Quick updates: Sol SpA, AS Creation, Vetropack

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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.

Guest post: Book review “The Outsiders, Eight unconventional CEOs and their radically rational Blueprint for Success”

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Many thanks to reader N. for this !!!

I would like to recommend the book: “The Outsiders, Eight unconventional CEOs and their radically rational Blueprint for Success”. It is written by William N. Thorndike Jr. and a team of Harvard students.

I first heard about the Book in the write-up of the annual Meeting of the Daily Journal as a book recommendation from Charlie Munger.
When reading the subtitle of the Book I was really eager to read it as soon as possible.

My first impression is that the book, considering its high price, is fairly short. The book has only got 225 pages.

The main content of the book is:

The 8 CEOs are so successful, because they follow 4 simple rules:

1. Run a decentralized organization which releases entrepreneurial energy and keeps both costs and “rancor” down.

2. Cash flow, not reported earnings, is what determines long term value.

3. Share buybacks increase in per share value and in the long run that is the only thing that matters – not the overall growth of the company.

4. With acquisitions, patience is a virtue… as is occasional boldness.

The author of the book points out that the outsider CEOs shared an interesting set of personal characteristics: They were generally frugal and humble, analytical, and understated. They were devoted to their families, often leaving the office early to attend school events. They did not give chamber of commerce speeches, and did not attend Davos and last but not least they did not exude charisma.

The outsiders are not like Jack Welch an example of a charismatic, action-oriented leader. They are more like Ben Franklin; they avoid bankers and other advisers and prefer their own counsel and that of a select group around them.

In the word of the author: “The outsiders are iconoclasts. The word iconoclast is derived from Greek and means ‘smasher of icons’.”

The outsiders are:

1. Tom Murphy and Capital Cities Broadcasting
2. Henry Singleton and Teledyne
3. Bill Anders and General Dynamics
4. John Malone and TCI
5. Katharine Graham and The Washington Post Company
6. Bill Stiritz and Ralston Purina
7. Dick Smith and General Cinema
8. Warren Buffett and Berkshire Hathaway

Summary:

It is a quite interesting read with many interesting stories about the company’s and the CEOs.
The book is really easy to read and there are summaries at the end of every chapter. At the end of the book, the author presents the outsiders mind frame in a simple approach and a checklist.

But I did not think that it is as easy as it seems comprehending the book. I think you always need the right time and the right location to be successful.

So if you want to enjoy a well written book about a really interesting topic which can help you figure out the right management of the company in which you like to invest you might consider buying it.

Weekly links

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Must read: Jim Chanos interview on fraud

The Brooklyn Investor on Loew’s corporation

A fund managament company which I discovered by chance which has an interesting “off the beaten path” portfolio: Evermore Capital

Highly recommended: “A good day to live” blog. Mainly about downshifting but with occassional great comments about investing, how to take crisis more easily etc.

Alternative Assets are overhyped says Abnormal returns. I like especially this quote which sums up alternative assets nicely:

Think of it like this, he [Bernstein] says: “The first person to the buffet table gets the lobster. The people who come a little later get the hamburger. And the ones who come at the end get whatever happens to be stuck to the tablecloth.”

Value Investor or Value Pretender ?

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There was a very nice post over at beyondproxy about the varieties of value investors.

The top 10 characteristics to spot the so called “Value Pretenders” from beyondproxy were the following:

Reason #10: You invest based on chart patterns,
Reason #9: You assume multiple expansion in your investment theses
Reason #8: You try to figure out how a company will do vis-à-vis quarterly EPS estimates
Reason #7: You base your decisions on analyst recommendations
Reason #6: You use P/E to Growth (PEG) as a key valuation metric
Reason #5: You use EBITDA as a measure of cash flow
Reason #4: You would worry about your portfolio if the market closed for a year.
Reason #3: You make investment decisions based on the activity or tips of others
Reason #2: Your investment process centers on the market opportunity.
Reason #1: Your investment theses do not reference the stock price

David Merkel at the Aleph blog has (as always) a very good reply to all the 10 points which I strongly support.

As I think this topic is quite interesting and funny, I tried to come up with some of my own characteristics which, in my opinion, could help to detect “Value Pretenders”:

My Top 10 list for detecting value pretenders would be the following:

10. Portfolio turnaround of 50% or more p.a.
“True value investments” are almost never short term bets. Sometimes if you are lucky, value gets realised more quickly but on average those ideas need at least 3-5 years for full potential.

9. Buy and sell decisions because of macro events or macro expectations
As a value investor, you have to be a fundamental investor and analyse on a company level. Macro expectations play a certain role but should never ever be the basis of a buy and sell decision as no one is able to really and consistently to predict them. In contrary, negative macro events are .sometimes very fertile hunting grounds for fundamental investors

8. Investment process does not include reading several annual reports per company in detail
As a fundamental investor, there is no replacement for reading the “original” source of information.

7. Investments in companies with questionable / aggressive accounting
As a value investor, you first thought should be: Can I lose money with this. Whenever a company looks cheap but accounting is questionable, there is no real margin of safety. Conservative accounting and integrity of the persons involved is key.

6. Investor does not discuss risks and weaknesses in detail
Again, the main point in value investing is not loosing. There is never a sure thing, every investment can go belly up. But as a value investor you should be able to identify and price in at least all the obvious risks. And communicate them.

5. Investor does not have a (to a certain extent) structured investment process or a very complicated one
A structured investment process is no guarantee for success, most asset managers pretend to have one. However, if the process is to complicated, with lots of committees and stuff, it is not a positive sign as responsibilities get diluted. No real proces at all is also a waring sign, although for the rare genius (WB) this might work. For pure mortals no process means the big risk of being vulnerable to all kind of behavioural biases.

4. Performance record consistently shows higher draw downs in negative periods than the market
Clearly, even the best value portfolio can underperform in a bad market. However if one sees this more than once, the portfolio is most likely not a “value portfolio” but a high beta portfolio of low quality stocks.

3. Investor offers you redemption on a daily basis
One of the big issues with investors is the tendency to second guess the investment manager. A value investor should “protect” his investors from their animal instincts and align their expectations with his investment style. Joel Greenblatt had a great article on this as he showed how individuals underperformed the Magic Formula by a wide margin because of jumping in and out of the strategy. For me, offering a daily redeemable investment vehicle (mutual fund) and claiming to be a value investor does not go well together.

2. Investor can tell you a great “story” for every stock he owns
On the one hand, any value investor should be able to lay out his investment thesis in a few simple sentences. Anything which is too complicated to explain is most likely not a good investment. On the other hand, “story stocks”, especially those touting some new invention or change in business strategy etc. are mostly never good investments. Good investments often don’t have “catchy” stories but rather are simply good and reliable businesses.

1. Investor uses only last year’s earnings / book value / cashflow plus projections as basis for an investment
This is one of the worst mistakes one can make. One year numbers are to a certain extent more or less meaningless. This is also one of the main reasons why I am very sceptical of “statistical value” strategies where people try to “data mine” investments. Clearly one can use this as a starting point for further analysis, but every company is the sum of its past and looking only at one year is like judging a book purely by its cover.

Finally a few words in general: there is clearly more than one way to success in investing and also more than one way to do “value” investing”. But at the core of value investing are in my opinion:

A) detailed fundamental analysis
B) protection of the downside
C) long time horizon
D) patience

Quick updates: G. Perrier, Maisons France Confort, April

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Some quick updates on French stocks:

G. Perrier

Already some days ago, G. Perrier announced preliminary 2012 numbers.

Highlights:

– Sales up 7% (+4% without acquisitions)
– Profit up 13.2% to 7.94 mn or 4.02 EUR per share

In my opinion, this is an absolut outstanding result if one considers that G. Perrier is more or less a purely domestic French company and clearly shows the quality of the company and their business model. I am not sure when the annual report is out, but as discussed perviously, I will increase the position further, target is now a full position.

Maisons France Confort

Also already a few days ago, Maisons France Confort issued annual numbers including the annual report. As some readers might remeber, i had two posts about them (part 1 & part 2), but didn’t include them in the portfolio yet.

Looking at the stock price action, it seems to be that market participants had expected better numbers or a better outlooK:

Final numbers were 2.70 EUR EPS for 2012. With around 7 EUR net cash per share, this translates into a trailing P/E of ~5.9. Of course, 2013 will not be easy for them, i guess the late spring in Europe will not improve things and the business model of MFC has much more exposure to the weak French economy. Nevertheless it looks like a potentially interesting cyclical entry point into a real good business. I will have to follow up on that one.

April SA

Quite similar to MFC, April came out with its 2012 numbers and the stock got hammered quite significantly.

The company earned 1.31 EUR per share, additionally there were some positive effects in the other comprehensive income. April clearly has the same problem as any financial services company which is very low interest rates. Nevertheless it is not clear to me, why the share price has now decoupeled from peer company AXA.

I will clearly have to look at the annual report, but so far I don’t see any reasons to sell.

March 2013 Performance & comment: “Another storm in the teacup”

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Performance:

Performance in March was again very satisfactory, with +2.0% vs. 0.2% in the benchmark (50% Eurostoxx, 30% Dax, 20% DAX). YTD this results in +13.48% against +4.90% BM performance. Since inception (1.1.2011) the score is now 49.6% against 14.4%.

Best performer was Total Produce with +15.6%., followed by Draeger with +12.5%, AS Creation +11.5%, WMF +10% and Tonnelerie with +9.7%. Biggest looser was of course the IVG convertible with -30.6%. This alone cost the protfolio ~1.5% absolute performance. Also, April SA lost ~12% in March.

Nevertheless I am still surprised how well most of the stocks performed, as many of them are nor really cheap any more. But as it is with momentum, it always carries much much longer than one thinks. Nevertheless, one should not indulge in complacency.

Major transactions

As discussed, I added G. Perrier as new stock. I also sold half of the Total Produce position and added to Gronlandsbanken.

Portfolio as of March 31st 2013:

Name Weight Perf. Incl. Div
Hornbach Baumarkt 4.1% 9.8%
AS Creation Tapeten 4.3% 43.6%
WMF VZ 3.7% 76.0%
Tonnellerie Frere Paris 6.5% 96.1%
Vetropack 4.4% 8.9%
Total Produce 3.1% 75.2%
Installux 3.0% 14.9%
Poujoulat 0.9% 4.9%
Dart Group 3.8% 106.4%
Cranswick 5.1% 18.7%
April SA 3.4% 4.3%
SOL Spa 2.5% 14.2%
Gronlandsbanken 2.3% 23.7%
G. Perrier 2.2% 7.7%
     
     
KAS Bank NV 5.0% 30.0%
BUZZI UNICEM SPA-RSP 5.3% 26.3%
SIAS 5.8% 57.4%
Bouygues 2.6% 10.0%
Drägerwerk Genüsse D 11.3% 198.6%
IVG Wandler 3.0% -22.4%
DEPFA LT2 2015 2.6% 51.6%
HT1 Funding 4.7% 54.1%
EMAK SPA 3.8% 16.7%
Rhoen Klinikum 2.3% 10.7%
     
     
     
Short: Focus Media Group -1.0% -10.9%
Short: Prada -1.1% -25.6%
Short Kabel Deutschland -1.0% -4.6%
Short Lyxor Cac40 -1.1% -8.5%
Short Ishares FTSE MIB -1.8% -1.6%
     
Terminverkauf CHF EUR 0.2% 5.8%
     
Tagesgeldkonto 2% 10.6%  
     
     
     
Value 49.1%  
Opportunity 46.3%  
Short+ Hedges -5.9%  
Cash 10.6%  
  100.0%

Dragerwerke is again above the 10% threshold. I will therefore sell ~1.3% asap. Also, I will reduce Total Produce to 0 in the next few days.

March 2013 comment: “Another storm in the teapot”

Following the press, Europe again narrowly escaped Armageddon in March during the”Cyprus situation”. Common knowledge now is that they broke a tabu with bailing in depositors and again, all the banks and Club Med countries are doomed.

Looking at this more realistically, one could argue that this was at first again an economic non-event. Less than 1mn inhabitants, total bailout of around 15 bn EUR. One should not call this peanuts, however compared for instance with the 57 bn the EU spends on agricultural subsidies annualy, it is clear that we are talking about a rounding error here.

Secondly, I am asking myself: What’s wrong when depositors actually share the burden to a certain extent instead of socializing everything on the tax payers ? Someone with more than 100 k EUR in the bank is actually quite rich. According to latest numbers, German households in the west have on average 132 K EUR, Eastern Germans 55 k EUR average net worth, including real estate. So people are freaking out because people with a lot of money are not being bailed out by people with an equal or lower total net worth ?

Why should a bank depositor in general be better protected than an investor in Government bonds in the same country ? Those implicit or explicit guarantees in my opinion are actually one of the root problems in this whole mess. With deposit guarantees, there is no distinction between good and bad banks. actually, managers of bad banks get a free ride and lot of optionality via this subsidized funding. The capital allocation function of the capital market is highly distorted by this kind of guarantee which is by the way free and not charged.

In the medium and long run, bailing in depositors will in my opinion contribute to the financial stability of a financial system because bad banks will have it much harder to blow up their balance sheet and support asset bubbles. Again, I don’t think we are out of the woods with regard to the “EUR crises” but for me the Cyprus depositor bail in is another small step into the right direction.

Despite the many pundits on TV who claim that they know exactly what to do in this situation, in reality know one has a clue. The best strategy in such situations is trial and error. When you are in unchartered waters or in a forrest at night without light, the most stupid thing would be to say: “Let’s go this way and full speed ahead”. What you should do instead is to go slow, test the waters, feel your way through and change directions if you see obstacles directly ahead.

Don’t get me worng though, this is not meant to be a statement that we will see share prises going up further because the EUR problem will be solved soon. There are a lot of risks out there which might or might not priced into the market. All I am saying is that the next “Black swan” or “grey swan” will most likely not come from the EUR mess but from somewhere else.

IVG – Now what ?

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IVG is one of my special situation investments, I had detailed posts about them here:

Introduction (German)
“Good news” (German)
Capital Increase
Capital Structure considerations
Balance sheet analysis

My overall thesis could be summarised as follows:

IVG is clearly in troubled water, so the shares and the Hybrid bonds are extremely risky, however the senior convertible which has a put in early 2014 has a good chance of being repaid. My main argument was and is that IVG is quite big and an outright default would have too bad consequences for the banks and hedge funds wer not yet involved. Even in the downside case, I would still come up with a recovery for the Hybrid in the 90ties due to the amount of underlying equity and hybrid debt.

Last week however, IVG came out with another worse than expected annual result for 2012.

The “bomb” however was this statement:

As the company would like to explain the financing concept being developed to the shareholders and to allow them to decide on specific measures, where appropriate, the 2013 Annual General Meeting will be postponed from 16 May 2013 to presumably the end of July 2013.

Well, clearly postponing the Annual Meeting is ALWAYS a bad sign. So all the listed IVG securities got of course hammered:

The stock lost around 2/3 of its value:

as well as the Hybrid bond:

The convertible lost almost half of its value before rebounding, resulting in a loss of 1/3:

So to look at the only positive aspect. At least the Senior bond outperformed against the subordinated capital tranches as one would expect in such cases. As reader JM commented, the activity in the convertible prior to the announcement looks very very suspicious and smells of insider trading.

Updated liquidation analysis

First of all, let’s update the liquidation analysis from 2012:

Summary valuation of Assets

In the first step, I think it makes sense to use the same assumptions as last time, to make the numbers comparable. In the following table we see the asset “model” updated based on the 2012 report.

2011 Adj. Val 2012 Adj.Val Comment
Intangibles 251 0 253 0 100% write off
Inv. Property 3,964 3,398 3,654 2,920 scaled to 7% yield
PPE 157 118 190 143 25% discount
Financial Assets 189 142 174 131 25% discount
equity part 95 71 84 63 25% discount
DTA 404 0 336 0 100% write off
Receivables 60 45     25% discount
   
Inventory 1,025 513 996 498 50% discount
Receivables 179 134 190 143 25% discount
Cash 238 238 142 142 0% discount
   
AFS 341 256 58 44 25% discount
Asset Management 275   318 1.5% of AUM
Marekt value caverns 163   140 50% of disclosed adj.
         
Total 6,903 5,351   4,540

In second step we can then determine, how much assets are available for which debtor class. In the case of an insolvency, collateralized lenders get paid first, then senior lenders then hybrid and then equity.

Based on the 2012 numbers, i would calculate the following liquidation values:

  2012
Adjusted NAV   4540
-Bank loans   -3837
Remaining   703
Other senior liabilities    
  -Derivatives -84
  – Tax -77
  – pension -34
  – other financial -17
  – other liabilities -218
  – Convertible -400
  Total senior unsecured -830
     
  Coverage 84.70%

So this means that senior creditors would get under my assumptions still around 85% of nominal. This is slightly worse than last year but still quite positive and should limit the downside.

Of course, I did not consider additional costs of winding such a company up, on the other hand I didn’t put for instance a business value on the cavern business. However it is also clear that in a liquidation, both Hybrid and shareholders get a big fat “donut” as recovery.

What next ?

In such situations, it usually makes sense to listen to the analyst call in order to see what Management is actually saying. Fortunately, the call is easily accessible via their website. By the way: The used app for the audio file is really shitty…..

The most interesting section of the management comments is the fact that the 0.7 bn EUR 2013 maturity doesn’t seem to be a problem at all, as this is a 50% LTV loan.

From the Q&A, I found the following points most interesting:

– Squaire: Relative slow increase in occupancy. They need 90% occupancy to really exit which seems to need time, at least until 2014
– Caverns: Demand from utility side has shrinked, “NAV adjustment” at risk
– IFRS 13: There seem to be some issues in order to reflect transactional costs in the current valuations. They mentioned 100 mn EUR as potential (negative) impact.
– LTV target: They mentioned 55% as a goal, from around 71% today, with the intermediate step of 60-65% (my remark: with ~4 bn Bank, 5% LTV is 200 mn EUR.)
– no plan to sell fund management (would have been one option to generate equity)
– no mention of hedge funds as holders of the bank debt
– the “gherkin fund” has an indirect 44 mn EUR risk for IVG

In general, they were very vague about refinancing. They mentioned Rothshild being an advisor which is not the best news for existing investors. The whole call was with that respect a deja vue similar to the Praktiker call almost 2 years ago.

My expectation is the following:

Current equity holders will suffer one way or the other. My guess is that a new convertible will be part of any refinancing package. I could easily imagine somthing like pledging the fund business to a new investor, similar to the “Max Bahr” pledge at Praktiker.

In the process, they will come up with some “voluntary” contribution of Hybrid and Convertible holders which in my opinion will not work. I still belive that the Convertible will be paid in full in 2014, but the next few months can be very volatile.

Lessons learned:

I think I made one real mistake here: When I researched utilities earlier this year, especially Energiedienst, it should have been clear that the gas cavern business will not be so good going forward as in the past. As my thesis on the IVG bond implied a stable gas cavern business, I should have reviewed the case back then.

On the other hand it is interesting to see that a very broad research focus could yield quite interesting “cross results”.

Summery:

I think there is no urgent need to sell as Convertible holder. The asset base is still high enough to support a relatively high worst case recovery for the senior unsecured creditors.

Nevertheless, one should prepare oneself for a quite bumpy rest of the year with some “Praktiker style” attempts t bail in bond holders. All in all I still expect full repayment in MArch 2014 with a high probability. However, because of the problems in the utility sector, the stabilizing effect of the cavern business has weakened significantly and the investment is riskier than before.

For the portfolio, I will hold the bonds for the time being.

DISCLAIMER: As always, DO YOUR OWN RESEARCH !!!! This is by no means an investment recommendation for anyone. Don’t trust anyone with tipps etc.

Severfield-Rowen – Follow up deeply discounted rights issue

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A few days ago, I mentioned UK based Severfield Rowen as a potential interesting “deeply discounted rights issue” special situation.

Problem is that I don’t know much about the company. So the problem is always: How do you start looking at a new company ?

That’s when I remembered a very good post of Geoff Gannnon a few days ago:

:
I recently mentioned something in an email that I’m not sure I’ve said before on this blog. I always read the newest and oldest 10-K for a company when I start analyzing it. Reading the oldest 10-K gives you perspective.

I have to confess that normally I would start with the latest report and then work my way back, but the approach of Geoff really makes a lot of intuitive sense to me. So why not try with Severfield-Rowen ?.

The oldest annual report to be found on S-R homepage is the one from 2000.

So let’s compare some key figures from 2000 against 2011:

The difference couldn’t be bigger. In 1999/2000 we have a completely unlevered company with OK margins but very nice ROE/ROCE because of a quite efficient capital/sales ratio.

The 2011 company however looks very different. Sales have doubled, but lower margins, significant goodwill and debt including a growing pension liability reduce ROE/ROCE into low single digits.

So what happened in between ? Well of course, acquisitions:

2005: Acquisition of Atlas Ward, however this looked like rather a small fish at a bargain price

But then the big bummer:

2007: Acquisition of Fisher Engineering for a whopping 90 mn GBP

Fisher Engineering seemed to have been a Northern Ireland based company at least, the seemed to have paid partly in new shares according to this article:

Severfield-Rowen has agreed to buy AML for a total consideration of approximately £90m, of which £36.6m will be satisfied by the issue of 1,750,000 new shares at approximately 2,089 pence each with the balance in cash.

The rational given now f course sounds like a big joke, but at that time Ireland was still “hot” (for another 6 months or so:

The Fisher acquisition will extend Severfield-Rowen’s leading market position in the UK and give Severfield-Rowen a stronger presence in the growing Irish steel fabrication market.

In 2010 finally, they started a JV in India, but more on that later.

SO let’s look at 2006 vs. 2007 :

We can see in 2006 a very very healthy company with lots of net cash on the balance sheet, no goodwill nothing. In 2007, profits still went up but didn’t really compensate for the increased invested capital.

Interestingly, 2008 and 2009 were quire ok, however in 2010 S-R was hit by the “Wile E. Coyote” moment:

I spare myself the details, but i think this table is quite telling:

2007 2008 2009 2010
United Kingdom 289.6 314.6 325.4 260.5
Republic of Ireland and mainland Europe 8.9 79.5 23.2 3.6
Other countries 0.9 2 0.8 2.5

The access to the “Fast growing Irish market” for which they paid 90 mn GBP in 2007 had completely “vaporized” in 2010. I have to confess that this seems to be one of the worst timed acquisitions I have seen in my life.

interestingly enough, the still carry proudly the whole acquisition goodwill on their balance sheet. I wonder how the auditors sign this on a subsidiary without sales ?

The rights issue

Propectuses for rights issues are a very good ssource of information, the one from S-r is no exception.

Especially the following paragraph makes clear, how severe the problems are:

Severfield-Rowen will be in breach of one or more covenants under the Existing Facilities on 18 March 2013, being the date of the General Meeting. A breach of any one of such covenants would be an event of default under the Existing Facilities entitling the Group’s lenders to demand immediate repayment of all outstanding amounts and cancel the facilities. As at 14 February 2013 the Group had net financial indebtedness of £44.0 million. In the event that Shareholders’ do not vote in favour of the Resolution and the Group’s lenders demanded repayment of all outstanding amounts and cancelled the Existing Facilities on 18 March 2013, the Group would have insufficient funds to repay the amounts outstanding. The Group would then immediately need to find alternative sources of funds to replace the funds that would have been made available pursuant to the Rights Issue and the Revised Facilities. The actions that the Group would then seek to take to make up the shortfall in its funding requirements (which the Directors believe would need to be pursued simultaneously and immediately), include seeking to negotiate a new facility agreement with its lenders; seeking to obtain a sufficient amount of alternative funding from other sources; seeking to dispose of some or all of its assets or businesses; and/or seeking to find a purchaser of the entire Group. The Directors are not confident that any of the above actions will be achievable. In the event that the alternative courses of action set out above fail, the Group
ultimately may have to cease trading at that time. As a result, Shareholders could lose their investment in the Company.

So it is pretty clear: A failure to get the rights issue approved will lead to a direct insolvency of the company.

Quick valuation exercise

We have seen that the business of S-R is clearly very cyclical. At the moment, the UK and S-R are clearly at a low part of the cycle. Also, years like 2006 and 2007 will not be repeated any time soon.

Over the full 1999-2012 cycle, S-R has an average net margin of 3.7%. The exactly same average is the result of the “Normal” years, taking out 2007-2009 and 2012.

So if S-R gets back to ~300 mn GBP sales, that could result in 11.1 mn GBP normalized earnings. After the capital increase,S-R will have 290 mn shares outstanding. This results ~ 3.7 cents normalized earnings per share or a “fair value per share” after the capital increase of around 37 pence.

In order to make this interesting, the price should be definitely cheaper than that, so I would only buy below 25 pence or so.

Stock price

The rights have been split of on Tue, March 19th. The stocks are trading now around 0,37 GBP

Summary:

Looking at Severfiled-Rowen in 1999 and 2011 is like looking at two different companies. Especially the misguided acquisition in 2007 lead the company in deep trouble. However, despite the very significant decrease in the share price, S-R is still not a real bargain due to the massive dilution of the rights issue.

Only if one believes in a short term recovery of the UK economy, S-R would be a “buy” right now. So for the time being “no action”.

Gerard Perrier – Follow up (Acquisition history)

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In my initial post, I was actually quite sloppy. As reader al sting pointed out in the comments, they actually made a couple of acquisitions over the last years:

– 2005: Ardatem
– 2007: Maditech (?)
– 2007: SEIREL AUTOMATISMES
– 2011: SERA

Let’s look for first at Ardatem,, the service comnpany specialised on nuclear facilities. In their 2005 annual report they mentioned the acquisition as follows:

24.- Evénements postérieurs à la clôture du bilan. Acquisition de la société Ardatem le 4 janvier 2006, par la SAS Soteb : cette société de prestations de services intervient dans le secteur du nucléaire et réalise un chiffre d’affaires de l’ordre de 5 millions d’euros pour une marge nette d’environ 4% en 2005.

So in beginning 0f 2006, when they bought it, Ardatem had sales of 5 mn EUR with a margin of 4%.

In 2007, they bought “Maditech” which complemented the Ardatem acquisition and seems to be now als part of the “Energy” segment. Maditech had sales of 3 mn EUR at the date of the acquisition.

In 2011 then for comparison, the “energy” segment had sales of 28 mn EUR and an operational result (before tax) of ~2 mn EUR. That is quite a good developement 4-6 years. So yes, G. Perrier did acquire companies, but most of the growth happened after the acquisition !

Seirel was acquired in 2007 as well, the following can be found in the 2007 report:

Le chiffre d’affaires de la SAS SEIREL AUTOMATISMES, contrôlée indirectement est de 3 887 367euros (exercice de 6 mois) contre 6 307 313 euros l’an passé (exercice de 12 mois) et le résultat de 134 426 euros contre 285 731 euros l’an passé.

In the 2011 report this looks like this:

Le chiffre d’affaires de la SAS SEIREL AUTOMATISMES, contrôlée indirectement est de 7 551 587 euros contre 6 471 226 euros et le résultat de 491 215 euros contre 229 896 euros l’an passé.

Again, within 4 years, the doubled sales and even managed to increase profit 4 times. Seirel looks like it was a “distressed buy”.

Overall, the recent acqusition startegy looks quite successful. They seem to buy opportunistic and are able to put those companies onto a growth path. This makes me worry less about their cash pile. I think having cash and then being able to move quickly can be a great advantage. Especially now that maybe more companies are struggling in France, G. Perrier could make very interesting deals.

I will use the current weakness of the stock to buy some more below 35 EUR.

Cyprus bank deposit guarantee scheme – fact checking

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Yesterday and today, the press and most of the blogs I follow are full of comments on the Cyprus Deal.

Some examples:

Pragmatic Capitalism, Naked capitalsim, self evident

The summary is clear:

“Insured” bank deposits are going to be confiscated because of the evil (Germans/IMF/ECB). This is a catastrophe because no one will believe in bank deposit insurance any more.

Fact checking:

What I find extremely interesting is the fact that no one actually bothered to really look at the so-called “bank deposit insurance” in Cyprus. The Central Bank of Cyprus has an English language description of the scheme on their homepage.

In the beginning it sounds like a “normal” deposit guarantee:

Deposit Protection Scheme (DPS) was established in September 2000, and operates since then, in accordance with Article 34 of the Banking Law of 1997 as subsequently amended, and the Establishment and Operation of the Deposit Protection Scheme Regulations of 2000 to 2009. In accordance with these Regulations, a Deposit Protection Fund has also been established which operates as a separate legal entity administered by a Management Committee.

The purpose of the DPS is to provide protection to deposits and compensate depositors in the event that a member bank is unable to repay its deposits. The DPS covers deposits denominated in all currencies.

But then this:

The maximum level of compensation, per depositor, per bank, is €100.000. This limit applies to the aggregate deposits held with a particular bank. When calculating the amount of compensation payable to a depositor, any loans or other credit facilities granted by the depositor’s bank are set-off against the deposits. Any counterclaims that the bank concerned may have against the depositor in respect of which a right of set-off exists, can also be set-off.

I have to admit that I didn’t check all European deposit guarantee schemes but setting of loans against your deposit first looks unique to me. So in practice this means if you have a 300 k mortgage from your bank and for some reason a deposit of 100k at the same bank, your guarantee is worth nothing/nada/niente/nichts.

So the proposed deal of getting a 6.75% haircut on deposits irrespective of outstanding loans will be a much better deal for many people than being the “beneficiary” of this so-called “deposit guarantee”. Maybe that is one of the reasons they did this ?

It also seems to be that the word “guarantee” means something different in Cyprus than in the rest of the (finance) world.

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