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Autostrada – the real Italian job !! (Holy Cow edition)

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Holy Cow !! (pardon my French..).

After I posted last week about a potential “Italian Job” at Autostarda / SIAS with the sale of the South American activities, the real Italian job now emerged:

Autostrada just released a “breaking news item” that they intend to:

– buy in total 30% of the Italian construction company Impegrilo from it’s parent and Insurance company Fondiaria at a total amount of 237 mn EUR
– The purchase price is above the current market price of Impegrilo shares
– additionally, they want to increase their capital by up to 500 mn EUR which based on the current market cap of 620 mn EUR is a lot.

I have to admit that this is really unexpected and hard to value. In any case, it completely changes the investment case and I am inclined to directly sell the shares or exchange them into SIAS.

One thing is a little bit strange: They say that they pay above market price (3.65 EUR for the Fondriaria part and 3 EUR from the parent company) and spend 237 mn EUR in total. However, those 120 mn shares are actually worth something like 312 mn EUR at the current price of 2.66 EUR for Impgegilo.

Edit:

I have just seen that Fondiaria actually issued a press release in December 2011 about the first part of the transaction:

Argo Finanziaria S.p.A., Immobiliare Fondiaria-SAI S.r.l. and Immobiliare Milano Assicurazioni S.r.l. announce the signing today of the acquisition by Argo Finanziaria S.p.A. of 8,040,000 ordinary shares of IGLI S.p.A., held by Immobiliare Fondiaria-SAI S.r.l. and Immobiliare Milano Assicurazioni S.r.l. and comprising 33.33% of the share capital of IGLI S.p.A.. As previously reported, IGLI S.p.A. in turn holds 120,576,293 Impregilo S.p.A. ordinary shares – 29.96% of the share capital with voting rights. The acquisition price of each IGLI S.p.A. share subject to the agreement was established at Euro
10.89572, based on the forecast balance sheet of IGLI S.p.A. at December 31, 2011, with each ordinary share of Impregilo S.p.A. attributed a value of Euro 3.65.
Argo Finanziaria S.p.A. may designate its subsidiary Autostrada Torino Milano S.p.A. to acquire the IGLI S.p.A. shares held by Immobiliare Fondiaria-SAI S.r.l. and Immobiliare Milano Assicurazioni S.r.l. .

So this was not exectly “brand new” news, but this potential “designation” was never mentioned anywhere on Autostrada’s website.

So let’s wait and see what the stock does tomorrow. Maybe I was the only one who did not know about this…..

Quick update: After a short suspension, the stock now trades down “after hour” at around 6,90 EUR from 7,10 earlier on the day. So I will try to sell them tomorrow with a limit of 6,75 EUR per share.

EDIT: I decided to skip the limit and sell at today’s VWAP without limit. Sell first, ask questions later….

Portfolio Performance February 2012 & comments

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Performance:

In February 2012, the portfolio performed suprisingly strong with a monthly performance of +6.7% against +5.1% of the benchmark.

Why is this a surprise ? As written before, I try to construct the portfolio in a way that I expect to get around 2/3 of any upside moves, but (hopefully) limiting the downside to max 50% of the benchmark. So a performance like February, with an outperformance in a still strongly rising market is definitely an exception.

The major reason for this outperformance were mainly the two “catalyst” events, the 210 EUR offer for Draeger Genußscheine and the buy back offer of Commerzbank for the HT1.

YTD the portfolio is up +10.4% against +13.9% in the benchmark. With a 75% participation rate of the upside move, this is still above my expectations and should be viewed as not typical.

Since inception (01.01.2011), the portfolio is now up +5.9% against -1.9% of the benchmark.

Current Portfolio:

Name Weight
Hornbach Baumarkt 5.1%
Fortum OYJ 5.2%
AS Creation Tapeten 4.0%
BUZZI UNICEM SPA-RSP 5.4%
Autostrada Milano Torino 4.9%
EVN 3.1%
Walmart 3.9%
WMF VZ 3.9%
Tonnellerie Frere Paris 4.0%
Vetropack 4.8%
Total Produce 5.2%
OMV AG 2.1%
Nestle 2.2%
Piquadro 1.1%
   
Drägerwerk Genüsse D 8.6%
IVG Wandler 2.3%
WESTLB 6.9% 5.6%
DEPFA LT2 2015 3.4%
AIRE 5.1%
HT1 Funding 5.1%
EMAK SPA 6.1%
DJE Real Estate 4.4%
   
   
Short: Kabel Deutschland -2.1%
Short: Green Mountain -2.2%
0 0.0%
Short Ishares FTSE MIB -1.0%
Terminverkauf CHF EUR 0.2%
   
Tagesgeldkonto 2% 9.7%
   
Summe 100.0%
   
Value 54.8%
Opportunity 40.6%
Short -5.1%
Tagesgeld 9.7%

As posted over the month, there had been quite some changes in the portfolio.

Completely sold /exit

– Frosta AG (limited upside due to increasing costs and limited power to raise prices)
– Westag (same as Frosta)
– Sto Vz (fairly valued at current prices)
– Magyar telecom (assumption in investment thesis did not play out, fairly valued)
– KSB Vz (fairly valued at current prices, BRIC exposure)
– Draeger Short (tactical move, price of Genußschein “floored” at current offer price)

Increased:
– DJE Real Estate (continued buying to reach fuel position size)
– Tonnelerie (increase to full position, potential “catalyst” with Radoux deal)
– Vetropack (increased to full position as “long term compounder”.
– Autostrada (increased due to catalyst event to full position)

The total number of positions is now 24, which is a managable number of stocks. The split between “value stocks” and “special situations” is now 55% / 40%, cash is at the target level of 10%.

On the buy list are currently Tonnelerie and DJE until 5% are reached, as well as Piquadro under EUR 1,50 per share. For Piquadro, I will enter into a half position max.

Potential sells are mainly the large caps (Walmart and Nestle). If I sell Nestle, I will need to close the GMCR short as well as this was set up as a pair trade.

Outlook:

All in all, I still expect a “sideways market” over the next view years and the protfolio will be positioned accordingly as described above. Short term tail risks especially for Europe seem to have diminished somehow through the ECB intervention. The outcome of the Greek PSI is in my opnion not very relevant on a macro perspective. Even a further decline for Portugal seems to be priced into the market already.

The one spot I am most concerned at a macro level is the situation in China. We clearly see a clear slow down in construction activity. Despite the rhetoric of China seamlessly moving to a stable, consumer oriented society through the wise hands of the communist party, this would be the first time in history that such an epic construction boom would not end in a prlongued recession or depression. “This time its differnet” is a concept which doesn’t work against common sense and historical evidence.

If China would actually go into a severe recession, especially the now successful large international companies would be hit, which currently show record margins despite the “western world” being more or less in depression.

The general argument in the moment runs like this: Large International stocks are “cheap” and they are more secure because they are less effected by the “European crisis”.

Volkswagen is a good example. Based on recently announced earnings for 2011, they trade at a trailing P/E of 4. Howver, the net Income margin of 2011 at 9.67% is around 3-4 times above the avaerage of the last 12 years at around 2.8%. So one could ask now: Has Volkswagen revolutionized the car business and gained a significant competitive advantage or are they just reaping the “fruits” of the current China boom. As I cannot identify any significant competitive advantage for Volkswagen, I assume that at some point in the not so far future, margins will “normalise”. Under this assumption, Volkswagen is currently farily valued. Not overvalued, but also without real potential. As we have seen in 2008 and 2009, the situation for car campanies can virtually change over night.

So for the protfolio, I am actually looking for increasing the share what I call “special situations” in order to protect the downside. Although the “lure” of “cheap” large caps will stay.

Inefficient Markets – Solon SE edition: Shorting to Zero

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One of the “ineffecient” corners of the stock markets are definitely penny stocks, in particular stocks of bankrupt companies.

A very good example is currently Solon SE, the once highflying German solar panel manufacturer.

Solon became bankrupt in mid December 2011. The stock dropped already a lot before:

However, after the news that an Indian company might be interested in some of the assets, the share price went up from around 0,23 EUR to 0,30 EUR, giving the shares a market cap of around 5 mn EUR.

Before going into the liquidation value anaylsis, we should look at the debt structure. Solon has created a lot of debt in the last years, in total around 400 mn in loans and bonds. Solon has one listed bond outstanding, a Convertible Bond from 2007 which would have matured end of 2012. Total outstanding amount is 132 mn EUR.

This bond is trading at 4% (!!! not 40%) of nominal value.

So in order for the shareholders to see a single cent of any liquidation proceeds, the bondholders will have to be paid in full. The likelyhood for this happening seems to be extremely low according to the bond price. The reason for this is that most of the asstes have been pledged for the bank loans after a debt restructuring in 2010.

One could now anaylse if the bond is correctly valued, but after any metric, the recovery rate for the bond will be significantly below 100%, which means the shareholders will get nothing.

So why on earth is someone willing to pay 30 cents for something thatr is worth nothing ? There are some theories about option value, but in my opinion the reason is most likely ignorance and “animal” spirits.

Fundemantally, Solon SE is a stock one can safely short down to zero, provided one can stand the volatility. For the portfolio I will initiate a short position of max. 2% from today, again following the 20% VWAP rule.

Edit: I have looked at the funding structure and my conclusion is that also the bond is a ZERO, but I would not want to bet on it. The safe bet is the stock.

Updates – Magyar Telecom, Walmart

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Magyar Telecom

Magyar issued 2011 results some days ago. The stock reacted positively on this. Some analysts seem to have expected less. If one looks at the “Normalized” numbers and cash flowws, both, free cashflow and “underlying EBITDA” decreased slightly in HUF terms (2-3%). With inflation in Hungary at around 5%, we see a real shrinkage of 7%.

If we look back to the initial case, we are somewhere between case 1 and case 3 with a fair value range between 416 HUF and 717 HUF, the more optimistic cases seem to be rather unrealistic, especially concerning the new entrant into the Hungarian mobile market. At a current price of 600 HUF, I actuallay think that the stock might be more or less fairly priced.

If one wants to bet on the Hungarian Forinth or an improvemt in the politival risk, Hungarian Government bonds with a yield of 8-9% might be the easier bet.

So starting today, I will sell down the Magyar Telecom stake with the usual restricitions.

Walmart:

Walmart has missed expectations with its 2011 earning release. Although I don’t care about analyst expectations, it is also intersting to see that the stockprice didn’t manage to surpass a kind of 15 year trading range if one looks at the long term chart:

As this is a rather “low conviction” play from my side, Walmart will be one of the next stocks to go if I find better opportunities.

Lingotes Especiales SA – Hidden Spanish Champion ?

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On my “quest” for small, obscure but interesting “GIPSI” companies, I stumbled upon Lingotes Especiales SA (ISIN ES0158480311) from Spain.

The company produces cast iron parts mostly for the Automobile industry. Fundamentally, the company looks extremely cheap:

Market cap 29 mn EUR
P/E 6.5 (based on 2010 EPS of 0.46 EUR)
P/S 0.4
P/B 0.9 (no intagibles)
EV/EBITDA 3.3
Dividend yield 8.2%

Net debt at 0,66 Cent per share (end of 2010) or 20% of total assets looks managable.

Further checks for the “obscurity” factor of the stock:

– There seems to be no analyst coverage for the stock (positive)
– financial information is only available in spanish (positive)
– shareholders do not include any “famous” names (positive)

A quick glance ar historical figures shows a relatively volatile picture, however the comapny managed to show a profit in each of the last 11 years form 1999-2010:

TRAIL_12M_EPS DVD_SH_12M SALES_PER_SH PROF_MARGIN RETURN_ON_CAP
31.12.1999 0.3413 0.1603 4.4678 7.6385 12.1374
29.12.2000 0.3055 0.1683 5.7244 5.3374 9.4819
31.12.2001 0.234 0.1803 5.9373 3.9405 7.2021
31.12.2002 0.186 0.1803 5.9111 3.1526 6.0903
31.12.2003 0.438 0.1765 7.0747 6.1958 11.029
31.12.2004 0.1853 0.2706 6.9367 2.6716 5.1811
30.12.2005 0.4127 0.1765 7.2769 5.6717 10.0944
29.12.2006 0.1277 0.2706 7.182 1.7785 3.939
31.12.2007 0.349 0.1 7.3892 4.7235 8.3868
31.12.2008 0.3287 0.2439 7.9795 4.1191 7.6808
31.12.2009 0.0715 0.2439 4.745 1.5067 2.309
31.12.2010 0.4602 0.2439 6.7386 6.8286 10.6053

Looking back, the Graham & Dodd P/E (current price / average 10 year earnings) doesn’t look extremely cheap at around 11. However if we check for a “normalized price” calculated as “current sales times avaerage net margin times average P/E” we see a “fair value of around 6,50 EUR.

The current year doesn’t look bad either, based on the Q3 report, Lingotes managed to increase sales significantly, although margins seem to have deteriorated a little. Nevertheless, 9 month profit is already 0.43 EUR a share, 5% more than in 2010.

A very interesting sentence in the Q3 report is the following:

Los riesgos de incremento del precio de la materia prima no son tales, pues los precios de venta del producto terminado están indexados a los de la evolución de aquélla.

Based on my little Spanish and Google translate, this means that increasing costs on the material side are not a problem because sales prices are indexed to this.

Another interesting point from the Q3 report is the fact that 70% of sales are exports outside Spain. I read an interesting post at the highly recommended IBEX salad blog, which showed that Spanish exports aren’t that bad and that they are improving significantly compared to imports.

The stock price chart doesn’t look pretty but one could imply some sort of bottom based on the historic chart:

Summary: A quick and dirty check shows that Lingotes might be one of the cheap overlooked GIPSI equities I have been looking for. A low valuation combined with a high dividend payout might companesate for any missing short term “catalysts”. So I think the stock definitely deserves a closer inspection following the usual methodology.

Efficient markets – Quick check Greece 2012 bond

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So we have a new “PSI” package for Greece.

If I understood everything correctly, as a current holder of the March 2012 bond, one will receive the following securities (example: 10.000 EUR nominal):

– 15% or 1.500 EUR in EFSF securities, which should be as good as cash
– 430 EUR or 4.3% of accrued interest in EFSF securities
– 31.5% in 20 different (!!!!) new Greek Government bonds. This means one will get 20 different bonds at a nominal value o EUR 157.50 each !!!
– a currently undefined “warrant” on the Greek GDP developement

At the German stock exchange, the march bond is currently selling around 37%. The August 2012 bond is selling at 26%, the longer bonds around 23%.

It seems that still a lot of people seem to believe that they will be paid in full in march. Because if you calculate the implict expected price of the new bonds at the 35% price tag, you would end up with a value of ~57% for the new bonds which is totally unrealistic.

The implict price for the new bonds priced into the longer bonds is more like 20% of the (new) nominal value.

There is no reason that the new Greek bonds should tarde significantly above the old bonds as the amount of debt will more or less remain constant and since last Friday, every private bondholder is effectively subordinated to the ECB.

So as a relative value trade, one could now short the march 2012 bond against the August 2012 bond if this would be theoretically possible.

For any “small money” gamblers, the transaction costs for having to sell at least 22 different investments after the exchange will further diminish any possible gains.

On the opther hand, this could open up some interesting opportunities AFTER the exchange, I am especially looking forward to the “GDP warrant”.

Hyundai Motors capital structure arbitrage continued

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Yesterday, I posted some first thoughts about a potential Hyundai Capital Structure arbitrage.

I know (through Thomtrader) that it is possible to buy the pref shares, but the short side for the commons is more difficult.

As mentioned, there are traded single stock equity futures on the Korean Stock exchange, but I think it might be difficult for private investors to find a broker who offers this access. I didn’t find any Hyundai Motors CFDs, so shorting through CFDs doesn’t seem to be feasable either.
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