Category Archives: Short

Short cuts: Installux, Kuka, Aixtron

Installux:

Installux is surprisingly one of my best performing stocks this year, including dividends the stock is more than 30% and is at an all time high.

installux

I did not fully understand why until I read the 6 month report.

Sales are up ~7% yoy, 6M earnings per share are 17,16 EUR vs. 14,37 EUR, an increase of almost 20%. Profit improvements happened across most of their sectors, so it doesn’t look like single special effects or so. Despite the recent run-up, the stock remains exceptionally cheap.

Kuka & MDAX exit

For those who did follow my comments on the original Kuka post, they might have noticed that I sold the stocks 2 days ago and bought them back yesterday slightly cheaper.

The reason was that in the meantime, the tendered shares were kicked out of the MDAX, the popular German MID Cap index.

As I was not sure how the shares would react I decided to manage the risk by staying out.

At the end of the day not much happened:

mdax kuka

Nevertheless I was able to cheapen my purchase price from ~107,5 to 106 EUR. As the deal now is more attractive, I invested a total of 4% of the portfolio.

 

Aixtron – another special situation (with a Chinese buyer)

Aixtron, a former TECDAX star has fallen on hard times. However a few weeks ago, a Chinese buyer showed up and finally made an offer for the company at 6 EUR per share.

With a share price at currently 5,53 EUR, the discount is similar to Kuka at around 8,5%.

The situation differs slightly from Kuka:

  • the buyer is a financial buyer, not a strategic one (more opportunistic ?)
  • The purchase price is “optically” not as rich as the one for Kuka (below book)
  • they require at least 60% acceptance as closing condition (vs. 30% for Kuka)
  • within the offer they have a “put” if the index (DAX or TEcDax) goes down more than 30%

On the plus side, there is little risk that anyone complains about the deal as Aixtron was not doing well anyway and they are not deemed “strategically important”. The time horizon here should be shorter than for the Kuka deal.

The offer runs until October 7th. So far, the acceptance is low, as of today, only 1,64% of the shares have been tendered.

I think the risk is slightly higher than in the Kuka case as they might not reach their threshold, on the other hand there might be a chance for a better offer.

Although the situation is less clear for me as in the Kuka case, I start here with a 1% position at 5,53 EUR and will monitor it closely.

 

 

 

Short cuts: Kuka, Swatch & Silver Chef

Kuka:

This is something that ran over the ticker today with regard to the Kuka case:

CFIUS Likely to Challenge Midea-Kuka Deal, Height Says

By Kasia Klimasinska

(Bloomberg) — CFIUS will likely challenge this deal “because Kuka has a direct relationship as a primary robotics supplier to Northrop Grumman,” Height analyst Nils Tracy says.

  • “At a minimum, we expect the transaction will face an extended CFIUS review timeline and a number of divestures”

Read more

Greenlight Re (sell), Handelsbanken (buy) & Bill Ackman

Greenlight Re

Following the E.On discussion, I really asked myself if it was such a good idea to invest into Greenlight Re.

My argument was as follows:

  • the stock looks historically cheap
  • Einhorn had a few very bad years
  • based on its track record hw might do much better in the future

After the E.On discussion however, I recognized the follwoing: Whenever I looked at a stock that Einhorn bought (Delta Lloyd, AerCap, SunEdison, Consol, E.on), I never understood why he did it or I thought it was not a good idea. Even if I look at his 20 bigest disclosed positions, I don’t find any stock that I would buy on my own:

     APPLE INC    AAPL  US
GENERAL MOTORS CO    GM  US
ISS A/S    ISS  DC
CHICAGO BRIDGE & IRON CO NV    CBI  US
TIME WARNER INC    TWX  US
MICHAEL KORS HOLDINGS LTD    KORS  US
AERCAP HOLDINGS NV    AER  US
CONSOL ENERGY INC    CNX  US
ARKEMA    AKE  FP
AECOM    ACM  US
ON SEMICONDUCTOR CORP    ON  US
BANK OF NEW YORK MELLON COR    BK  US
TAKE-TWO INTERACTIVE SOFTWR    TTWO  US
GREEN BRICK PARTNERS INC    GRBK  US
MICRON TECHNOLOGY INC    MU  US
MARKET VECTORS GOLD MINERS    GDX  US
VOYA FINANCIAL INC    VOYA  US
LIBERTY GLOBAL PLC-SERIES C    LBTYK  US
DILLARDS INC-CL A    DDS  US
APPLIED MATERIALS INC    AMAT  US

That in effect lead me to the conclusion that I am most likely the wrong kind of shareholder for Greenlight Re. If things go really  bad, I am not sure if I would have enough trust to keep the position or if I would get really nervous because I could not identify with the manager.

Secondly, I honestly don’t have much insight, how Einhorn generated his fantastic past track record.

Together with not liking his long position, I think it was a mistake to invest in Greenlight and I sold my stocks as mentioned in the comments at around 18,45 USD per share with a tiny profit of around +2,5%.

It could well be that Greenlight maybe has a spectacular 2016 but as I have mentioned above, one should not allocate money to someone where you don’t understand what that manager is doing. Conviction is important to withstand all kind of behavioural traps in investing.

Finally, I am not sure if there could be some isues on the Reinsurance side. AIG surpisingly disclosed a pretty massive reserve strengtening for Q4 and it looks like that this is mostly “long tail” exposure from long ago which is also the “bread and butter” business of Greenlight Re.

Handelsbanken

Following the market turmoil, I began to establish a first (2%) position in Handelsbanken. Purchase price was on average ~98 SEK per share. Valuation wise they are now at a level where I would expect to earn around 16-17% p.a. long term which looks atractive to me despite potential short term head winds.

I plan to increase this to a full position over the next months. I funded this position by selling some of the HT1 bonds, as I want to keep some cash (~10%) in order to be flexible if some of my watch list shares become really cheap.

Bill Ackman

Bill Ackman came out with his Q4 letter to investors just a few days ago. His results were similarily bad than Einhorn’s with -20,5% after fees for 2015.

There was already good coverage on his letter for instance from Matt Levine.

My 2 cents on this:

  • compared to Einhorn, he mostly blames others for his losses (index funds, copycats, the market)
  • he doesn’t seem to fully understand how index funds work
  • funnily enough, he accuses index funds that their only goal is to “attract more funds” at low costs. Why did Ackman then create the public vehicle Pershing Square Holdings ? Well, he also wants to attract more fund but a high costs.
  • he thinks that there are not enough activists. Understandable from an activist perspective. Subjectively I have the feeling that Carl Icahn alone is activist at every single stock in the US.
  • at least he admits that “platform” companies like Valeant are not such fantastic cases per se.

On a personal level, I do think there might be already TOO MANY activists. Many of them only care for short term payouts which, in many cases, might not be benefitial for long term share holders.

All in all, if I would have money invested with Ackman, I would really ask myself if I would trust a guy who only blames others for his misfortunes.

 

 

 

 

 

Short cuts: Greenlight Re, Hornbach & TGS Nopec

Greenlight Re:

One reader Emailed me that I had made a mistake in my initial post with regard to the book value and P/B ratio. This is what I wrote in December:

<

2007 2008 2009 2010 2011 2012 2013 2014 2015
P/B Ratio 1,24 0,96 1,23 1,23 1,08 1,03 1,19 1,05 0,78
P/B Ratio adj. B Shares 1,48 1,15 1,46 1,47 1,29 1,23 1,42 1,25 0,93

For some reason, the official Bloomberg ratios do not include the class B shares held by David Einhorn, so I adjusted them accordingly.

Actually, the B shares are included in the stated Bloomberg Ratios despite showing the wrong number of shares, so the “true” P/B ratio is around ~0,79 which then of course makes the “mean reversion” story even more compelling.

Additionally, Greenlight already released the monthly investment return for December which was -0,1% against -1,6% for the S&P 500. So at least its going into the right direction.

Maybe one quick point on comparisons of Greenlight Re to Berkshire, Markel or Fairfax: Although it is true that the other companies have better track records, I do think that Greenlight has one big advantage: The company is transparent and relatively easy to value as the whole investment portfolio is marked-to-market. And as I pointed out, Greenlight for me is not a long-term compounding story but a mid-term special situation betting on a David Einhorn outperformance.

Hornbach

After Hornbach’s profit warning in December, a lot of people asked me: What are you going to do ? Are you selling now ? Why do you own Hornbach at all ?

First thing: I wil do nothing and watch. For me , the profit warning was very surprising as I thought that they are on a good track and have the right strategy, although the business they are in is very tough.

For me, Hornbach is a pretty low risk position. My expectation was that I can make around 10-12% p.a. with very little risk. Until Q3 2015, that was on track but now of course it looks like a clear underperformer.

One of the reasons for this is clearly the fact that in contrast to almost any other stock in Germany, Hornbach did not enjoy any multiple expansion over the last 5 years. For a capital intensive, real estate dominated business like Hornbach, book value is one of the relevant measures. If we look at this we can clearly see that Hornbach now is valued at the low end of the historical range of P/B which ranged from ~0,8 – 1,8 in the past 15 years:

P/B BV/Share
30.12.1999 1,86 8,335
29.12.2000 1,46 8,679
28.12.2001 1,07 11,654
30.12.2002 0,99 11,642
30.12.2003 1,09 12,103
30.12.2004 1,10 13,201
30.12.2005 1,17 13,661
29.12.2006 1,33 15,182
28.12.2007 1,31 16,441
30.12.2008 0,81 18,784
30.12.2009 0,89 20,584
30.12.2010 1,09 22,947
30.12.2011 0,93 24,900
28.12.2012 0,99 25,881
30.12.2013 1,03 27,101
30.12.2014 1,04 29,023
Jan 16 0,84 31,230

Obviously, Hornbach does have some issues. Personally I think one needs to watch the E-Commerce issue most closely. So far I thought that DIY does not have big issues with Amazon & CO but this now needs to be tested.

TGS Nopec

Tgs Nopec released preliminary 2015 figures and a first outlook for 2016. Naturally, the outlook is rather subdued. Combined with the drop in oil prices, the stock got hammered. For shareholders, the only positive aspect is that TGS still is doing a lot better than its capital-intensive competitors, for instance PGS or CGG:

For the moment I will not do anything. Clearly the oil price went lower than I ever thought but TGS has net cash and will manage the cycle conservatively. So I don’t think one has to panic now.

Overall I think the best advice in such a situation is: Either you panic early or you don’t panic at all. For the early panic it is already too late for oil related stocks in my opinion, so the only alternative is to sit it out.

FBD Insurance Update – Prem Watsa to the rescue….

FBD, the troubled Irish insurer issued an interesting press release last week. In one of my last posts on FBD, I mentioned that their plan for capital raising was still unclear.

This clearly shows that FBD is extremely strained from a capital perspective. The biggest unknown in my opinion is how the proceeds of the sold JV will be reinvested into FBD. They don’t comment on that 45 mn EUR at current prices (5,8 EUR per share) would be more than 20% of the company. I don’t know about Irish company laws, but this normally needs to be done on a subscription rights basis. Or the Farmers provide the subordinated capital ?

A few weeks ago, they were out in the market to raise a subordinated bond. Last week however, FBD came out with a quite surprising announcement:
Read more

Short cuts: Bilfinger, FBD Insurance, ABN Amro IPO

Bilfinger:

It’s “bloodbath time” at least when it comes to accounting. Bilfinger released 6M 2015 figures a few days ago. As often the case with new CEOs, the new one tried to write down as much as possible, in this case ~423 mn EUR or roughly -9 EUR/share:

Charges of 430 million euros ($476 million), including a 330 million write-down of the Power division and 30 million in restructuring costs for Industrial, pushed Bilfinger to a 423 million euro net loss from a profit of 47 million a year ago.

The CEO has sent a letter to all employees, similar to the “burning platform” letter at Nokia some time ago. In Nokia’s case back then it was already too late, let’s see how it works out for Bilfinger. I do think there is some good substance in the company but the transition will be very difficult. For me personally, Bilfinger is still on the “too hard” pile as I cannot judge the viability of the remaining business.

Overall my impression is that the “accounting blood bath” is less aggressive as for instance at Vossloh. I think this has to do with the motivation of the shareholders. At Vossloh, the biggest shareholder Thiele clearly wants to buy more shares at a price as cheaply as possible. At Bilfinger, Cevian clearly does not want to take over the company but rather exit sooner than later.

FBD

I looked at FBD, the Irish Insurance company in January and decided to not invest as a didn’t like a couple of things (non-alignment of incentives, aggressive reserving, stupid investment strategy).

In the meantime, quite a lot happened:

The CEO left, the CFO took over and the stock lost around -50% since then. On monday, FBD issued its 6M report and things look even worse than back then, as at Bilfinger, they created a nice “blood bath”. The Farmer’s journal interestingly has the best coverage for FBD. Here are the highlights from the 6M report:

– the had to increase past reserves by 88 mn EUR (!!!)
– they will sell their hotel JV at book value, the proceeds at Farmer’s side will be reinvested into FBD
– they will go for a subordinated bond issue (50-100 mn)

Overall, the lost over 1/3 of their equity in the first 6 months (from 275 mn to 180 mn). The current equity position includes a retroactively implemented restatement which boosted equity by 30 mn EUR. I honestly didn’t fully understand the reason for this restatement.

Within the 6M presentation, they give the following interesting statement with regard to Solvency II:

JV sales and pension scheme actions take FBD solvency capital levels to the regulatory minimum (~100%)

Debt raise will bolster the firm’s capital buffer, taking Solvency II capital to within the firms target range of 110-130% by December 2015

This clearly shows that FBD is extremely strained from a capital perspective. The biggest unknown in my opinion is how the proceeds of the sold JV will be reinvested into FBD. They don’t comment on that 45 mn EUR at current prices (5,8 EUR per share) would be more than 20% of the company. I don’t know about Irish company laws, but this normally needs to be done on a subscription rights basis. Or the Farmers provide the subordinated capital ?

Anyway for now I still don’t think that FBD is investible, one really needs to understand how the capital increase will be executed. From a positive side, my analysis in January was actually quite good and saved me a lot of trouble. Still, FBD will go on my “focused watch list” as it could develop into an interesting “turn around” case as the underlying business, if run well, is still attractive. I ususally don’t invest into turn arounds but in this case I would make an exception as I consider this inside my circle of competence.

Funnily enough the price adjusted almost directly to the new “book value”. It seems as this is kind of the “anker” for investors.

ABN Amro IPO

The upcoming ABN Amro IPO could be another chance to invest in a “forced IPO” kind of special situation. However, for the time being it doesn’t seem to be a real bargain according to this Reuters article:

The government has said the bank is currently worth about 15 billion euros, just under its just-reported book value, suggesting a paper loss of about a third on the initial share sale. To break even, the bank would need to fetch a valuation of 1.4 times forward book value – higher than rival ING, which trades at 1.2 times.

For a wholesale/corporate/investment bank like ABN I would not be prepared to pay book value, so for the time being I will watch this from the sidelines, unless they come up with a clear discount to book value.

Update Gronlandsbanken – result and annual report 2014 & Danish interest rates

Gronlandsbanken

Gronlandsbanken has just released 2014 numbers and its 2014 annual report. 2014 results look solid: ~50 DKK profit per share, roughly 6% more than in 2013. The dividend remains at DKK 55 (dividend is paid out of pretax income). ROE has remained high at 16,3%. The result would have been even better if Gronlandsbanken would have not increased reserves. This is the quote from the annual report:

The result before value adjustments and write downs of DKK 148,6 million is the Bank’s best basis result so far. This is of course satisfactory. It is at the same time above the last announced results expectation of a result before value adjustments and write downs in the upper end of the range DKK 125 – 145 million. The result before tax returns 16.3% on year start equity after dividend.

This was achieved against a slight drop in Greenland’s GDP which I find quite remarkable. The stock market seemed to have “anticipated” those results to a certain extend as the stock price shows:

The balance sheet is still super rock solid with an equity ratio of 19% (of total balance sheet, not risk weighted assets or some similar shenanigans).

My initial investment thesis 2 years ago was the following:

– 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 into the spotlight. Gronlandsbanken is the easiest (and only) way to invest into Greenland without project specific risk

One of the issues of course is that most of the natural resources projects look a lot less likely to happen than 2,5 years ago.The annual report is as always a great resource to see what is going on in Greenland. Most projects seem to be on hold or cancelled, the only remaining interest is from China:

Among the larger projects, it has become obvious that virtually only Chinese investors continue to show a certain interest. The BANK of Greenland considers it likely and quite naturally, that the funding can come from China. Chinese enterprises are often the leaders in processing for further use in either Chinese, American, or European industry.

Especially the oil sector has been hit hard:

The prospects of the oil area are more dismal than of the mineral area. After Cairns test drilling in 2010 and 2011, oil exploration in Greenland is now greatly reduced, see Figure 8. The stagnation of the exploration in both the oil and the mineral area is expected to continue over the next few years, even though new licenses have been issued and the preparatory work is continuing in 2014 as well.
The declining interest in oil exploration is a.o. due to large oil and gas discoveries in other places, and the fall in the oil price . Of importance can possibly also be the administration and regulation of the area so far have not been regarded as sufficient by several persons in the industry.

So the bad news is that within my initial time frame of 3-5 years, I will not see any large mining or oil projects in Greenland. The upside might be that the incentive for other banks to enter Greenland will be most likely quite low.

Interest rates

However, another thing happened which was not on my radar screen: Denmark went from having low-interest rates to negative interest rates. This is how 3 month local swap rates developed:

dkk ir

Just as a reminder: Swap rates are “unfunded”, that means based on contracts where no principal changes hands. If we look at “funded” rates, so how much money Danish banks pay for actual deposits, the situation is much more dramatic:

dkk fund

So just to put this in context: If you want to deposit money for 3 months at a Danish bank for 3 months in DKK, they charge you -1,6% p.a. for this “service” !!!!

Impact on Gronlandsbanken:

One thing about Gronlandsbanken which I liked initially but what could be a problem going forward is the following: Gronlandsbanken has a significantly higher deposit base than loans outstanding. While this is good from a liquidity and risk point of view, it is bad because those excess funds have to be invested somewhere and in local currency.

I am not sure if Gronlandsbanken could actually charge for deposits locally, so the risk is there that they get squeezed on the amounts not loaned out to customers. They seem to have anticipated this and increased their bond holdings, but still, at year end 2014, roughly 20% of the balance sheet is potentially exposed to this potential “Negative carry” problem.

On the other hand, as a EUR investor being invested into a DKK security exposes me to a “positive Black Swan” similar to the CHF/EUR move in January. If something goes horribly wrong in the EUR zone, there might be some upside in holding DKK denominated securities.

Addtitionally, any Danish pension fund and Insurance company will struggle to find income producing assets in DKK. With a dividend yield of (gross) of around 8%, Grondlandsbanken should be not unattractive and therefore support the share price in the short term.

Summary:

The underlying business of Gronlandsbanken has done surprisingly well in 2014 despite a lackluster economy. Due to the carnage in natural resource prices, the implied “resource option” has been postponed some years into the future, making the investment case less attractive compared to 2,5 years ago.

Ultra low and negative interest rates could make it more difficult for deposit-rich banks like Gronlandsbanken to maintain their interest margins. As there are not that many alternatives at the moment I will continue to hold the stock for the time being, as it also functions as a kind of “Euro Black Swan” hedge. If I find other interesting finaincial service stocks, Gronlandsbanken would be the first one to be replaced as I think that my other financial holdings (Kasbank, Van Lanschot, NN, Admiral) have a better risk/return ratio.

I will also monitor closely if and how the negative rates will feed through Grondlandsbanken’s Q1 results.

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