value and opportunity

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.