Category Archives: Drägerwerk

Short cuts: KAS Bank, April SA, Draegerwwerke GS

KAS Bank

When I invested into KAS Bank, the Dutch, the main motivation was the cheap valuation and the stable core business (custody). One add-on was that they wanted to extend their retail business together with dwp bank from Germany.

For some reason, dwp decided not to go ahead with this cooperation and cancelled it in June 2014. Kas Bank will be compensated for this according to the press release:

As a compensation for the loss of the anticipated annual saving that KAS BANK would have realised from 2016 onwards, dwp bank will pay KAS BANK a lump sum at the end of June which, after deducting the costs in 2014, amounts to approximately € 20 million. KAS BANK will use this one-off compensation to invest in further improving its efficiency and its services to institutional investors. dwp bank will focus its future investments on improving the quality and standards of its operations and IT.

20 mn compensation for a 160 mn Market company is a lot, but it seems that this contract would have been quite good for KAS Bank going forward. Maybe it was so good that dwp bank only recognized it after signing ? I don’t know. In any case, I think the “Value case” for KAS Bank is still intact. Book value should still be achievable, which would mean the stock has still 50% upside let, despite the quite satisfactory performance of +58% (incl. dividends) since I bought the stock 2 years ago.

April SA

A few weeks ago, I finally sold the rest of my April SA position. I never really explained this in more detail. When I first looked at April SA, I didn’t buy it because the stock was not cheap enough (part 1, part 2, follow up, follow up).

I only established a position when the stock got hammered during the EUR crisis, as they were then trading in single digit P/E territory and implcitly I asumed at least constant earnings going forward. Fast forward 2 years. EPS developed negatively, both in 2012 and 2013:

EPS
31.12.2010 1,96
30.12.2011 1,37
31.12.2012 1,32
31.12.2013 1,26

Nevertheless, the new-found enthusiasm for European and especially French stocks led to a significant multiple expansion from around 8xP/E to ~ 14xP/E in June. Although I still think that April is not a bad company, I had to admit that the ~63% return I made on the stock was much more luck than anything else as I don’t think that multiple expansion like this (even considering shrinking EPS) could be forecasted. Additionally, I found much more interesting alternatives in the insurance sector (Admiral, NN Group), so I decided to sell although the two years holding period were shorter than I would normally target.

Draegerwerke GS

A few days ago, Draeger revised their guidance for 2014 significantly downwards. The stock got hammered significantly, the Genußscheine lost some value as well but less than the shares.

For me, Draeger was always a relative bet, assuming that the intrinsic value of the Genußscheine (10 times the Vorzuege) would at sometime close. I never believed that Draeger itself was a “great” company. Looking at the developement of the ratio (price Genußschein / Price Vorzuege) we can clearly see that currently we are in a territory which we haven’t seen for the last 15 years:

draeger upd 2014

At almost 6 times the Pref shares, the relative risk/return ratio is not as good as it was before. With almost 7%, the Draeger Genußschein is still with a margin my largest position. In order to reflect the somehow lower relative potential of this position, I will cut the position to a 5% stake going forward.

Draeger Genußscheine (ISIN DE0005550719) Update

No real news but a very interesting developement at my largest portfolio position, Draeger Genußscheine.

As a refresher: The “Genußscheine” include the right to receive 10 times the dividend of the pref shares (DRW3, ISIN DE0005550636). I started the position as a long Genußschein / Short pref shares “carry trade”. I decided to cover the short when Drager issued a EUR 210 offer and keep the Genußscheine as this put a floor under the price.

Now, in the last view days one can see something interesting happening: The Pref shares trade lower while the Genußscheine jumped.

If we look at the 10 year history of price of the Genußscheine divided by price of the prefs , we can see that the relation has increased significantly to a 10 year high at currently around 3.7 times.

I didn’t find any real news, however in some internet boards there is a speculation that either Draeger might increase the dividend or even come out with a higher offer. I am not sure about that if they will really do something.

Back then I wrote the following:

For the patient investor, I think the Genußscheine will be still an intersting medium term investment. For the portfolio I will hold them unless I find something better, there is no need to sell.

I think this is the same lesson as from the AIRE KGaA example as well as with the Bertelsmann Genußschein: If someone really wants to have a company or a certain share class / security , it usually pays off to wait and not jump on the first offer.

In the past, I often used to sell at the first offer, being happy to make a nice gain quickly. But as those two example show (so far), the risk /return relationship of just doing nothing and wait further seems to be quite good.

The only “problem” now is that the position is currently 10.2% of the portfolio. a ~10% is kind of the maximum I can stand for a single position, I will have to decide to sell if the Genußschein moves further.

Draeger – Results of repurchase offer for Genußscheine & Warrant

Genußscheine

Draeger released yesterday that they bought back 41.1% of the outstanding Genußschein. In one of my previous posts, I said the following:

I am still struggling how to interpret potential acceptance outcomes for the offer. If we have a very low acceptance for instance, we have two potential factors which could influence future Genußschein prices:

1. With a low acceptance ratio, everyone knows that Draeger needs to do more to buy the Genußschein back (positve)

2. In theory, they could try to make life difficult for the Genußscheine either by continuing low dividends for a longer time (negative) or try some other tricks like possible dilution etc. (negative)

With a high acceptance rate we have the following potential issues:

3. The Genußscheine will become illiquid, larger investors will no longer be interested (negative)

4. Draeger will not need to increase the offer (negative)

5. However, Draeger could afford to raise the dividend quite fast back to or above last years levels as it doesn’t hurt shareholders anymore (positive).

Now we are somewhere in between. The percentage is high enough so that Draeger does not need to do really nasty stuff, although the percentage is too low to see higher dividends on very short notice. Draeger will also be motivated to buy anything which comes on the market under 210 EUR, so going forward there is a nice “put” under the current market price.

For the patient investor, I think the Genußscheine will be still an intersting medium term investment. For the portfolio I will hold them unless I find something better, there is no need to sell.

Interestingly, in their latest Earnings release , Draeger actually showed “diluted” earnings for the first time. They call it “Earnings per share in the case of full distribution”…

Warrants

Early this week, a (at a first glance) very strange deal took place, where I had to look twice to really understand it. What happened is best explained in this IFR article:

Siemens had already seen the value in the convert market last month and looked to take advantage once again by attaching the warrants into pref shares, which were turned into a tradable warrant by Deutsche Bank, to a bond. Rather than take the normal approach of a Deutsche Bank SPV bond, some Bunds of a near tenor (2.5% February 2015s) were sourced and bundled – to create a German state exchangeable into Draegerwerk, without either party being involved.

The bonds of €79.6m principal trade at 106% of par and the March 2015 bonds were issued with a 2.5% coupon and packaged with the warrants for a total 134.631% of par to raise €107.17m. A placing in the illiquid prefs helped with the delta hedge for hedge funds that dominated the book of about 40 lines. As the warrants have an exercise price of €63.68, versus the €78.40 placing price, this was a true technical trade, but a few outrights were interested and were filled in full.

So basically Siemens did cash out the Warrants from Draeger which they got when they sold their JV stake to Draeger. They used this structure so that hedge funds could invest in this instrument and extract the option premium.

Draegerwerk Genußschein – some more thoughts on the repurchase offer

Following yesterday’s post about the 210 EUR offer per “Genußschein”, some other interesting aspects should be considered.

Dividend cut

I think this is the only time in history I remember that a 80% suprise dividend cut led to a almost 3% increase in the corresponding share price. The reason could be very simple and I have maybe underestimated the Draeger shareholders:

Many Draeger shareholders were maybe well aware of the effective massive dilution through the Genußscheine. The repurchase offer with 210 EUR is considered to be very advantagous for shareholders and therefore the net effect of the Announcement (Dividend reduction against cheap repurchase price) is a positive for shareholders.

As the announcement alone maybe caused this jump, a high acceptence ratio could possibly move the stock price even higher. So there is a lot of “upside risk” in the stock from a short perspective.

Another reason for the jump in the share price could of cours be some short covering, if I was not the only one who has the relative value trade in place.

Game theory Genußscheine

I am still struggling how to interpret potential acceptance outcomes for the offer. If we have a very low acceptance for instance, we have two potential factors which could influence future Genußschein prices:

1. With a low acceptance ratio, everyone knows that Draeger needs to do more to buy the Genußschein back (positve)

2. In theory, they could try to make life difficult for the Genußscheine either by continuing low dividends for a longer time (negative) or try some other tricks like possible dilution etc. (negative)

With a high acceptance rate we have the following potential issues:

3. The Genußscheine will become illiquid, larger investors will no longer be interested (negative)

4. Draeger will not need to increase the offer (negative)

5. However, Draeger could afford to raise the dividend quite fast back to or above last years levels as it doesn’t hurt shareholders anymore (positive).

So we can see, there are many paths how this could develop.

I think what is also interesting in this case is the fact that as Genußscheinholder the interests are not aligned with Management (and shareholders) but directly opposed. This is something one should keep in mind.

210 EUR repurchase offer Draegerwerk Genußschein

In a classic “carrot and stick” approach, Draeger issued a buyback offer today for the Genußscheine at EUR 210.

The “carrot” would be the 30 EUR premium compared to yesterday’s prices. The stick is the annoncement to drastically reduce the dividend for 2011:

Zur Finanzierung der verbesserten Kapitalstruktur beabsichtigt der Vorstand der persönlich haftenden Gesellschafterin, gemeinsam mit dem Aufsichtsrat der Hauptversammlung am 4. Mai 2012 eine einmalig reduzierte Dividende von 0,19 Euro je Vorzugsaktie und eine Dividende von 0,13 Euro je Stammaktie vorzuschlagen

The German announcement is quite funny, they argue to finance the repurchase with a one time dividend cut by ~-90%. This one time cut wouldn’t even finance 5% of the to be repurchased Genußscheine, so the only reason to do this is to scare some Genußschein holders to sell if the yield drops to less then one percent. As an additional effect the 2011 result of Draeger shows a positive effect as they have already accrued a higher amount of interest for the Genußscheine.

Going forward, they announce additionally to reduce the dividend from the current 30% of net income to 15% of net income until they meet their target equity ratio of 40%.

Bis zur Erreichung dieser Eigenkapitalquote beabsichtigt der Vorstand der persönlich haftenden Gesellschafterin, 15 % des Konzernjahresüberschusses (abzüglich der Ergebnisanteile nicht beherrschender Anteilsinhaber) auszuschütten

So what to do now?

If history is any guide, as a Genußschein holder you most likely should just lean back relax and get some popcorn.

Bertelsmann in 2010 was in a similar situation and tried to buy back their Genußscheine at 180, from that the price went straight to 225.

Inmy opinion the Draeger offerproves the following: They actually proved that the Genußscheine are a problem for the shareholders andthey need to get read of them. Effectively they introduced a “put option” at EUR 210 for the Genußscheinholder.

There might be less liquidity in the future,but with the preference shares at 70 EUR plus,the 210 EUR are still a joke.

For the long Genußschein short Vorzug strategy in the portfolio I will reduce the short position at least by half,as the implicit put at 210 EUR reduces the downside significantly.

Best Ideas Summaries Part 1: Draegerwerk Participation Rights (ISIN DE0005550719)

One of my best investment ideas at the moment are the Dragerwerk “Genußscheine Serie D” (ISIN DE0005550719)

Draegerwerk produces medical devices, safety and aerospace equipment. Draegerwerk has managed to achieve a remarkable turnaround which resulted in a very strong performance of the shares

They have a fairly complicted capital structure, with normal voting shares, preferred shares and participation rights.

The most liquid securities are the Non-Voting Preferred Shares which trade at the following multiples:

Price/Book 2,2
Price/Sales 0.61
Trailing PE 15.3
EV/EBITDA 6.1
Dividend Yield 1.48%

They are up YTD 34.2%, making them the 4th best perfomer in the German Top 100 HDAX.

The numbers above don’t look too compelling, so what’s the deal here ?

So now let’s look at the “Genußscheine”: Draegerwerke has issued 3 different series, the most liquid beeing the “D series” (ISIN DE0005550719).

In contrast to “regular” German style particpation rights which are more like a subordinated bond, they have some special features:

– they don’t have a fixed coupon or nominal value
– instead they simply pay 10 times the dividend of the Preferred Shares
– they cannot be called or cancelled. In the initial terms the only way to redeem them by the issuer was to exchange them into 10 Preferred shares
– in the case of a capital increase holders will be “compensated” for dilution in the form of cash (no new participation rights)

The last point raised some issue when Draegerwerk issed new shares in 2010 in order to pay for an acquisition (50% of an existing Joint venture with Siemens). in my opinion they paid out the fair amount, however with a 9 month delay.

To sum up the situation: The so called “Genußschein” is very similar to a preferred share, the main difference being that it pays 10 times the dividend.

Now the “Genußschein” currently trades at around 160 EUR which is roughly 2.0 times the price of a preferred share.

Or put it differently, through the Genußschein one could gain exposure to Draeger at the following multiples:

Price/Book 0.44
Price/Sales 0.12
Trailing PE 3.1
EV/EBITDA 1.2
Dividend Yield 7.5%

Now this looks like a value investment to me. There are two ways to play this:

1. Outright Ivestment
2. Relative Value long / short

For the Blog Portfolio, I have combined the long position in the “Genuscheine” with a short Position in the Preferred Shares in order to establish a “market neutral” position while harvesting the positive carry of 8 preffered dividends (short 2 shares /dividends, long 10 dividends).

As one could see, the are not perfectly correlated, so a long short position requires some “buffer” for diverging prices:

Over the medium term, the Genußscheine should perform better than the Preferred shares, especially if Drager further raises the dividend. If I were the CFO or Treasurer of Draeger I would be desperate to buy back the Genußscheine at the current level, so we could see some tender offer going forward.

Summary: Although the Dragerwerk Genußscheine are not called shares, they offer the same Exposure to Draegerwerk than the widely held Preferred Shares at a 80% discount. A long Genußschein / short Preferred share position offers a interesing risk / return profile with a nice carry.

Draeger Genußschein – die billigste Medizintechnik Aktie der Welt !!!!

Mal schauen ob die reisserische Schlagzeile den Kurs hochbringt, aber Spass bei Seite.

Draeger hatte ja wie gestern berichtet eine Anpassung der geplanten EBIT MArge nach oben gemeldet, die genaue Meldung findet sich hier.

Die erste Satz der Meldung lautete wie folgt:

Die Drägerwerk AG & Co. KGaA erwartet für das Geschäftsjahr 2011 ein besseres Ergebnis als bisher prognostiziert. Das Unternehmen rechnet nun – unter der unveränderten Annahme eines leichten Umsatzwachstums – mit einer EBIT-Marge von 8,0 bis 9,5 Prozent (bisher 7,5 bis 8,5 Prozent).

Nachdem im letzten Jahr die EBIT Marge bei 8,9% lag und der Umsatz fast stabil ist würde ich das mal so übersetzen: Der EBIT bei Dräger wird vmtl. auf Vorjahreshöhe oder leicht darüber liegen.

EPS waren im letzten Jahr 6,19 EUR. Auf diesen “Schock” hin haben einige Analysten Ihre EPS Ziele gleich mal nach oben gesetzt, so z.B. WestLB von 5.39 EUR auf 6,33 EUR und die Commerzbank gleich von 4.69 EUR auf ebenfalls 6,33 EUR.

Das erklärt natürlich auch den mehr als 10% Sprung der Aktie. Auf Basis dieser Zahlen sieht die Aktie mit einem P/E von 14,5 nicht teuer aus.

Wir hatten ja in einem früheren Posting schon mal darauf hin gewiesen, dass man ökonomisch eigentlich “fully diluted” rechnen sollte.

Zur Erinnerung: Behandle ich die Genußscheine wie 10 Vz. habe ich folgende Aktienanzahl:

10,16 Mio Stämme
6,35 Mio „echte“ Vorzüge
11,41 Mio „virtuelle“ Vorzüge

Damit ergeben sich als “Diluted Earnings” ungefähr (6.33x(10.16+6.35)+10)/(10.16+6.35+11.41)= 3,74 EUR pro Aktie für 2011. Dann wären die Vorzüge mit einem KGV von 23.5 recht sportlich bewertet.

Theoretisch kann man das natürlich auch aus Sicht des Genußscheins rechnen: für knapp 180 EUR bekomme ich 10×3.74 oder 37,4 EUR Gewinnanteil. Das macht ein KGV für den Genußschein von schlappen 4,8 !!!

Fazit: Damit dürfte die Überschrift wieder stimmen, der Genusßschein ist mit einem KGV von 4.8 wohl tatsächlich eine der billigsten (profitablen) Medizintechnikaktien der Welt. Heisst halt blöderweise “Genußschein”.

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