Category Archives: AS Creation

Short cuts: AS Creation, Fortum, KAS Bank annual report

AS Creation

As Creation is a stock I owned in the past. Last November I had quickly updated the case and written the following:

In any case, I don’t think AS Creation is interesting at the current level of 30 EUR. At a 2014 P/E of 15-20 (before any extra write-offs on Russia) there seems to be quite some turn around fantasy being priced in.

Just a few days ago, AS Creation came out with an anouncement. There will be no dividend and the loss for the year 2014 is 9,3 mn EUR, at the upper end of the communicated range. In parallel, the CFO left the company. The loss seems triggered by a 10 mn EUR FX loss and a 5 mn EUR fine in France. They did not give further details but one can assume that the German business wasn’t that great either.

In any case a good reminder that despite cheap fundamentals, not every “value stock” is good value.

Fortum

Fortum is also a stock which I owned in the past. I sold them in autumn 2012 because I was not really convinced by the idea anymore.

Looking at the chart, we can see that Fortum has done OK since then, especially compared to like German utilities like RWE, which looked a lot cheaper back then:

Again a reminder that cheap doesn’t mean good. The even more interesting aspect is that a few days ago, Fortum finalised the sale of the Swedish power distribution grid to a consortium of pension plans and insurers for 4.4 bn EUR.

According to Reuters, the multiples were quite “Juicy” for the seller:

The deal values the network at around 16.6 times earnings before interest, taxes, depreciation and amortization (EBITDA), the same as for Fortum’s Finnish grid sale in 2013.

16,6 times EBITDA for a business which is quite comparable to my portfolio stock Electrica is an interesting price point. Clearly, you need to take some kind of discount for a recently privatized Romanian company, but I think it clearly shows what kind of prices especially pension and insurance companies are ready to pay. This makes me feel even better about the prospects of Electrica than before.

KAS Bank annual report

When I looked first at KAS Bank 2 and a half years ago, i was drawn in mostly by a very low valuation and the solid business model with a good “mean reversion” potential. that’s what I wrote back then:

Summary:

KAS Bank for me looks like a very interesting opportunity within the banking sector due to the following reasons:

+ attractive specialist business model (custodian)
+ cheap valuation even based on current “bottom of the cycle” earnings
+ valuation depressed because of overall hostility against banks
+ low or no analyst coverage
+ reversion to the mean speculation a lot less risky than with normal banks as virtually no risk of dilution (even Basel III standards are met by a wide margin)
+ potential upside ~100% over the next 3-5 years plus dividends+ low correlation / beta good portfolio diversifier

The upside has realized much quicker than i thought. As of now, including dividends, the stock return +75%. So good analysis, great return ? Well not really. Actually, if I am honest, this was mostly luck as I made a big mistake or omission when i analyzed the stock: I did not look at the pension liability. And this despite the fact that I have written and warned quite often about pensions.

In Kas Bank’s case I have ignored that because the plan was funded. That was a mistake and I will show you why.

Looking into the 2014 annual report of KAS Bank, we can see that they made a nice 24 mn EUR profit this year, which includes the one time effect of the canceled German JV. However, total equity DEcreased from 213 to 194 mn EUR. As the 2014 dividend is around 10 mn EUR, the question is clearly: Where did the other 35 mn EUR equity go ?

The solution to this question can be found on page 52, in the Comprehensive Income statement: KAS Bank lost 52,6 mn EUR pre tax) because of the increase in its pension liability. 2014 has been a brutal year for pensions. The discount rate has been reduced significantly. In 2013 I didn’t pay attention, but KAS Bank used 3,9% which was on the very high-end of permitted rates for EUR. In 2014 they had to slash this to 2,2% (page 80). It gets even crazier if we look at the gross numbers on page 81. The gross DBO increase 105 mn EUR from 182 mn to 287 mn. Luckily, some of that increase could be countered by asset increases. From an overfunding of 40 mn EUR, the plan went to break even. What really surprised me is the duration of the plan with around 22 years. The problem for me is the following: Despite the current funded status, there is a significant amount of risk in the plan. The gross size of the plan is 1,5 times the equity of KAS Bank. The run a significant equity allocation (85 mn EUR or ~ 45% of KAS Banks Equity). So in a scenario with a stock market crash with continuing low-interest rates, KAS Bank would pretty quickly be forced to do a capital increase.

Additionally, the current environment is clearly not helping KAS Bank in its core business. A custody bank is always deposit rich which is a problem now. Another second level problem is mentioned on page 18:

Treasury income, mainly securities lending, decreased by 20% to EUR 11.4 million (2013: EUR 14.3 million). The lower income from securities lending was primarily due to a market wide liquidity surplus which decreased
the prices for securities lending services.

This decrease happened even before the ECB started pumping liquidity into the markets.

So overall, I have been very lucky so far. I didn’t take into account the pension liability in my first analysis and fundamentals got worse for the business itself. Nevertheless I made good money because i bought cheap enough. Optically, the stock still looks priced oK at P/B 1, trailing P/E of 7 and 5,6% dividend yield, but fundamentally, especially looking at ultra low interest rates for quite some time, KAS Bank is in my view now at fair value.

However, I didn’t want to stretch my luck too far and therefore I sold the whole position at around 11,50 EUR per share.

AS Creation (DE000A1TNNN5) Half year report 2013 – SELL

AS Creation was on my watch list for a potential sale quite some time.

The initial investment casé was as follows:

At the time of writing in 2010, AS Creation was trading at around 29 EUR. We thought at that time that either “reversion to the mean” of net margins of around 5% and/or the Russian JV could give earnings and of course the stock price a nice boost. Our overall fair value at that time was estimated at around 38 EUR, a weighted average of good/medium/weak scenario.

In the meantime however, both assumptions were not reached. Net margins went down to 2.4% in 2011 and back to 3.6% in 2012. So far away from the 5% we assumed for the good case.

Additionally, based on the 6 month report issued on Monday, the Russian JV seems to develop rather dissapointing. The second quarter alone brought an additional “at equity” loss of 1.5 mn EUR after 0.5 mn loss in Q1. The reasons for this disappointing developement were “unforeseeable” difficulties in getting their stuff into the sales channels. This sounds like a quite weak explanation. Additionally they mention declining demand in Russia which fits into my “Gorilla” thesis.

So our old “best case” seems hard to reach. I mean if they don’t earn their margin now, with parts of Germany in a real estate bubble, then I highly doubt that they can do that ever again.

Combined with some other issues, like a non-explained general waiver for management in connection with the ongoing cartel investigations, I do not see a lot of upside in the stock for the next couple of years.

As the current share price is way above the estimated “Mid case” valuation, the only possible consequence is to sell the AS Creation position completely.

This further increase the cash pile, so I have to work hard on new ideas….

Quick updates: Sol SpA, AS Creation, Vetropack

Sol SpA

Sol came out with a “preliminary annual” already end of March. The numbers were not really surprising.

Sales were up 4.9%, EBITDA was up +1.4%, however net result was down -6.8%. I find this surprisingly good especially considering the tough environment for the mostly Italien based industrial gas business.

Most interesting is this part of the statement:

In comparison to 2011, the sales increased slightly in Italy (+0.2%) but much more abroad (+10.8%), which represents 46.8% of the total turnover. The home-care business, in which the Group operates through VIVISOL, marked a growth of 10.9% (sales equal to € 264.9 ml), while the technical gases business increased of 1.3% (sales equal to € 344.9 ml).

I think this is also the reason why the share price is doing quite well at the moment, despite the overall EPS decrease.

AS Creation

Also last week, AS Creation came out with its annual report for 2012. Numbers were ok (EPS 2.67 EUR per share against 1.69 EUR last year. Dividend will be increased to 1.20 EUR.

This is all quite positive, however the shares are now not cheap anymore. With a trailing P/E of 16 and the German economy running on full steam, there seems to be quite a lot of positive expectations for the Russian JV priced in.

AS Creation is one of the stocks where I have to check in more detail if there is still a real “margin of safety” at this level. (Edit: Interestingly, in Bloomberg they show a wrong EPS number for 2012. Here the EPS is 3.22 EUR, this makes the stock look cheaper)

The stock price has great momentum and is on its way to challenge the ATH from 2007 at around 50 EUR:

Vetropack

Last but not least, Vetropack came out with their 2012 report some days ago. Although EPS wass up strongly at 197 CHF per share, operating profit was down. The reason for this was a sale of non used real estate. Vetropack invested significantly more in 2012 than 2011, the question will be if this results in more growth.

In 2012, positive developements in some countires were off set mainly through negative developements in Switzerland and high energy costs.

I still like Vetropack as a very boring, extremely defensive (indirect) consumer play, again one has to monitor if the capital is allocated efficiently. At the moment a solid “hold” position.

The stock price is stagnating clearly, also compared for instance vs. Italian competitor Zignano:

Vetropack is trading at a discount (EV/EBITDA) both to Zignano and Vidrala, the 2 European peers which, in my opnion should be theother way round.

Catching up: Green Mountain, AS Creation and AIRE KGaA Tender offer at 17 EUR

What a week for the portfolio ….

Green Mountain

Green Mountain imploded (again) last week after they lowered their guidance.

Green Mountain had many attributes making it a “perfect short”:

+ shady accounting as revealed early by Sam Antar at WhiteCollarFraud
+ massive insider sales
+ negative free cashflows
+ pumped up growth through expensive acquisitions
+ expiring patents in 2012

David Einhorn, now credited for “revealing” the over-valuation was actually relatively late in the game. However one has to admire his timing capabilities. I was relatively early and hat to swallow a intermediate -40% loss on the position before I got into the money.

The question is now, how low can the stock go ? If GMCR is a “real business”, then the current valuation seems to be fair. If they are a real fraud, the stock could go down much further. Also one should remember that momentum always goes in both directions. Nevertheless, as the easy money on the short seems to have been made, I will exit (cover) the short on Monday.

AS Creation

AS Creation reported surprisingly good Q1 numbers which show that at least with a certain time lag, the company does have some pricing power in its core business. The outlook is mixed as they expect losses when they ramp up the Russian JV.

Nevertheless, I think the first quarter gives credibility to the managment as they always told investors that on an annual basis they are able to pass cost increases onto clients.

AIRE KGaA Tender offer EUR 17 per share

After I was already happy that my special situation investment AIRE KgAA offered to buy back 10% of the shares at 14 EUR, suddenly AIG real estate issues an offer for 17 EUR per share for the whole company.

Luckily, I only sold relatively small amounts of AIRE at around 14 EUR. As someone said before: Sometimes it better to be lucky than smart.

What I find interesting about the offer are two things:

– first, they seem to have already 31.8% of shares under their control, so from their existing 7.85% the have bought 24% through option contracts

– second, based on the official NAV of around 21 EUR, the 17 EUR offer in theory does not leave a lot of upside for AIG. However one has to remember, that AIRE KGaA owns a lot of highly leveraged equity positions in US developements which were pretty aggresively written down to zero over the last few years. So there is lot of positive optionality in the legacy portfolio. If some of those projects are “coming back”, the NAV could be significantly higher. AIG Real estate as the previous manager should know those projects pretty well.

If I remember correctly, they were active in residential, multi tennant developements. Maybe this has to do with AIG’s decission from early April to go back into real estate investments on a larger scale. I had actually read this but didn’t really make the connection.

For the time being, I will wait for the final offering documents to decide what to do, however I will continue to sell down to 5% of portfolio weight.

As Green Mountain was the ideal short, AIRE KGaA was the ideal special situation:

+ unusual vehicle (listed, closed real investment fund, US and Asian real estate, only German listing)
+ difficult to analyse (lot of debt, but non-recourse)
+ bad name / scandal, however no direct exposure (AIG)
+ early entry of “activist” investors (Grevenkamp, Swiss guy)

From a timing perspective, I was very lucky in the portfolio, getting in at a very low point in January 2011. The chart shows that with such investments, one usually has time to analyse and invest. It doesn’t reallypay out to invest driectly after the drop:

After the big drop in 2008/2009, the stock was “sleeping” now for almost 3 years before something happened.

That is something to keep in mind for investing in such situations. I t takes some time until the value will be (hopefully) realised by someone.

Quick news: EMAK Spa, AS Creation, Autostrada & SIAS & Impregilo

EMAK has published a new Investor presentation. Proforma 2011 P/E is around 7, P/B around 0.64. Still very cheap.

AS Creation:

The Russian JV partner has bought another 5% in AS Creation and holds now 10%. Despite the lackluster results of AS Creation in 2011, this is a very encouraging sign.

For me, this purchase should be counted as “insider transaction” as the Russian JV partner will be in the best position to judge the success potential of the Russian JV which is expected to start this year.

I am actually contemplating to fill up AS Creation to a full position (currently 3.7%) if the stock price weakens over the next few weeks.

Autostrada

Autostrada continues to implode. Interstingly the regulated subsidiary SIAS is doing relatively better:

In contrast, Impregilo continues to increase:

Impegrilo reported preliminary results this week with a 50% increase in earnings due to the sale of some South americen Assets. So there seems to be some real value in this company.

I am actually tmepted to get back into Autostrada at some point in time. They roughly lost 170 mn market value since the IGLI Deal, although the disdavantage dissapears with each increase in the Impegrilo share. I think when the capital increase is going to be announced, then it could be a good opportunity to get back in.

Updates: As Creation, Hornbach & Frosta

A very busy day:

AS Creation

As Creation reported a significantly lower profit for 2011 plus a dividend reduction. The stock price remeined relatively flat, which in my opnion is driven by the “Russian option”. For the normal business it is clear that risiong costs are an issue and pricing power is limited.

Frosta

Frosta, which is sold a couple of weeks ago, reported also relatively weak numbers. Very similar to AS Creation, costs rose faster than prices.

Hornbach

Core Value stock Hornbach however showed very strong preliminary numbers today. Increasing same store sales, increasing market share and increasing profits. It is still a joke, why such a business tardes at book value and a single digit P/E.

Duell: Colefax Plc vs. AS Creation AG – part 1

AS Creation is one of my core holdings. It is the clear market leader for wallpaper in Germany, however subject to an Anti Trust probe. Historically, AS Creation has produced rock solid returns. Currently there is some grwoth potential in the stock as they are building up a significant joint venture in Russia.

I was not aware that there is a UK listed company specialising in wallpaper as well. Interactive Investor Blog (highly recommended by the way) had a very nice summary post on Colefax Plc a few days ago.

So I thought it might make sense to compare the two companies “head to head”. I am not sure if Colefax and AS Creation are really competitors. Colefax sells most of its products in the US and the UK and only a relatively small part in Europe, whereas AS Craetion is more focused on Germany with some French wholesale activities.

Colefax has a market Cap of ~31 mn GBP, AS Creation around 62 mn GBP.

Let’s have a quick look at “traditional” valuation metrics

Colefax AS Creation
P/B 1.19 0.77
P/B tang 1.19 0.86
P/S 0.41 0.36
P/E 7.7 11.1
EV/EBITDA 3.31 4.75
EV/EBIT 4.6 9.1
Debt/Capital 0% 27%

Apart from Price/Book and Price sales, Colefax looks a lot cheaper than AS Creation. AS Creation has some debt on its balance sheet vs. Colefax which actually shows net cash. AS Creation used to have little debt or net cash as well, however the investments in the Russian JV have been funded with debt.

Let’s look at historical profit margins next:

Net margin  
  ACW CFX
1999 5.66% 4.67%
2000 5.75% 5.61%
2001 5.38% 3.77%
2002 5.23% 2.78%
2003 3.94% 3.05%
2004 5.00% 3.43%
2005 5.33% 4.13%
2006 6.68% 5.49%
2007 5.95% 5.20%
2008 5.06% 2.51%
2009 4.14% 3.43%
2010 4.55% 5.88%
avg 5.22% 4.16%

From 1999 to 2010, AS Creation managed to earn 1% more margins on average with a lower volatility than Colefax. So one could conclude that AS Creation at least historically had better pricing power than Colefax.

However if we look at ROE and ROIC, the picture changes completely:

AS Creation   Colefax  
  ROE ROIC ROE ROIC
1999 12.98% 6.90% 26.01% 17.82%
2000 14.87% 8.19% 30.92% 20.42%
2001 13.52% 10.39% 17.72% 13.15%
2002 12.42% 9.83% 12.83% 10.37%
2003 8.79% 7.74% 14.83% 12.81%
2004 11.53% 9.63% 17.55% 19.24%
2005 12.41% 11.05% 20.22% 18.01%
2006 14.93% 12.54% 25.34% 22.55%
2007 13.45% 10.42% 23.57% 26.94%
2008 11.36% 7.86% 9.07% 22.37%
2009 9.14% 7.97% 10.75% 16.55%
2010 9.73% 8.00% 18.85% 21.06%
avg 12.10% 9.21% 18.97% 18.44%

Colefax shows almost twice the returns on equity and invested capital compared to AS Creation. The absolute amount achieved by Colefax is remarkable as well, even if some of the difference could be explained by differences in UK and EUR interest rates.

Before jumping to the conclusion that Colefax is the cheaper and more capital efficient company, we should chekc 2 major items which may distort return on capital numbers and Enterprise Value (EV) multiples:

– pension liabilities
– operating leases

Pension liabilities:

Interestingly enough, Colefax seems to be a very untypical UK company. They have only a tiny defined benefit plan (DBO) with liabilites of 1 mn GBP. AS Creation’s DBO liablities are higher at around 7 mn EUR. So no big impact in both cases (remark: to be on the safe side, DBO should always be added to finanical debt)

Operating leases

This is more interesting. AS Creation only records 600 tsd EUR of Operating leasing liabilities whereas Colefax has around 25 mn GBP gross liabilites. If we look at the different components of assets required to run the busines we see some intersting numbers:

Colefax AS Creation
Sales 77,722 184,603
Non-Current Assets 7,282 50,770
Net WC 11,881 66,424
Operating Leases 25,258 600
 
NCA/ Sales 9.4% 27.5%
NCA+OL/Sales 41.9% 27.8%
Net WC/Sales 15.3% 36.0%
 
NCA + NWC+OL 44,421 117,794
in % of Sales 57.2% 63.8%
 
EV/EBITDA 3.31 4.75
EV/EBITDA OL 7.20 4.80
 
Net Debt+OL+pension/total Assets 47% 14.4%

Non Current Assets (ex Goodwill) at Colefax in percentage of sales is only a fraction of AS Creations non -current assets. However taking into account the (gross) operating leases, the picture suddenly shifts dramatically.

Both, EV/EBITDA and leverage ratios suddenly shift to AS Creations favour if one accounts for the operating leases.

Colefax still uses less capital in percentage of sales, but this is “only” due to much lower working capital requirements.

I don’t really understand why Colefax needs to rent such a large amount of land and buildings if they are not producing the stuff. Do they have a warehouse in Central London ?

Business models

One thing I forgot to mention is that the two companies have very different business models, despite both selling mostly wallpaper. Colefax only designs and distributes their products, whereas AS Creation creation really produces all the wallpaper themselves.

“Producing” wallpaper is basically only a specialised version of printing, with the big advantage that at least so far the internet has failed to come up with a paperless alternative in contrast to many other printing products.

Despite having outsourced production, Colefax employs 305 persons (fy 2011) for 77 mn GBP in sales whereas AS creation generates 172 mn EUR sales with 706 employees (2010).

The differences in the business model can be easily seen if we look at the major cost blocks compared to sales:

Colefax AS Creation
Staff cost 14,933 39,336
– in % of sales 19.2% 21.3%
Marketing, distribution & admin 36,345 27,166
– in % of sales 46.8% 14.7%
COGS 34,929 96,064
-in % of saless 44.9% 52.0%

Colefax needs to spend a lot more on advertising and administrative expenses than AS Creation. I am somehow surprised that Colefax seems to buy their merchandise cheaper in relation to sales than AS Creation has to pay for the raw material.

Staff costs are relatively comparable, which is interesting as well.

First results:

– Colefax “design and distribute” model is less capital intensive than AS Creation’s “full production” operations
– taking into account operating leases, the major advantage seems to be a lower amount of required working capital
– surprisingly, Colefax seems to require a lot of fixed investments if one includes operating leases
– however return on invested capital is still higher for Colefax despite slightly lower profit margins
– the higher voltality in Colefax profit margins ist most likely due to higher leverage through off balance sheet operating leases
so far I can see no clear “winner” between the two companies. Both copmpanies have problems but also opportunities.
– Colefax might be a good diversification in order to gain exposure to UK and US housing recovery while AS Creation has growth opportunities in Russia and benefits from a still strong domestic market

In the second part I will try to come up with a valuation for Colefax Plc to see if it is an interesting investment for the portfolio.

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