change for instance the “normal non bancruptcy” probability to 35% and increase the two bancrupty scenarios to 25% each, we would end upwith a 17.6% IRR.

Bankrupt Prob. in % 2013 2014 2015 2016
Best Case No 5.00% 5.88 105.88 0.00 0.00
Normal Case No 35.00% 5.88 5.88 5.88 105.88
bad case No 10.00% 1.00 1.00 1.00 101.00
Normal Case Yes 25.00% 0.00 0.00 0.00 40.00
bad case Yes 25.00% 0.00 0.00 0.00 10.00
             
Weighted CF   100% 2.45 7.45 2.16 59.66

An analysis like this can help to understand better the sensitivities of such a rather complicated special situation investment.

Of coure, the probability of bankruptcy is the single most important driver, so let’s discuss this shortly:

On the positive side we have the fact that Praktiker survived the year end and the restocking of inventory for the spring 2012 season. Further, I think at the moment no one has a real advantage if Praktiker goes bankrupt. The biggest problem, the leases for the real estate, could be better reduced if Praktiker would be bancrupt but on the other hand they might have much more problems getting merchandise delivered even if bankruptcy would only be short term.

Additionally, I think the “year end accounting blood bath” makes more sense on a going concern basis than if one would prepare a “prepackaged” bancruptcy.

Potential Catalyst:

In my opinion, something with regard to financing has to happen this year. So there might be a good chance that the bond reacts positively within a limited time frame if the refinancing package is hopefully finalized.

Stand alone risk / return and portfolio view

If I compare Praktiker with the sucessful WestLB Genußschein investment, the Praktiker bond looks more risky, both from the potential downside and time horizon. However, also the potential upside is a lot higher at current levels.

However, on a portfolio level, things look differently. With special situations, I try to make “bets” as long as they are company specific and not directly correlate with each other or “normal” portfolio companies.

With Praktiker, we have the interesting situation that the bond ecoonomically is even negatively correlated with one of my core holdings, Hornbach.

This is something we can clearly see in current company news. In 2011, the German DIY segment showed around 3% growth, Praktiker lost almost 10% in slaes whereas Hornbach and OBI gained significantly above the market growth with 5-6% growth each.

If Praktiker really goes bancrupt, Hornbach among other will profit even more, either through taking over some of the better locations or just gaining more customers. On the other hand, if Praktiker manages the turn around or even gets a startegic shareholder, they might win back a lot of customers from the competition and hurt them significantly.

So one could argue (and I know this sounds a little crazy) that the Praktiker bond combined with the Hornbach shares creates a kind of “hedged” position.

Just for fun I loked at correlations between the Praktiker share, the Praktiker bond and the Hornbach Baumarkt Aktie. And, surprisingly we see the following based on 12 months and daily observations:

Over the last 12 months, the Praktiker share was slightly positively correlated with the Hornbach share (+0.03) whereas the bond was slightly negatively correlated with -.002. Not much but. nevertheless interesting. Again, for instance the last 4 months shows a small positive correlation between the shares (0.05) and a slightly negative correlation (-0.02) between Bond and Hornbach. So maybe not that crazy after all….

Summary:

On a stand alone basis, at current level, the Praktiker Bond is no “sure thing”, but a relatively risky speculation however with a relatively attractive risk/return ratio. In combination with the Hornbach share in my opinion, the combined position has a very intersting risk/return relationship which can greatly increase the expected return of the portfolio by actually reducing risk on an overall level.

I will therefore add a half position (2.5%) of Praktiker 2016 bonds to the portfolio at current prices (limit 41% of nominal value).

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