Category Archives: Magic Sixes

Magic Sixes meets Boss Score: Mr. Bricolage (ISIN FR0004034320)

As some might remember, I kind of like the Magic Sixes Screen (P/E < 6, P/B 6%) initially mentioned by Peter Cundill.

Many of the “Magic Sixes” companies are declining and/or cyclical companies which do not score well on my Boss Screen which is looking for stable companies.

The exception at first sight seems to be French DIY chain Mr. Bricolage.

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Magic Sixes – “new entries” quick check (BAM, ENEL, Mr. Bricolage, Europac)

After the recent stock market declines I had a look into the “Magic Sixes” screen (P/E < 6, P/B 6%), if some interesting companies show up as potential candidates for “contrarian” Plays.

Currently, using Bloomberg, the following “new” companies seem to be interesting:

BAM Groep

P/E 5.9, P/B 0.49, Div. Yield 6,42%

Dutch constrcution group. However highly leveraged, lots of goodwill and negative free cash flow, chart looks like a falling knife on the way to zero —> NOPE

ENEL SpA

P/E 5.4, P/P 0.57, Div. Yield 10.7 %

Large Italian utility.. Political risk, high debt load and negative tangible book. Howver significant free cash flow genration –> WATCHLIST

Mr. Bricolage

P/E 5,3, P/B 0.4, Div. Yield 6.34%

French DIY chain. Relatively low tangible book, relatively high debt but improving. Stable results over past year —> WATCHLIST

Europac

P/E 4.6, P/B 0.6, Div. Yield 7.7%

Spanish paper and cardboard producer. Good tangible book, however relatively high debt load. Volatile Free Cashflow generation, although very profitable in 2011 —> WATCHLIST

Summary: It is interesting to see that some “normal” companies enter into the “Magic Sixes territory”. So the choice for contrarian invetsments is getting better.

Magic Sixes: Follow up Iren SpA

In November, I had a quick look at Iren SpA, an Italian company which would have qualified as a “Magic Sixes” company.

My summary was the following:

For me, the combination of a large debt pile, negative free cashflows and a significant portion of non-tangible book value makes Iren SpA more or less uninvestible. Based on the pure financials without any further analysis there doens’t seem to exist any Margin of Safety despite qualifying as “Magic Sixes” stock. For the time being, Iren will not be analyzed further as there seem to be more attractive “targets”.

Yesterday, Iren SpA announced that due to “one off effects”, they will actually show a loss for 2011 and the dividend is cut down to 1 cent per share.

The stock now is down almost 50% from when I wrote the post:

Interestingly, by just looking at “momentum” one would have come to the same conclusion. Both in absolute terms and relative terms, the stock started underperforming from October.

Or maybe “momentum” for low P/B Stocks (and magic sixes) maybe is a shortcut to detect weak balance sheets ? I don’t know but something to keep in mind.

Nevertheless, I will keep Iren SpA on my radar screen in order to learn more about the Italian market. In theory Iren would be a prime take over target.

Magic Sixes Portuguese companies : Conduril (ISIN PTCDU0AE0003) – Too good to be true ???

Although my last “Magic Sixes” (P/B < 0,6, P/E 6%) Investment, Autostrada was not a runaway success, I still use the screener from time to time to see what companies are “really” cheap.

It might not be a big surprise that some Portuguese companies are among those “cheapies” now. As of today, the following Portuguese Companies are “magic Sixes”:

P/B P/E Div Yield
Ramada Invest 0.380 2.68 10.45%
Orey Antunes 0.440 5.11 15.48%
Grupo Soares 0.400 3.30 7.48%

Ramada is a steel company, Orey a shipping company and Soares a construction company.

As discussed before I also run a “Magic Sixes light” screener with slightly relaxed rules (P/B < 0.7, P/E 5%).

Here we get an additional 5 companies:

P/B P/E Div Yield
Corticeria Amorim 0.67 6.78 7.09%
Sonae 0.66 0.66 7.39%
Sonaecom 0.67 0.43 5.71%
Conduril 0.66 1.50 6.82%
Espirito Santo 0.47 3.44 5.28%

One has to keep in mind that only around 65 Portuguese companies are actually listed, so 8 “dirt cheap” out of a total 65 is quite significant.

A relatively well known problem of most Portuguese companies is their relatively high debt load. With Portuguese banks in trouble (not to speak of the Government), it is intersting to look at debt levels. I usually look at nebt debt / market cap in combination with EV/EBITDA:

Net debt per share Share price Net debt/Marcet cap EV/EBITDA
Ramada Invest 3.03 0.67 452% 6.52
Orey Antunes 0.55 1.15 48% n.a.
Grupo Soares 4.87 0.29 1679%  
Corticeria Amorim 1.01 1.41 72% 4.35
Sonae 0.62 0.45 138% 4.33
Sonaecom 0.76 1.23 62% 3.38
Conduril -33.8 22 -154% 0.55
Espirito Santo 313 5.3 5906% n.a.

Ratios above 100% are very critical in my opinion, because then a capital increase to “save” the company needs to be above current market cap which is highly unlikely.

Based on this list, Conduril looks like a ” bad data” input.

A P/E of 1.5, EV/EBITDA of 0.55 and Net cash above current market cap must surely be a mistake or ?

However a quick look into Conduril’s 2010 annual report shows an amazingly profitable company.

In 2009 and 2010, the company earned net margins 13-14% and ROEs of 30-40%. .

So how comes ? The answer seems to be relatively easy: Conduril is very active in the “hot” African markets Angola, Mozambique and Botswana. I only have 2009 figurtes, but of the 250 mn EUR sales in 2009, 167 mn were in Angola and only 45 mn or less than 20% in Portugal.

Of course doing business in those countries will be quite risky, but nevertheless it is a very intersting case.

Trading seems to be relatively strange. As far as I can see, 1000 shares are traded most of the days at 22 EUR per share, the chart doesn’t really look like a stock chart:

However it is definitely a stock I want to research deeper.

It might also make sense to look at the other less indebted comapanies at some point in time. If one wants to bet on a Portuguese Non-default, those stocks might be more interesting than Portuguese Govies.

Magic Sixes quick check: Creston plc

Regular reader know that I run a “Magix Sixes” screening for investment idea generation.

This idea is from Peter Cundill’s book and is a very simple screen: Stocks which trade below 0.6 book, below 6 PE and have a dividend yield of > 6%.

As one could imagine, the result of this search are not really “wide moat” beauties…

However, one new entry, Creston PLC doesn’t look too bad.
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Esso S.A.F. – less attractive at a second glance

After having quickly analysed “Magix Six” stock Esso S.A.F a few days ago with some encouraging results, I dived a little bit into the company.

Despite beeing a subsidiary of ExxonMobil, the homepage is “french only”.

Luckily, I managed to understand at least the two investor presentations they have on their website.

Both, the 2011 and the 2010 show a quite depressing picture.

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Magix Sixes – Quick Check Esso S.A.F. (ISIN FR0000120669)

Another “New Entry” in the Magix Sixes Screen (P/B < 0.6, P/E 6%) is Esso S.A.F.

The company is described by Bloomberg as follows:

Esso S.A.F. refines, distributes and sells petroleum products such as gasoline, heating and other fuels, distillates and asphalt. The Company’s subsidiaries include Esso REP and Esso Raffinage.

Esso is a 82% subsidiary of Exxon Mobile, market cap is around 800 mn EUR (12.9 mn shares at 63.4 EUR)

Current “traditional” valuation metrics are:

P/E: 5.8

P/E 10: 5.3

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Magic Sixes – “New entries”

    At the moment. there are some interesting “new entries” in my Europe based “Magic Sixes” Screen.
    New entries (non financials) at which I will have a look in the next days are:

    ESSO S.A.F (French Exxon subsidiary)
    Stora Enso (another paper company)
    Deutsche Lufthansa– CSP International (Italian underwear, firewall blocks website ;-))
    Screen Service (Italian manufactorer of television broadcasting equipment)
    Isagro SpA (Italian producer of herbicides)
    Mondadori (Italian publisher, majority owned by Berlusconi)

    It looks like an interesting time for contrarian investors…..

    Additionally i run a “magic sixes light screen” with slightly relaxed rulse (P/b 0.7, P/E 7, Div. yield 5%)

    Some interesting companies there:

    ICT Automatisering (Durch softwar company)
    Huntsworth PLC (UK PR company)
    BWG Homes (norwegian residentail house builder)

Magix Sixes – Quick Check UPM-Kymmene OYJ (ISIN FI0009005987)

One stock which has been popping in and out of the Magic Sixes Screen several times is the Finish Paper Company UPM Kymmene.

Current “simple” value metrics are (stock price 8,30 EUR):

P/B 0.60
P/E Trailing 2010 5.4
Dividend Yield: 6,65%

Market Cap is 4.4 bn, there are no majority shareholders. The stock is fairly liquid.

Some standard quick qualitiy checks:

Tangible Equity: Tangible book value per share is 10,86 EUR (YE 2010), which represents ~80% of book value, so no issues here
Debt: Net debt per share is relatively high at ~7.1 EUR per share, however with ~2.5 EUR trailing 12M EBITDA per share, total EV/EBITDA at ~6.8 looks OK.
Free cashflow: Free cashflow is positive as far as I can look back (1999).

If I find a stock interesting, I try to do a quick check of historical earnings quality and cashflow usage based on Bloomberg numbers:

Year Earnings Dividends Free Cashflow Debt per share
2001 1.93 0.75 1.62 10.52
2002 1.06 0.75 1.67 10.53
2003 0.61 0.75 1.26 10.21
2004 1.76 0.75 0.70 9.58
2005 0.50 0.75 0.31 9.62
2006 0.65 0.75 1.11 7.92
2007 0.16 0.75 0.37 7.96
2008 -0.35 0.40 0.14 9.12
2009 0.33 0.45 1.97 7.74
2010 1.08 0.55 1.43 7.14
Total 7.73 6.65 10.57  
In % of Earnings   86.1% 136.8%

In this case, the result looks quite good. UPM seems to generate much higher free cashflows than earnings (137%). Also 86% of Earnings have been distributed to shareholders via dividends and the company has significantly reduced debt until 2010.

First summary after this “Quick check”: From a “semi mechanical” point of view, the stock might be a interesting Contrarian investment, so it makes sense to more deeply research the company.

Magic Sixes – Quick Check Iren SpA (ISIN IT0003027817)

One of the companies which recently appeared in the Magic Sixes Screening (P/B < 0.6, P/E 6%) is another Italian Company named Iren Spa.

Based on “simple” criteria, the Share seems to be really cheap:

P/B 0.58
P/E 4.59
Div. Yield 9,15% (!!)

The description of the business in Bloomberg reads as follows:

IREN S.p.A. generates, distributes, and sells electricity and district heating. The Company manages natural gas distribution networks, markets and sells natural gas and electricity, and manages water services.

Based on available data, the bulk of the business seems to be energy distribution, geographically 100% of the business is done in Italy.

Market Cap is around ~ 1bn EUR– There doesn’t seem to be a single majority shareholder.

The company was IPOed almost exactly 11 years ago at 2,70 EUR. Even taking into account dividends, the performance from the initial IPO was around -6% p.a., which is better than the Italian BM index (9% p.a.).

However, the first thing I usually check is the debt load and free cashflows.

Currently, they have around 2.14 EUR per share net debt per share, which results in an enterprise value of ~3,50 EUR per Share. Based on trailing 12M EBITDA of 0,43 EUR, this results in 12M trailing EV/EBITDA of 8,8x, which for a Italian utility seems to be quite rich.

Based on Bloomberg, free cashflow has been negative for every single year since IPO.

Last but not least, only 0,42 EUR of the 1.42 EUR book value is “tangible”. One would have to check, if certain infrastructure licenses are included in the intangible part.

However at this point I can already stop summarize:

For me, the combination of a large debt pile, negative free cashflows and a significant portion of non-tangible book value makes Iren SpA more or less uninvestible. Based on the pure financials without any further analysis there doens’t seem to exist any Margin of Safety despite qualifying as “Magic Sixes” stock. For the time being, Iren will not be analyzed further as there seem to be more attractive “targets”.

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