Listed German utility companies – part 1: Overview and E.on (ISIN DE000ENAG999)

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In my small series about utility companies, it might make sense to start with those companies which are at least geographically in my “circle of competence”, Germany.

There are currently 8 listed companies which qualifiy one way or the other as “utilities” which are:

Ticker Name Mkt Cap EV/EBITDA T12M P/B P/E Dvd Yld
 
EOAN GR Equity E.ON SE 28,194 7.5 0.7   7.8
RWE GR Equity RWE AG 19,099 4.7 1.2 8.3 6.3
EBK GR Equity ENBW ENERGIE BADEN-WUERTTEMB 8,340 5.6 1.4 31.0 2.7
MVV1 GR Equity MVV ENERGIE AG 1,549 8.3 1.4 25.3 3.8
FHW GR Equity FERNHEIZWERK NEUKOELLN AG 72 6.8 2.1 15.6 4.5
MNV6 GR Equity MAINOVA AG 2,031 22.9 2.2 20.8 2.5
WWG GR Equity GELSENWASSER AG 1,887 17.8 2.3 19.3 3.2
LEC GR Equity LECHWERKE AG 2,198 20.0 2.7 22.6 3.2

Obviously, the large companies look the cheapest. Most of the smaller companies are in fact subsidiaries of the large players or owned by the Government such as:

– Lechwerke is owned ~90% by RWE
– Mainova is part of EON (91.3%)
– Gelsenwasser is owned by the government (92%)
– MVV is majority owned by the city of Mannheim (50.1%)
– EnbW is majority owned by the Government (85-90%)
– Fernheizwerk Neukölln is owned by Sweidish Vattenfall (80.1%)

RWE is de facto controlled by the regional government as well, only E.On to my knowledge does not have a controlling shareholder or significant Government influence.
A
s one could read in the press, the regulatory environment in Germany is supposed to be quite ugly, among others, the major issues are:

– unpredictable politics (close down of Nuclear power plants following Fukushima), the utilities are actually trying to sue the Governemnt for this
– heavily subsidized renewable energy (costs are added to the electricity bill for retail customers)
– relative low allowed yields on infrastructure which led the major players to shed electricity grids and gas pipelines
– heavy competition for instance for electricity. I just checked, where I am living (Munich), I got ~44 different offers for electricity

Going back to the “Buffet on utilities” approach, especially suing the Government (i.e. regulator) is maybe not a ver good long-term strategy if you then want to negotiate your next investment.

Another interesting aspect in my opinion is the fact, that especially the subsidiaries with purely local (regulated) focus show quite satisfying longterm ROEs.

10Y ROE 5Y ROE Debt/Equity
FERNHEIZWERK NEUKOELLN AG 18.6% 19.6% 0.0%
LECHWERKE AG 24.5% 13.9% 0.2%
GELSENWASSER AG 17.7% 12.5% 2.1%
MAINOVA AG 17.1% 9.1% 70.3%
ENBW ENERGIE BADEN-WUERTTEMB 21.0% 12.8% 94.1%
MVV ENERGIE AG 10.3% 11.3% 107.6%
       
 
RWE AG 17.4% 15.4% 122.4%
E.ON AG 10.2% 1.8% 79.2%

I find especially Lechwerke, Fernheizwerk and Gelsenwasser fascinating. Without any leverage they manage to produce solid double-digit ROE’s over long periods of time. So looking at this one might think that both, for RWE and EON, the German regulator is maybe not the real reason for their current problems.

Rather bad management and failed international expansion are the drivers between the rather bad performance in the last few years. Eon for instance lost lot of money with gas contracts outside Germany.

This is also the major issue I have with E.on. For some reason, they believe that they must grow outside Germany, just recently they swapped German Hydro plants with Austrian Verbund against a 50% stake in a Turkish utility group. Earlier in 2012 they teamed up with Brazil’s Eike Batista to invest in Brazil. Some people might like this exposure to “growth markets”, but personally I think this is a quite risky strategy.

Again, if we look at the comparable performance between E.on and its listed German subsidiary Mainova, we can see that at least this German business performs quite well and consistent despite E.on’s claims of bad German regulation:

Some additional thoughts about E.on based on the 2011 annual report:

– Nuclear is not coming back, that was more than 1 bn of EBIT which is missing going forward
– 60% of sales are actually energy trading revenues. The results of this “sector” look quite volatile
– they show huge swings in the net results of financial derivatives. In 2010 for instance, E.on showed a net gain of 2.5 bn against a 2011 loss of -1 bn .
– E.on has around 17 bn liabilities for nuclear waste etc. This liability is hard to analyse and could be grossly over-/understated. In the notes they state that the discount rate they use is 5.2%. I think this is a rather high rate. Combined with the long duration of those liabilities, there could lurk a potential multi billion hole there as well as in the 14 bn pension liabilities
– another “whopper” are the 325 bn EUR (yes that’s three hundred twenty five billion) of outstanding fossil fuel purchase commitments. Disclosure is rather limited here but I guess this is one of the big problem areas where they have locked in Russian NatGas purchases at too high rates
–

On the plus side we could add:

+ maybe earnings were understated to put pressure on regulators and trade unions
+ positive effect from future reduction in interest rates

All in all, EON in the current form looks like a big black box to me. mostly due to the large trading activities which are not transparent at all. I would be not able to value the company. I also don’t think it is particularly well-managed. As there is no dominant shareholder, the major “upside catalyst” could come from an activist investor. In contrast, I think current management will most likely waste the cash flow in stupid “growth investments”.

Another issue, and that goes for most of the German utilities is the fact, that the combination of Nuclear exit and strongly subsidised local renewal energy production might have altered the business model going forward. So betting on a “reversion to the mean” might not necessarily work here, at least not in the short run.

Last but not least, I don’t see how I could have any “edge” in valueing E.on. It is a liquid large cap stock, with plenty of analyst coverage. True, sentiment is quite bad which is maybe a chance at some point in time but as a private investor with a small portfolio, this is not the first place to look for “value”.

Yes I know, for many “value investors”, a P/B of 0.77 and dividend yield of 7.6% would already be enough and maybe yield starved investors will bid up E.On stocks for the dividend, but looking 3.5 years ahead, I don’t see a real “Margin of safety” at current prices with the current management and strategy plus taking into account the fundamental issues mentioned above.

2012 Performance review and comments

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Performance

2012 was a very good year for the blog portfolio. Overall performance 2012 including dividends and interest) was 37,4% vs 26.6 % for the Benchmark (50% Eurostoxx, 30% DAX, 20% MDAX), resulting in a relative outperformance of 10.4% for the year 2012.

Further details can be found in the following table:

Bench Portfolio Perf BM Perf. Portf. Portf-BM
2010 6,394 100      
2011 5,510 95.95 -13.8% -4.1% 9.8%
           
Jan 12 5,972 99.27 8.4% 3.5% -4.9%
Feb 12 6,275 105.90 5.1% 6.7% 1.6%
Mrz 12 6,330 107.22 0.9% 1.2% 0.4%
Apr 12 6,168 108.02 0.8% -2.6% -3.3%
Mai 12 5,750 108.90 -6.8% 0.8% 7.5%
Jun 12 5,969 110.17 3.8% 1.2% -2.6%
Jul 12 6,229 112.15 4.4% 1.8% -2.6%
Aug 12 6,428 119.48 3.2% 6.5% 3.3%
Sep 12 6,510 123.48 1.3% 3.3% 2.1%
Okt 12 6,672 125.32 2.5% 1.5% -1.0%
Nov 12 6,804 127.04 2.0% 1.4% -0.6%
Dez 12 6,973 131.81 2.5% 3.8% 1.3%
           
           
YTD 12 6,973 131.81 26.6% 37.4% 10.8%
           
Since inception 6,973 131.81 9.1% 31.8% 22.7%

The December 2012 outperformance is mainly a result of some significant year-end effects in some of the stocks like Total Produce, SIAS and Buzzi to name a few.

Also many of the stocks are rather “boring” low beta stocks. Therefore the 2012 outperformance should be viewed more as lucky timing of special situations than anything else. In a normal “bull year” like 2012 the portfolio should significantly underperform. In 2012 however, some of the special situations (esp. AIRE KgAA and Draegerwerke) catalysed unexpectedly early and let to this outperformance. From an overall strategy point of view, i would assume that my portfolio outperforms in bad years and underperforms in bull years.

To be honest, I don’t think that the current portfolio has an equal upside potential like in the beginning of last year, mostly due to the lack of really interesting special situation investments. For instance, the upside of athe Draeger Genußschein was much higher when it trades at ~2.5 times the pref shares than the current 4.5 times. On the other hand, I think the portfolio is well protected to the downside which should be the major concern of any (real) value investor.

Portfolio:

The only change in the portfolio in December was the purchase of some Sol Spa shares in the last few days, taking advantage of the significantly dropping share price.

Name Weight Perf. Incl. Div
Hornbach Baumarkt 4.5% 6.9%
AS Creation Tapeten 4.1% 22.2%
BUZZI UNICEM SPA-RSP 5.5% 16.0%
WMF VZ 3.4% 42.6%
Tonnellerie Frere Paris 4.9% 31.5%
Vetropack 4.5% -2.3%
Total Produce 6.2% 53.3%
SIAS 6.3% 52.6%
Installux 2.9% -1.6%
Poujoulat 0.9% -2.8%
Dart Group 3.8% 83.7%
Cranswick 5.0% 2.7%
April SA 3.5% 33.0%
Bouygues 3.1% 15.2%
KAS Bank NV 4.7% 9.6%
Gronlandsbanken 1.2% 19.5%
SOL Spa 1.7% -0.7%
     
Drägerwerk Genüsse D 9.2% 96.5%
IVG Wandler 4.9% 11.6%
DEPFA LT2 2015 3.0% 52.6%
HT1 Funding 4.7% 38.4%
EMAK SPA 4.4% 17.6%
Rhoen Klinikum 2.4% 2.4%
     
Short: Focus Media Group -1.0% -3.7%
Short: Prada -1.2% -17.3%
     
Short Lyxor Cac40 -1.3% -5.7%
Short Ishares FTSE MIB -2.2% -7.5%
     
Terminverkauf CHF EUR 0.2% 5.0%
     
Tagesgeldkonto 2% 10.7%  
     
     
     
Value 63.4%  
Opportunity 28.6%  
Short+ Hedges -5.5%  
Cash 10.7%  
  97.2%

The cash quota of ~10% is within my usual target range.

Outlook and comments:

If I would be in the “tactical” Asset allocation business, I would expect a rather strong start into the new year.(Edit: Is started writing this 2 days ago…) So many investors have watched the stock market from the outside and momentum looks quite strong. It looks like the fear of missing out another strong year is overcoming the fear of Euro crisis, fiscal cliff etc. or to quote Howard Marks: “when greed is stronger than fear”.

On the other hand, as a bottom up value investor one should be more cautious than ever. When greed is trumping fear, naturally for a value investor times get harder as under valuations are fewer and harder to find. The temptation rises to invest in “weak” stocks or turnarounds without much downside protection.

This goes together with the behavioural bias of “overconfidence” which usually is getting stronger after good years.

So the main focus for value investors will be to “stay the course” and not get lured into more risky and only superficially “cheap” stocks despite another period of potential underperformance against major stock indices.

The “harvest” will come when everyone is “on board” in the stock market and the next (inevitable) correction or contraction will come.

Weekly links

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Very interesting NYT article about Steve Cohen, Hedge fund mastermind

Jim Grant’s free winter issue of past articles

A new book on quantitative value investing from the guy who runs the Greenbackd Blog

Great post from the Brooklyn Investor about possible lessons from Kodak for Apple

Good analysis of Fortress Group “Wexboy style”

And, of course, Bill Ackman’s Herbalife short presentation and Kid Dynamites answer

Utility companies – The Warren Buffet perspective

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In 2012, I sold my two utility stocks EVN and Fortum because I realised that I didn’t really understand the business model. I looked a little bit more general into utilities here, but with no real results. However,at least in Europe, the utility sector looks like one of the few remaining “cheap” sector.

If you don’t know a lot about a sector but need to start somewhere,it is always a good idea to look ifWarren Buffet has something to say about it

Although mostly his well-known consumer good investments like Coca Cola and Gilette are mentioned, Buffet runs a quite sizable utility operation called MidAmerican Energy.

Starting with the Berkshire 2011 annual report, let us look how the “sage” describes the business:

We have two very large businesses, BNSF and MidAmerican Energy, that have important common characteristics distinguishing them from our many other businesses. Consequently, we assign them their own sector in this letter and also split out their combined financial statistics in our GAAP balance sheet and income statement.
A key characteristic of both companies is the huge investment they have in very long-lived, regulated assets, with these partially funded by large amounts of long-term debt that is not guaranteed by Berkshire. Our credit is not needed: Both businesses have earning power that even under terrible business conditions amply covers their interest requirements.

So let’s note here first: Buffet uses “large amounts” of debt for his utility company.

Just below we find the following statement:

At MidAmerican, meanwhile, two key factors ensure its ability to service debt under all circumstances: The stability of earnings that is inherent in our exclusively offering an essential service and a diversity of earnings streams, which shield it from the actions of any single regulatory body.

I would argue he second point is interesting: Diversification in utilities works across regulators, not necessarily geographic location.

What I found extremely interesting is that Buffet is allocating a lot of capital to the utility sector. Out of the 19 bn USD Capex in Berkies operating businesses from 2009-2011, MidAmerican Capex summed up to ~9 bn USD, so almost half of Berkies total Capex.

One can assume that Buffet is not making all share investment decisions nowadays, but I think capital allocation to operating companies will be still made by him personally.

Buffet seems also quite interested in renewable energy, as the following comment from the annual report shows:

MidAmerican will have 3,316 megawatts of wind generation in operation by the end of 2012, far more than any other regulated electric utility in the country. The total amount that we have invested or committed to wind is a staggering $6 billion. We can make this sort of investment because MidAmerican retains all of its earnings, unlike other utilities that generally pay out most of what they earn. In addition, late last year we took on two solar projects – one 100%-owned in California and the other 49%-owned in Arizona – that will cost about $3 billion to construct. Many more wind and solar projects will almost certainly follow.

Here, he also mentions that he doesn’t extract any dividends out of his utility group. He considers it a growth opportunity rather than a cash cow. I think this is also worth keeping in mind, as many investors would judge utility stocks mainly by dividend yield.

From the 2009 report we learn the following:

Our regulated electric utilities, offering monopoly service in most cases, operate in a symbiotic manner with the customers in their service areas, with those users depending on us to provide first-class service and invest for their future needs. Permitting and construction periods for generation and major transmission facilities stretch way out, so it is incumbent on us to be far-sighted. We, in turn, look to our utilities’ regulators (acting on behalf of our customers) to allow us an appropriate return on the huge amounts of capital we must deploy to meet future needs. We shouldn’t expect our regulators to live up to their end of the bargain unless we live up to ours.

This is as clear as it gets. Utilities are a “natural” monopoly. If you play by the rules (at least in the US), you are guaranteed a decent return.

In the same report Buffet once more explains why he is suddenly more interested in utilities:

In earlier days, Charlie and I shunned capital-intensive businesses such as public utilities. Indeed, the best businesses by far for owners continue to be those that have high returns on capital and that require little incremental investment to grow. We are fortunate to own a number of such businesses, and we would love to buy more. Anticipating, however, that Berkshire will generate ever-increasing amounts of cash, we are today quite
willing to enter businesses that regularly require large capital expenditures.

From the 2008 report, this sentence is reinforcing Buffets strategy:

Indeed, MidAmerican has not paid a dividend since Berkshire bought into the company in early 2000. Its earnings have instead been reinvested to develop the utility systems our customers require and deserve. In exchange, we have been allowed to earn a fair return on the huge sums we have invested. It’s a great partnership for all concerned.

On acquisition of utilities, we can also find his thoughts in that report:

In the regulated utility field there are no large family owned businesses. Here, Berkshire hopes to be the “buyer of choice” of regulators. It is they, rather than selling shareholders, who judge the fitness of purchasers when transactions are proposed.

There is no hiding your history when you stand before these regulators. They can – and do – call their counterparts in other states where you operate and ask how you have behaved in respect to all aspects of the business, including a willingness to commit adequate equity capital.

When MidAmerican proposed its purchase of PacifiCorp in 2005, regulators in the six new states we would be serving immediately checked our record in Iowa. They also carefully evaluated our financing plans and capabilities. We passed this examination, just as we expect to pass future ones.

So being nice and trustworthy to the regulator is what counts in this business.

Finally let’s look at some “hard numbers” from MidAmerican, in order to be able to compare this to other utilities. I will use the MidAmerican 2011 annual report for this.

  2011 2010 2009 2008
Total Assets   47.7 45.7 44.7 41.4
Shareholders Equity   14.1 13.2 12.6 10.2
total financial debt   17.8 18.2 19.3 18.2
Sales   11.2 11.1 11.2 12.7
EBIT   2.684 2.502 2.465 2.828
Net Income   1.331 1.238 1.157 1.85
Int. Exp   1.196 1.225 1.257 1.333
Op. CF   3.220 2.759 3.572 2.587
Capex   2.684 2.593 3.413 3.937
 
ROE   9.8% 9.6% 10.2%  
NI margin   11.9% 11.2% 10.3% 14.6%
EBIT Margin   24.0% 22.5% 22.0% 22.3%
Debt/equity   126.2% 137.9% 153.5% 178.4%
EBIT/Int exp   2.24 2.04 1.96 2.12
ROA   2.9% 2.7% 2.7%

We can clearly see that this is low ROA business. Only the significant leverage allows Buffet to have ~10% ROE on average. Additionally, he seems to provide some “contingent” capital to MidAmercian, i.e. to promise a capital contribution of 2 bn USD if required. I think this keeps down the cost of debt without explicitly guaranteeing it. MidAmerican has a credit rating of “only” A- against Berkshire’s AA+. Also one can see that he reduced leverage over the last few years since taking over MidAmerican.

Nevertheless he seems to prefer this vs. returning cash to shareholders. Interesting.

So let’s quickly summarize Warren Buffet’s perspective on utilities as far as I understood it:

– he only started to invest into utilities relatively lately because he needs something where to invest his growing cashflows from the other operations
– he prefers regulated utility business, diversified over different regulators
– he invests a lot of money into renewable energy
– he uses significant leverage to achieve 10% ROE
– he is not looking at the busienss as a cash cow but a long term growth business and therefore does not extract any dividends

My 22 investments for 2013

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Many bloggers and other market pundits are currently touting their 2013 picks.

Mcturra for instance names 5 of them, Nate at Oddball selected his 13 stocks for 2013, red has pulished 3 full portfolios for 2013 (UK portfolio, Euro portfolio, US portfolio).

So in order to contribute something here, I will show my 22 favourite investments for 2012, which by total coincidence, are similar to my blog portfolio. As an added value for the readers (and for me), I try to add 2 or 3 sentences for each investment in order to summarize the investment case.

1. Hornbach Baumarkt
Solid long-term compounder. 2012 was weaker than 2011 but Hornbach has a solid long-term strategy and is increasing market share steadily. Potential upside catalyst if main competitor Praktiker will not manage turn around.

2. AS Creation
German market leader for wallpaper. Hit by anticompetitive issues, but recovered quite nicely. Upside catalyst: Start of Russian JV in 2013. Russian JV partner has bought already 10% of AS Creation.

3. Buzzi Unichem pref
Italian based cement company, however with large international operations. Comparably low leverage, long-term strategy. Company announced a few weeks ago to squeeze out minority shareholders of German subsidiary Dyckerhoff. In my opinion a sign for increased financial flexibility and long-term thinking.

4. WMF AG pref
KKR bought majority from previous PE owner Capvis. Underlying business, esp. Coffee makers still going strong. Interesting to see if KKR will try to take WMF off the stock market or spin-off the coffee maker division. No reason to sell, downside well protected.

5. Tonnelerie Francois Freres
French “hidden champion” for oak wine barrels. Acquired major competitor Radoux in 2012, issued very good results just a few days ago. Very long term oriented company.

6. Vetropack
Swiss based producer of glass bottles, however production locally in central and eastern Europe, so no FX issues. Ultra solid company, lately no big growth because of stagnating eastern European markets. Looks like owner family will try to increase stake directly and indirectly via share repurchases. ultimately, they might want to take company private.

7. Total Produce
Ireland based fruit and produce wholesale company. Good stock price momentum at the moment. Business relatively independent from overall economy. However, a large number of smaller acquisitions in the last months, so one must scrutinze closely if this pays off.

8. SIAS Spa
Italian toll road operator. Despite overall weakness in Italy, holding up very well as tariff increases almost fully compensated traffic decreases. Has a lot of excess cash because of sale of LatAm operations. Large special dividend expected.

9. Installux SA
Unspectacular french company specialised on aluminium related products. No special story here, but ultra cheap and safe as well very profitable.

10. Poujoulat
Similar to Installux, cheap and profitable French company. 2012 might not look so good from P&L as French building activity is very low, but company invested a lot into wood pellet production. If this works out, earnings could increase significantly.

11. Dart Group
UK based operator of ground transportation and budget airline. Spectacular growth in packaged holidays. Still cheap despite share price having doubled in 2012

12. Cranswick
Very unspectacular UK based pork specialist. Very consistent, in my opinion with a certain kind of moat. Current share price does not reflect quality of business and balance sheet.

13. April SA
French based Insurance broker and specialist insurance company. Still owner managed, generates incredible high free cashflow without real capital requirements.

14. Bouygues SA
Sum-of-part undervaluation story. Bad headline news for mobile subsidiary overshadows ultra solid road and construction business. Company is very shareholder friendly for a French company.

15. KAS bank
Specialist Dutch depository bank. Currently valued at single p/E at bottom of the cycle margins. Very good mean reversion potential over 3-5 years.

16. Gronlandsbanken
Major bank in Greenland with very good margins. Will benefit greatly if any of the energy projects in Greenland will be realised. Management bought shares until recently.

17. Draegerwerk Genuesse
Special situation /capital structure arbitrage. Theoretically, the “Genuesse” should be worth 10 times the pref shares (theoretical price ~700 EUR against current price of 300 EUR). Management has already tried to buy back the Genuesse but got only back a part of them.

18. IVG convertible
Convertible bond with a 2014 put option for the bond holders. Although IVG is still struggling with some legacy real estate, very good risk/return relationship based on the short time to put exercise date.

19. Depfa LT2 bond
Special situation bond with good risk/return potential despite issuing company Having been bailed out by the Government.

20. HT1 Funding
Special situation Commerzbank deeply subordinated bond with coupon guarantee. Has profited from repeated equity raisings as more and more equity is now below the bond. At current prices stilla very solid “hold”.

21. EMAK
Italian special situation. Manufacturer of garden tools etc. Currently hit by Italian recession but with increasing international exposure. Significant reversion to mean potential.

22. Rhoen klinikum
Special situation investment, following the unsuccessful take over attempt from Fresenius. Only available “target” in the German hospital sector. I expect further take over attempts going forward. Standalone solid company, relatively low downside risks.

Weekly links

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With a little delay, some hoepfully interesting links:

MUST READ: Damodaran with a three part series on acquisitions: Acquisition accounting part I and part II and success factors for acquisitions.

Good paper about investing under uncertainty

Interesting interview with Jean-Marie Eveillard with comments about accounting across time and countries (good comments about British accounting and securities…).

Stableman with an interesting quote from Seth Klarmann about complex securities as investment opportunities

Wilbur Ross warms up to Spanish Banks…

Chovanec on the crackdown of the SEC against Chinese auditors

Viel et Cie (ISIN FR FR0000050049) – “sum-of-parts” or long/short opportunity ?

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Viel et Compagnie SAis one of the many French companies with a good Boss score. According to Bloomberg they are active in the following areas:

Viel et Compagnie is a broker of financial products for the French interbank market. The Company deals in money market instruments, and offers clients a range of derivatives.

Traditional valuation metrics look OK but not extremely exciting:

Market Cap: 194 mn EUR
P/B: 0.62
Div. Yield 6.0%
Trailing P/E 12

However looking into the companies’ annual report, one can easily see that the Bloomberg description in this case is actually not very good.

The company describes itself the following way:

VIEL & Cie comprises three core businesses in the financial sector: Compagnie Financière Tradition SA, an interdealer broker with a presence in 27 countries, Bourse Direct, a major player in the online trading sector in France, and a 40% equity accounted stake in SwissLife Banque, present in the private banking sector in France.

Now it gets interesting, Compagnie Financiere Tradition SA itself is a Swiss listed company (ISIN CH0014345117) with a market cap of currently 320 mn CHF or 267 mn EUR. Viel & Cie owns 63.54% of the company, so that should be worth 170 mn EUR.

So again, we have here a holding company, which seems to become one of my specialties…

According to the annual report (pages 85 and following), the holding company had 70 mn in cash and 25 mn liquid securities and 150 mn in debt, leaving net debt of ~65 mn EUR.

The holding company owns on top of the participations:

– 29 mn EUR “other” securities
– 89 mn receivables

If we assume a “haircut” of 50% on those assets, we are left with around 55 mn EUR “extra assets” at holding level which I would net out against the debt.

So a first sum of parts analysis would get us.

Market cap: 194 mn EUR
+ net debt 65 mn EUR
– own shares (9.4%) 20 mn EUR
= EV 239 mn EUR

Assets:

63.5% of Cie Fin. Tradition : 167 mn EUR
+ other holding assets at 50%: 55 mn EUR
= 225 mn EUR

So we have 27 mn EUR left which should cover

a) 100% in the French online broker “Bourse en ligne”
b) 40% in Swiss Life Banque Privee

According to Viel’s annual report, the online broker earned 3.5 mn EUR in 2011, so with a 10 P/E, this company would be worth 35 mn EUR

The 40% Stake in the French Swiss Life Banque Privee seems to be the result of a 2007 transaction with Swiss Life.

However, this 40% stake only generates “at Equity” profits of 2 mn EUR, even optimistically I would not attach more than 25 mn EUR valuation for this minority stake.

So bringing it together, the Sum of Parts looks as follows:

a) Cie Fin tradition 167 mn
b) holding assets 55 mn
c) Online broking 35 mn
d) 40% Banque 25 mn

Sum 282 mn EUR

Against an “EV” of 239 mn EUR, so only a slight 16% “discount”. So not really something to follow up and let’s move on with some other stock ?

Not so fast: It is quite interesting to look at the relative performance of Viel &Cie against its main participation over the past 2 years:

For some reason which I don’t understand, the two stocks completely “decoupled” in January 2011. Since then, Viel & Cie remained constant and Compagnie Financiere tradition lost ~54%. Or put it another way: In January 2011, Viel was trading at a very large discount (50% or more) to sum of parts whereas now it trades almost without any discount.

I found this very strange. Most of the value of Viel comes from its stake in the Swiss company and for some reason, Viel shareholders do not care that the major stake looses 55% ?

I don’t know if one could short Viel, but a “long CFT / short VIL” trade might be a very interesting market neutral opportunity.

Another potential idea out of this is Compagnie Financier Tradition. This could be a very interesting situation in its own.

Edit: I had originally written this post 2 weeks ago, since then Viel already lost 10% relative to Compagnie Tradition

2 years of valueandopportunity.com – Thank you very much !!!

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Exactly 2 years ago, Valuematze and I got our first post online, the German version of our investment philosophy.

Since then a lot of things happened, among others, Valuematze went “professional” after a few months. I then started to write mostly english language posts from November 2011.

So after 680 posts and 2000 comments it is a good time to have a quick look back as well as forward

Some numbers:

– 680 posts or ~ 0.8 per day
– 2000 comments
– in the first month, December 2010, the blog had 309 views in total for the month
– since then, the blog had around 260 k visits, currently around 500-800 views per day
– on a typical day, ~30-50% of the readers are still German readers, followed by US, UK, France and Switzerland

The Top 10 posts over the last 2 years are:

1. WFG Anleihen-interessant oder lieber finger weg
2. “Risk free” rates and discount rates for DCF models
3. Kurzanalyse Prokon Genußrechte
4. Exotic securities-detachable GDP linked Greek warrant – valuation-approach
5. Piquadro SpA – Competitors, market analysis and strategies
6. (Hard Core) Opportunity Investments: WestLB 2011er Genußscheine
7. Exotic securities: “Detachable GDP linked Greek warant” (ISIN GRR000000010)
8. Operating Leases – Bewertung und anstehende Änderungen (IFRS 17)
9. Praktiker Anleiheprospekt – “Poison Pill” gegen potentielle Übernehmer
10. Quick check: Vivendi SA – Seth Klarman “Cigar butt”

Interestingly, only one of my successful investment ideas (WestLB) made it into the top 10. People seem to be more interested in popular “grey market” investments (WGF, Prokon), high profile cases (Praktiker, Greek GDPs, Vivendi/Klarman) and general issues (risk free rates, leasing).

As I am not a financial journalist, I will still focus on (long) investment ideas. Looking at bad investments (and frauds) is also some kind of hobby of mine, but usually one gets a lot of negative comments and from time to time even “not so nice” emails from lawyers. Nevertheless, I think this is some kind of “community service” to the investment community I will try to provide in the future.

Why I blog

For me, the main purpose of this blog is to have a kind of journal which helps structuring my thinking and provide some immediate feedback.

It is a very different thing to just have a half baked idea and trade compared to writing it down, publishing it and defending it against critical comments. Also with books for instance, I found it extremely helpful after reading them, to summarize the content in a “book review” post.

So one of the big benefits of writing this blog is that I approach my investments much more structured way than I did before and trade less than ever. On the other hand, the blog motivates me to continuously search for new ideas.

The icing on the cake however are the many valuable comments I got from the readers.This kind of immediate feedback is really really helpful and very motivating.

Portfolio performance

I personally see the portfolio performance more like a side-effect, especially over such a relatively short time period like 2 years. Since running th blog, I was very very lucky. Basically almost every “opportunity” idea really had a catalyst event, most notably Draegerwerke and AIRe. Also, the “window of opportunity” of interesting situations with good risk/return relationships which opened up following the financial crisis is closing pretty quickly.

Of course, a good performance also motivates me to write in the blog, but I am pretty sure that I would still enjoy blogging with a benchmark (or worse) performance.

Portfolio composition /turnover

As most of you have already found out, this blog is not about market timing or quick trading tips. After 2 years, ~50% of the portfolio are still the original constituents.

Two of the original constituents (AIRE and Depfa) were taken over or matured. So Portfolio turnover was something like 20-30% p.a. which corresponds nicely with my target investment horizon of around 3-5 years.

Targets for the future

For the next year, I have set myself the target to review hopefully 1 new stock/bond per week. I know that’s quite ambitious but on the other hand, looking at companies for me is the most effective way of improving my investment skills. Reading books etc. is nice, but nothing beats the experience of researching a stock and make an investment decision.

Further, I try to further develop my Boss Score database. I am currently at ~2500 stocks covered and I have some ideas to improve the model. So far Ia m extremely happy how it works.

I will also try to interact more with other financial bloggers. I think this one of the great aspects of blogging against just scribbling down one’s notes on a piece of paper. The exchange about HoldCos with Geoff Gannon for instance was quite funny and yielded some interesting thoughts on this topic.

So finally, many thanks again to all readers and especially to those who have commented and/or sent me Emails or even contributed write ups for the blog. Blogging is much more fun with feedback and I think I have learned quite a lot of things over the last 2 years.

By the way, I am always open for contributions to the blog. Let me know if you have something that I should put on the log.

Holding companies – Solvac SA (ISIN BE0003545531)

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This is a quick follow-up on the Porsche SE post and the Holding company post.

Solvac SA (Had tip to reader G.) is the Belgian Holding company for 30% of the shares of Solvay SA, the Belgium based Chemical company. Majority shareholders of Solvac are the heirs of the founding Solvay family.

The holding company shares some interesting similarities with Porsche, for instance they hold also a 30% stake and account for the stake at equity.
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