Vetropack – Business model, Peer Group

Posted on by Leave a comment

After yesterday’s starting post for Vetropack, I would like to add some additional thoughts.

Business model & possible moat:
Vetrpopack basiscally produces glass bottles for beer, juice and softdrink companies. With all those beverages, usually both, the brewing and botteling part is done locally. Beverages esp. in glass containers are ussually difficult and expensive to ship, so especially the big breweries and soft drink companies produce everything locally.

The same applies for the glass containers themnselves , which are relatively cheap but expensive and difficult to transport. So somehow similar to a cement plant, someone with a local glass bottle production has a local natural cost advantage (“moat”) to competitors from geographically remote regions. The major difference to cement plants being the lower cyclicality of the business.

Peer Companies

I found the following companies which could be considered “peers” i.e. companies manufacturing glass packaging:

Vidrala SpA (Spain, glass bottles, very similar to Vetropack)
Gerresheimer (Germany, glass and plasticv bottles, more focused on pharmaceutical containers)
Zignago Vetro SpA (Italy, glass bottles)

Based on “simple” valuation ratios, the results look interesting:

Tkr & Exch Mkt Cap P/E P/B P/S EV/EBITDA T12M Net D/E LF
             
 
VET SW 650.8 10.40 1.23 0.80 4.46 0.00
VID SM 418.1 10.49 1.84 1.08 6.33 76.20
GXI GR 913.4 17.59 1.81 0.86 6.38 69.45
ZV IM 373.6 11.03 3.51 1.41 6.40 69.86

Although the P/Es are quite similar, all the other peers carry a significant amount of debt. This results in a singificantly lower EV/EBITDA multiple for Vetropack compared to its much more highly levered peers, which interestingly all trade around 6.4x EV/EBITDA.

EV/EBITDA is often used as a “proxy” for a private company valueation (Gabelli). Under this metric, Vertropack would be significantly undervalued compared to its Peers.

For me its not clear why the most solid company of the peer group should have the lowest relative valueation, in my opnion this should actually imply a premium.

Portfolio Management
As mentioned in the first post, Vetropack has currently a weight of 2.9%. As the cash balance in the portfolio is currently at the low end of the target (10%), I will either need to decrease another position or fund the increase through a short position.

My initial idea to create a pair trade between Vetropack and Gerresheimer (short) does not work to well. Correlations between the peer companies are extremely low (Vetropack against Gerresheimer for instance 0,24 for the last 12 months).

So before increasing the Vetropack position I will have to reduce other positions first.

Vetropack (CH0006227612) – Rock Solid Swiss compounder

Posted on by 5 comments

Vetropack is one of the “Core Value” shares of my portfolio which I haven’t covered in detail yet.

Vetropack describes itself on its homepage as follows:

Vetropack is one of Europe’s leading manufacturers of packaging glass. With a rich variety of glass packaging products to offer the beverages and food industry, as well as a broad spectrum of services, Vetropack truly delivers “tailor-made glass”.

and:

This end-to-end service is the fundamental reason for Vetropack’s position as market leader in its six home markets, namely Switzerland, Austria, the Czech Republic, Slovakia, Croatia and Ukraine.

Based on “traditional” metrics, the stock looks OK but not “super cheap”:

P/B 1.25
P/E 2010 17.6
P/E 12M Trailing 10.4
P/E Graham (10 years): 13.5
EV/EBITDA 12M Trailing 5.1
Div. Yield 2%
FCF Yield (2010) 9%

No debt (95 CHF net Cash per share)
no intangibles

A quick view on historical earnings shows quite an impressive picture:

EPS BV/share FCF Share
1999 10.96 497.29 25.21
2000 36.58 510.66 92.28
2001 27.22 534.51 30.76
2002 59.78 578.15 -29.87
2003 91.03 681.03 120.04
2004 97.74 768.46 19.42
2005 119.10 909.37 85.48
2006 101.20 933.70 -22.48
2007 236.30 1,180.99 138.17
2008 182.55 1,243.69 105.58
2009 184.84 1,371.71 207.95
2010 91.24 1,283.77 155.84

We can clearly see the incredible rise in Earnings and Book value since 1999 until 2007, however in the last few years the picture has changed to a certain extent.

Looking at the Earnings developement in Swiss franks only shows part of the picture. Only 17% of Vetropacks sales are generated in Switzerland by the Swiss operations, 83% is outside Switzerland. Important: Vetropack does not export anything from Switzerland.

So if we look at peak Earnings in 2007 and compare them to the 2010 earnings, we should take into account that the 87% of Euro denominated Earnings have been reduced by a significant reduction in the value of the EUR against the CHF. Even more interesting is the effect on Free Cashflows:

FCF CHF FCF EUR FX Rate CHF/EUR
2007 138.17 83.56 1.65
2008 105.58 70.69 1.49
2009 207.95 140.16 1.48
2010 155.84 124.51 1.25
CAGR 3.2% 12.3%

Over the last 4 years, Cashflos in CHF have increased by 3%, the underlying EUR Cashflows by 12%, quite a difference. The currency movement also explains the lower book value in 2010 against 2009 despite the profit made.

So how can we value Vetropack ? If we look at the last 5 year free cashflows, we can see that the 2006 number looks quite odd, being negative. A quick glance into the 2006 annual report shows, that actually operating cashflow was strong but the company invested some extra amount in acquisitions and starting productions in contries like Slovakia.

So if we just take the average Free Cash flow of the last 4 years (which would be 150 CHF per share) and capitalise them at 10% we would end up with an intrinsic value of 1.500 or roughly 5% less than the current market price of 1.600 ChF.

Now we enter a difficult area for a contrarian investor: lower discount rates and growth.

If we just look at the following table where I simply discount the avg. Free Cash flow with various growth and discount rates (Discount rate X axis, growth : y axis)

7% 8% 9% 10%
1% 2,516.67 2,157.14 1,887.50 1,677.78
2% 3,020.00 2,516.67 2,157.14 1,887.50
3% 3,775.00 3,020.00 2,516.67 2,157.14
4% 5,033.33 3,775.00 3,020.00 2,516.67
5% 7,550.00 5,033.33 3,775.00 3,020.00

We can clearly see that for a margin of safety of 50% I would need to assume for instance a discount rate of 8% and a growth rate of 3%.

If history is any guide, Vetropack should be easily able to grow by 3%, having achieved much much mor in the past. Additionally, a 8% discount rate for a non-cyclical consumer product related company with net cash and an extreme conservative balance sheet should be reasonable.

Finally a quick check of the stock chart:

In 2008 the stock went down to almost 1.100 CHF, slightly below book value. Currentbook Value is around 1.300 CHF, so in a 2008 scenario we look at a 20% downside from here.

Summary: Vetropack is a stock with extremely strong historical growth, strong free cash flow generation and a rock solid balance sheet. Based on relatively conservative assumptions (3% growth, 8% Cost of capital), the current price would imply amargin of safety of almost 50%. If the stock should show some weekness in the next few days, I would actually be tempted to increase the allocation from the current 2.8% to 5% on acurrency hedged basis.

Magic Sixes – “New entries”

Posted on by Leave a comment
    At the moment. there are some interesting “new entries” in my Europe based “Magic Sixes” Screen.
    New entries (non financials) at which I will have a look in the next days are:

    – ESSO S.A.F (French Exxon subsidiary)
    – Stora Enso (another paper company)
    – Deutsche Lufthansa– CSP International (Italian underwear, firewall blocks website ;-))
    – Screen Service (Italian manufactorer of television broadcasting equipment)
    – Isagro SpA (Italian producer of herbicides)
    – Mondadori (Italian publisher, majority owned by Berlusconi)

    It looks like an interesting time for contrarian investors…..

    Additionally i run a “magic sixes light screen” with slightly relaxed rulse (P/b 0.7, P/E 7, Div. yield 5%)

    Some interesting companies there:

    – ICT Automatisering (Durch softwar company)
    – Huntsworth PLC (UK PR company)
    – BWG Homes (norwegian residentail house builder)

Lesenswertes – Wochenrückblick

Posted on by Leave a comment

Toller langer Artikel über die Übernahme und Pleite der LA Times durch Sam Zell (via Simoleon Sense)

Graham & Doddsville Herbstausgabe u.A.mit Marty Whitman.

Fairholme Präsentation zu Bankof America. Motto: “Ignore the crowds….”

Bronte zu Olympus, MF Global und US Kongress Insidertrading

Audio Interview mit Kyle Bass

Interview mit Gordon Chang, der den baldigen Kollaps von China prognostiziert

Hartes Jahr für Whitney Tilson

Sehr interessanter Post zum Thema Schiffebroker

AIRE KGaA – Q3 Bericht 2011

Posted on by Leave a comment

Ein kurzer Blick auf den Quartalsbericht:

Nach dem Verkauf der Bratislava Immobilie sieht die Bilanz deutlich einfacher aus:

Man hält jetzt folgende Investments:

+ Fonds 37,3 Mio
+ US Direktinvestitionen 34,6 Mio.
+ Cash 20 Mio EUR
abzgl.
-2 Mio EUR Verbindlichkeiten
= 90 Mio NAV oder 21 EUR pro Aktie (4,22 Mio Aktien)

Demgegenüber stehen Investitionsverpflichtungen von:

CUR in CUR EUR k X-Rate
AIG Europe I EUR 1,459 1,459 1
AIG US Res USD 811 601 1.35
Neptune USD 4,114 3,047 1.35
Trivest USD 3,362 2,490 1.35
Invesco Jap II JPY 570 5,429 105
Marina V USD 998 739 1.35
Invesco Jap III JPY 628 5,981 105
AIG Mex USD 6,565 4,863 1.35
Station USD 138 102 1.35
One world USD 11 8 1.35
Pleasanton USD 2,079 1,540 1.35
Millenium USD 1 1 1.35
Invesco Asia JPY 3,675 35,000 105
AIG India USD 3,314 2,455 1.35
 
Summe     63,715

Man sieht deutlich, dass dies die “Achillessehne” ist.

Im Bericht steht dazu noch, dass das Management davon ausgeht, dass nicht alle Zusagen in Anspruch genommen werden.

Was jetzt eigentlich fehlt is eine Art Cashflowplanung:

Wieviel Erlöse kommen aus den bestehenden Investments zurück und wieviel Geld muss wann noch ausgezahlt werden ?

M.E. ist die Chance, dass von den 20 Mio Cash ein größerer Teil sofort an die Aktionäre fliesst, relativ gering. Es bleibt eine “Geduldsprobe”.

UPM Kymmene part 3: Qualitative aspects, Value Trap check and conclusion

Posted on by 3 comments

So after the quick check, the Replacement Value analysis and the calculation of the EPV we have the following result:

Replacement Value ~ 14 EUR
EPV between 9.2 and 13.5 EUR depending on the assumption for future Capex.

Reader Weljo grouv however made a very good comment: The lower Capex seems to be an industry wide developement, so actually projecting the currently low capex expenditures into the future might be aggressive.

If we then just try to explain, why a conservative EPV is so much lower (maybe ~10 EUR) than the replacement value, the simple answer could be that I falsely took all the machinery at book value instead of applying a discount.

At this point in time it makes also sense to check for characteristics of a value trap. I posted already the great presentation from Jim Chanos and like to use now as a exercise.

I will start with the first mentioned characteristic:

Cyclical and/or Single Product
• Cycles sometimes become secular (Steel, Autos)
• Fad does not equal sustainable value (Coleco,Salton, Renewable Energy)
• Illegal does not equal value (Online Poker)

The first point is really the key: Will demand for paper (especially magazine paper where UPM is market leader) really recover ? Or will the Ipad take over. I am not an expert in this, but this is definitely a “red light”.

Hindsight Drives Perceived Value
• Technological obsolescence (Minicomputers,Eastman Kodak, Video Rental)
• Rapid prior growth – “Law of Large Numbers”(Telecom Build-Out)

This is also an interesting point. Although UPM is not a technology company, its major product magazine paper could be a victim of technolgy change. Let’s call this an “yellow light”.

Marquis Management and/or Famous Investor(s)
• New CEO as a savior – ignoring Buffett’s maxim(Conseco)
• The “Smart Guy Syndrome” (Take your pick!)

No problem here, “green light”.

Cheap on Management’s Metric
• EBITDA…Arrgh! (Cable TV, Blockbuster)
• Ignore restructuring charges at your own peril(Eastman Kodak)
• ‘Free’ cash flow…? (Tyco)

This could be a problem. Management stresses “free cashflow” based on current low Capex. We don’t know how sustainable that is. “yellow light”.

Accounting Issues
• Confusing disclosure (Bally Total Fitness)
• Nonsensical GAAP (Subprime lenders)
• Growth by acquisition (Tyco, Roll-ups)
• Fair value (Level 3 assets)

“Green Light” here I would say.

So all in all, that makes 2 green lights, two yellow one red.

So basically we can stop at this point. Especially based on the EPV analysis, UPM doesn’t really offer a “hard” Margin of Safety. It also shows several characteristics of potential value traps. The relativley high free cashflow could be at least partly more a liquidation than a going concern.

Despite some very positive characteristics like

– transparent use of free cash flow
– strong market position
– some upside due to consolidation (recent takeover of smaller competitor)
– vertical integration
– some “extra assets”

the risk of ending up with a value trap in a secular declining industry is not offset by the margin of safety.

As a result, I will still follow UPM and maybe look at other paper companies (SCA is maybe a better choice), but for the time being I will not buy any shares of UPM at the current price.

Portfolio transaction update – Einhell & AIRE KGaA

Posted on by Leave a comment

Einhell:

As anounced a couple of days ago, I have been reducing the Einhell position since then.

Due to the low volume of trading and my restriction not to simulate trades greater than 20% of daily volumes, I was only able to sell roughly 2/5 of the position at the VWAP of 34.03 EUR per share. Einhell is now doww to ~1% of the portfolio and will be reduced to 0% going forward.

AIRE KGaA

In parallel, as mentioned here, I continued to build up the AIRE KgAA Position into a “full” position , which means a 5% portfolio share.

Total trading volume since then (20.10.) has been 79.139 shares at a VWAP of 8.17 EUR per share. 20% of that volume results in a purchase of 15.827 shares at 8.17 EUR, increasing the weight of AIRE to 4,6% at a cost of 8,75 EUR per share.

After these transaction, the cash percentage dropped below 10% (9,9%), so going forward I will only increase the AIRE position to the extend Einhell shares can be sold at the same time.

UPM Kymmene Part 2: Earnings Power Value (EPV)

Posted on by 2 comments

After the replacement value analysis for UPM in part 1, let’s move to an EV analysis based on free cash flows:

Interestingly, UPM’s standard cashflow reporting makes life relatively easy for my free cashflow analysis.

I will start with a rather big table and then explain

Starting with the operating Cashflow as stated, one can quickly see that working capital is relatively volatile, however over 7 years the effect was more or less neutral.

Next, the capex line is really interesting (Capex ex M&A and sale of assets). We can clearly see that UPM drastically reduced capex from 2009 on. UPM’ paper mills seem to be relatively new and don’t require a lot of maintenance cost in the foreseeable future.

Also interesting is the fact that although UPM is still relatively “asset rich” and despite having invested more than 500 mn EUR into the Uruguyan pulp mill in 2008, over the last 7 years ~ 1.8 bn EUR of net assets have been sold.

So in total, UPM generated ~ 4.9 bn cash, thereof 3.1 bn free Cash flow plus 1.8 bn assset sales over the last seven years. More than half of this has been used to pay dividends and buy back stock, the rest has been used to pay down net debt.

This corresponds nicely ith the communicated goals of the company:

UPM intends to pay as an annual dividend at least one third of net cash flow from operating activities less operational capital expenditure. To promote stability in dividends, net cash flow will be calculated as an average over a three-year period.
Remaining funds are to be allocated between growth capital expenditure and debt reduction. The net cash flow from operating activities for 2010 was EUR 982 million and operational capital expenditure EUR 186 million.

So how does this translate into EPV ? Based on the 7 year average free cashflow of 0.92 EUR and a standard discount rate of 10%, this would only result in an EPV of 9,2 EUR or roughly 10% undervaluation.

Now the big question is: are those 7 years really “average” years or has something changed? In particular it is crucial to understand if capex will go up again in the future or remain at the current low level.

A quick glance into the Q3 report shows that “normal” capex has remained at a relatively low level, at a run rate of around 300 mn EUR for 2011.

If we assume this as a representative Capex going forward, UPM could deliver under a “no growth” scenario around 1 bn of operating cash minus 300 mn for Capex which would result in a recurring free cash flow of 700 mn EUR or ~ 1.35 EUR per share p.a., which would give us an EPV of around 13.5 EUR, relatively close to the Replacement Value of 14.26 EUR.

So summarizing this I would state the following:

– UPM seems to have greatly reduced Capex over the last 2 years
– if those reductions are to a large extent permanent, a “fair” EPV could be around 13.5 EUR per share (no growth), if not, the stock would be only slightly undervalued
– management clearly communicates and delivers on the use of free cash flow (very positive in my opinion)

In the upcoming final post for UPM I will focus on the qualitative aspects and the business itself

Book Review: The Match King

Posted on by 3 comments

Those who read my blog more often know that I like to read “historical” Finance books especially when there is high volitility in the markets. For me this is maybe some sort of “therapy” in order to control my “Buy and sell” finger better…..

Anyway, when I read my last historical book, the “Lords of finance”, a historical financier named Ivar Kreuger popped up a couple of times.

Coincidently, I found out there is a recent book avaliable from the author Frank Partnoy who also wrote “FIASCO”, a wall street classic.

Back to “the Match King”:

It is the story of Ivan Kreuger, a self-made Swede who made his first money in construction and then moved on and tried to monopolise the international match production in the 1920ies and early 30ies.

He soon became one of the most famous business men in the world, having shares of his companies listed on the New York stock exchange and dining with US President Hoover and other head of states. He was a master in taking advantage of the problems after WWI by offering loans to Governments in return for monopolies for match production and imports.

As some side activities, he also owned Ericsson, the Swedish telephone company as well as gold mines and other assets.

However from his early beginnings he was an absolute master in 2 disciplins: issueing complicated securities including many “derivatives” and creative accounting and transactions between his numerous official and unofficial companies.

After the big crash of 1929 he had to do more and more aggresive transactions in order to stabilize his empire before he was finally caught out and shot himself in Paris in 1932.

Besides being a really good read, the book clearly shows that nothing is really new in finance. One could even think that the CFOs of companies like Enron or several Chinese Reverse Mergers have used the “Match empire” as a case study.

The story of a brilliant guy, impressing everyone but doing one deal too many seems to be one of the constant themes of financial history. Indirectly it is also a lesson not to believe too much in Management, no matter how brilliant it seems, but stick to the hard numbers and facts (Groupon anyone ?).

I really liked the book and can recommend it to anyone who is interested in historical finance and large financial scandals.

« Older Entries Recent Entries »