value and opportunity

Koc Holding

Koc releaed 2014 earnings already beginning of March. Looking at the presentation (there is no English annual report yet), one can see that despite the troubles, Koc showed a remarkably solid result with overall net income up 1% against 2013, although operating profit was down -6%.

I read the earnings conference call transcript as well. The major story was that Turkey was struggling in the first 6-9 months but following the oil price decline, things seem to have improved in the last 3 months or so. This confirms the general assumption that Turkey as a large oil importer should benefit from lower oil prices.

Management made a point that the largest subsidiary, oil refiner Tupras is expected to increase earnings significantly in 2015 as a 3 bn USD investment program will be finished and the refinery then will run on full capacity. Although Tupras had losses on inventory, Koc stresses that margins are independent of oil prices.

Koc clearly has suffered as well from their USD denominated debt, but other than many EM companies, they do have a “natural” hedge because of their large, foreign currency denominated earnings stream.

Almost exactly 6 months ago, I reduced my Koc stake by 2/3 as I was worried about Turkey in general and my bad experience with Sistema in Russia. Looking back, I have to admit that this might have been a typical “fast thinking” mistake. I actually do think that Koc is  a very good long-term investment if one believes in the Turkish economy. I am therefore inclined to increase the position again to around 2,5% of the portfolio, as I think that Koc with a P/E of ~10-11 is still good value, considering both, the quality of the company as well as the potential growth opportunity. The long-term downside in my opinion is relatively limited.

NN Group

NN Group had issued their annual report some days ago. Overall, earnings etc were unspectacular. However there was on extremely interesting sentence right in the beginning:

NN Group’s Solvency II capital ratio, calculated as the ratio of Own Funds (OF) to the Solvency
Capital Requirement (SCR) based on our current interpretation of the Standard Formula, is estimated to be in a range around 200% as at 31 December 2014. NN Group is considering to apply for the usage of a Partial Internal Model. The Solvency II capital ratio remains subject
to significant uncertainties, including the final specifications of the Solvency II regulations and the regulatory approval process.

This is remarkable in 2 ways. First, the Solvency II standard formula is relatively onerous so having 200% in the standard formulae is a good sign. Secondly, many competitors actually do not comment at all on their Solvency II ratios. Aegon for instance or more recently Talanx didn’t even give an indication. Swiss Life, which is not subject to Solvency II but the Swiss Solvency test (SST) also declined to give numbers.

One can of course interpret this in many ways but in my opinion, not communicating estimated SII ratios is much more a sign of weakness than anything else.

There is also a recent presentation to be found on NN website which clearly shows that their ALM matching in their big life Dutch company looks Ok. Plus they made a 200 mn EUR share repurchase (from ING) in February. Not a bad idea when the stock is valued at 0,43 times book. Overall, I am quite happy with NN despite the big fundamental headwinds for the industry. This is a stock I will invest more into when there is weakness in the stock price.

Romgaz

Romgaz issued preliminary numbers for 2014 as well. In my interpretation, they are incredibly good. Net income increased by +44%  to 3,72 RON, resulting in a P/E of ~9 even before taking into account net cash. Even better, the dividend will increase to 3,15 RON or roughly 9,5% yield at current prices.

As mentioned, Romgaz is pretty independent from market prizes for the time being as they are just starting to adjust to (higher) market prices.

In any other market, this should have had at least some impact on the share price, but for now the market seems to have ignored it completely. For fun, I ran a quick correlation analysis for Romgaz since the IPO. Romgaz has a pretty low correlation to the Romanian stock index with a value of around 0,45. It is however even less correlated to any European index. For the Stoxx 600 it is around 0,21. Interestingly for the Euro Stoxx Oil and Gas it is even lower at around 0,17.  As I do like uncorrelated investments a lot, this is a big plus for me.

Deutsch Bank started to cover Romgaz some days ago with a buy rating, although in my opinion with a pretty strange way of calculating the cost of capital.

Anyway, as a consequence of the great results, I increased my Romgaz position by around two percentage points to 4,2% of the portfolio at around 7,70 EUR per share.