value and opportunity

Sometimes the only reason why I research a stock is because I find it interesting for some reason, not because it will be a good investment or so.

Gronlandsbanken AB is such a stock. Although it showed up in my Top 25 Scandinavian stocks, normally I would discard that because it is a bank. With Gronlandbanken however, the fact that this is the only listed stock of a company from Greenland got me interested.

Before looking into the bank, a few facts about Greenland from Wikipedia:

– Greenland has arond 60 tsd inhabitants spread over 2 mn square kilometers, however only 400 k square kilomoters are not permanent ice (Germany has ~350 k Square kilometers)

– politically, Greenland is mostly independent since 1979, however strong ties to its former “Colonial master” Denmark remain, among others the offical currency which is the Danish Krone
– total GDP is estimated to be around ~2 bn USD
– However, basically 50% of the countries GDP are transfer payments from Denmark
– Greenland left the EU in the 80ties but still enjoys free trade and other preferred treatments via Denmark
– most people basically work for the Government, the second largest sector is fishing
– Last but not least, Greenland could become one of the prime beneficiaries of climate change, as its vast natural resources could become much easier to access

The Bank:

Grondlandsbanken has been founded in 1967. In 1997 it merged with the only other bank in Greenland, Nuna Bank and is therefore the only bank based in Greenland. However it doesn’t seem to be the only bank with branches in Greenland as this post shows:

Banking
There are 2 banks in Nuuk, Greenland Bank and BankNordik. However, the latter has no cash function. There are ATMs in both banks in Nuuk, and cash in advance and Visa Card can be used in all stores and the like.

Anyway, it looks like competition is currently quite limited in Greenland in the banking sector.

Gronlandsbanken valuation looks Ok, but not very exciting:

Market cap: 830 mn DKK (~110 mn EUR)
P/E Trailing ~14
P/B 1.0
Dividend yield 6.5%

Around 65% of the shares are held by large shareholders, among them with 14% the Government of Greenland. So “free float” is around 30-35% or 35-40 mn EUR only.

Interestingly, value shop Sparinvest has a 0.44% stake . Another value fund which I didn’t encounter yet, Nielsen Global Value holds 5% as well. For them it seems to be a quite significant position with 5% portfolio weight according to the latest fact sheet.

Thankfully, no sell-side analyst has discovered the stock yet.

The stock is up 56% YTD, however this is still less then 50% of the peak price back in 2007:

Not surprisingly, the stock has a very low beta of ~0.55 vs. the Danish stock index.

But why buy a bank at book value if you can get banks for 0.3 times book ?

Well, there are a few things which are “not normal”:

– Gronlandsbanken has an equity ratio of 17.3% (that’s right, not Tier 1 ratio or such crap)

– their net interest margin is around 4%-5%, Return on assets is around 1.7% If we compare this to the most profitable banks like HSBC (1.9% – 0.6% and Standard Chartered (2.4% and 0.9%) or DNB (1.4% -0.6%), we can see that Gronlandsbanken is at least twice as profitable as the most profitable European bank.

Due to the high ratio of equity, ROEs do not look spectacular, but still my model calculates ~15-16% total ROE with a relatively low volatility. According to my model, the fair value for such a company should be around 1.3 times higher than the current market price.

Especially interesting for me was the 2011 annual report from Gronlandsbanken.

The pages 8-16 are definitely the best summary of the economic situation in Greenland I have been able to find. Most interesting was the following passage:

Greenland at a Cross-Road
Looking forward the economy of Greenland will come to a cross-road because most likely the economy will follow one of the following paths:
1. If one or more of the major projects are built, enormous pressure will be exerted on the economy of Greenland with concurrent high rates of growth and pressure on inflation. Based on current analyses, a great deal of the required labour force will be from abroad.
2. If none of these major projects is built, the major challenge in Greenland will be to create jobs and to ensure economic growth.
Within a few years, we can be expecting either very high rates of growth or zero-growth, or perhaps even negative growth. On the other hand, it is harder to imagine a middle-of-the-road scenario with reasonable and sustainable rates of growth since there are few growth-drivers in the economy (except for metals and minerals).

So this is fundamentally a very interesting “Binary” situation with a clear “trigger”.

Some of those “projects” mentioned are relatively interesting as well:

– Oil: Uk Cairn Plc seems to have drilled for oil but has found nothing yet
– a public listed company called London Mining Plc is trying to develop a large iron ore mine
– ALCOA seems to be interested in building a large Aluminium plant
– there seems to be a “rare earth” project buy an Australian listed company called “Greenland Mineral and Energy”, the so called Kvanefjield deposit.

Additional interesting articles form the Web about the natural resources developement in Greenland

Natural resources and Oil in Greenland
Cairn’s drilling results in Greenland
Chinese interest in Greenland
Chinese workers to be “Imported” ?

So it seems to be that the Government in Greenland seems to “warm up” to the natural resources projects. Maybe this is the reason why Management is buying shares since end of October. The amounts are not huge but every other day one can see purchases.

Summary:

Although I wish I had discovered Gronlandsbanken some months ago, I still think it is a really interesting stock:

– as it is the only bank in Greenland, its margins are around twice as high as the best global banks and the balance sheet is rock solid. One could call this a natural moat
– even based on the current state, current valuation implies significant upside to fair value
– the Greenland resource story could add significant growth going forward, even with maybe other banks entering Greenland
– finally, Management has started to buy shares after surprisingly good Q3 numbers
– although there is no direct catalyst, an indirect catalyst could be if some of the projects proceed well and Greenland will move inte the spotlight. Gronlandsbanken is the easiest (and only) way to invest into Greenland without project specific risk

As a result, I will start with a 1% position in order to further track this interesting “opportunity” stock.