Search Results for: italian job

Quick updates: Installux, EMAK, SIAS & ATSM

As I am not doing this fulltime, I sometimes miss if companies publish their results. In principle, for my “Value companies” I don’t think that one time period makes a big change in the overall investment case. However it definitely makes sense to look at existing companies at least once a year.


As reader Caque commented, Installux reported prelimary earnings a few days ago.

With 6.67 mn EUR or around 22 EUR per share, earnings were surprisingly good. Net cash is now at 18.8 mn EUR or 62 EUR per share. So trailing EPS ex cash is around (100/22) ~4.9 times, quite low for a company which earns around 15-20% ROCE.

2013 will clearly be a challenge for them, according to the last sentence of the statement:

L’environnement général incite Installux à la prudence quant à ses perspectives 2013. Le groupe anticipe un repli d’environ -8%. “Cette tendance se confirme malheureusement en terme de volume d’activité sur le 1er trimestre (-13%),

-13% in sales in the 1 quarter is quite substantial. On the other side, this might open up some interesting entry points during the year. Nevertheless it should be clear that France in general is going through a quite difficult year. As ussual, the stock price doesn’t do much and volume remains low:

One remark from my side: France and the Netherlands are Germany’s major trading partners. I cannot understand how people can be so positive about German companies and negative about Netherlands and France in particular.


EMAK came out with a investor relation presentation including preliminary annual figures already a few weeks ago.

Interestingly, the “old” EMAK business is doing quite poorly, profit is down 50% or so. The “new” businesses acquired from the main shareholder were holding up much better. So looking back, the dilution is not that big.

EPS was ~5 cent per share so we have a trailing P/E of around 10. If they really make good on their ambition level (38-40 mn EBITDA), the stock would be quite cheap. Let’s wait and see, no need to do something at the moment. This has 2-3 years more to play out.

The stock price at the moment seems to “lazily” trail the FTSE MIB to a certain extent:


SIAS came out with preliminary 2012 numbers already 4 weeks ago.

What was clearly an issue is the fact, that traffic declined significantly in 2012, much more than expected. So despite a overall tariff increase, revenues stayed flat.

The good news: On April 15th, they are expected to pay the special dividend of 90 cent per share , distributing what is left from the sale of the Chilean asset sale and the purchase of the concession.

Operationally, there seems to be additional preassure from the regulatory side, as agreed tarrif increases have been suspended by the regulator.

After the special dividend, a large part of the “special situation” aspect (extra asset) has now played out. Howver, the fundamental part looks not as good as I have though initially. I will need to decide if I hold on to SIAS as a “Normal” value investmetn or sell it at some point in the near future. Fundamentally, the company does a lot worse than I had exepected. Thankfully, the entry price was low enough and investors seem to liek special dividends.

The stock price has outperformed the FTSE MIB in the last 12 month by a margin of more than 30%. Quite significant for a purely domestic business:

Even more interesting:

Autostrada (“ATSM”) now caught up with SIAS ver 2 years as it turned out that the “Italian Job”, the Purchase of Impregilo,turned out to be a great special situation investment, netting Autostrada a nice profit.

Maybe time to switch back into the “Cheapie” ? Let’s wait and see. Definitely worth to check the Autostrada annual report this year.

Panic journal (2) – Fear & Bullet proof your portfolio

Upfront remark:
Although this blog is mostly about investing, I hope that none of my readers will lose any dear ones because of Covid19. Stay safe, stay at home as much as possible and don’t take any unnecessary real world risks especially if you belong to or have regular contact to people who are most vulnerable.

Panic turns into fear
At the time of writing, Spain and France have gone into lock down after Italy last week and the US has implemented a National Emergency and Austria even tries to ban meetings of more than 5 persons. In Germany, Schools and Kindergartens are closed and the coming week will bring more lock downs as well.  So it is pretty useless trying to predict what will happen with the economy in the coming weeks/month. It is pretty clear that there will be a recession, but it is close to impossible to figure out how deep and how long this will go.

Read more

Some links

The UK stock market seems to be fairly valued at the moment

Good story on how fights back against AirBnB

The similarities between Intel’s fail at mobile and ICOs

The incredibly shrinking balance sheet of Steinhoff

29 life changing lessons thar one of my favorite authors (Ryan Holiday) learned from another (Tyler Cowen)

A great and comprehensive overview how things are currently in Italy

The Andreessen Horowitz summer nook reading list


10 wildly Optimistic Predictions for 2017 (and beyond)

These days, negative news is everywhere. Brexit, Trump, Syria, Terrorist attacks, Monte Di Pasci etc. It is not that hard to feel depressed about the world and the future. As I mentioned earlier on the blog, sometimes it makes sense to follow Charlie Munger’s advice and “invert, always invert”. Therefore I tried to come up with some potential positive and surprising news of how the world could get better in 2017. Some of them are pure fantasy, some might actually happen, who knows ? In any case it was fun to come up with those ideas. “think positive” is clearly not a solution for every problem of the world but sometimes it just helps to change the perspective in order not to fall into the “everything is doomed” trap.

1. Italy has actually turned the corner. NPLs, which have been decreasing since Mid 2106 drop dramatically and are snapped up from investors. BMPS will be nationalized, the rest of the Italian banks privately recapitalized. Building activity soars in Italy but also in Portugal and Spain.

2. Battery technology & Electric Vehicles will make a break through, accelerated growth because of jump in new car sales and build up of infrastructure. Growth easily outpaces decline in traditional cars.

3. Break through for healthy organic food which enables many people to start farming and really make a living out of it. Rural areas get a real boost as people want to move back to the country. People eat  more healthy food which lowers the cost for health care.

4. “Robots” will free up capacity from low value creation assembly line jobs to do really meaningful jobs (customer service, integrating refugees, caring for old and sick people, educating children).

5. Refugees create a large number of super innovative startups that contribute meaningful to GDP based on their experience from their home country (do more with less or nothing)

6. The Euro Zone and UK reach an agreement for the Brexit. As a result, UK will keep access to the common market but will pay for the recapitalization of the Greek Banking system. The EU will enlarge the franchise, grant access to the market against cash and will also recapitalize Portugal and Spain.

7. Donald Trump finds out that renewable energy is even better for energy independence (and jobs) than shale oil and gas. He will turbo charge the growth in the sector and will be known as the “Greenest President” in the history of the US. His Children accidentally had bought the majority of Tesla/Solar City just before his announcement. Musk makes so much money from Tesla which he puts into SpaceX and he will start his Mars mission already in early 2018.

8. A powerful and charismatic “Mahdi” appears and declares that peace is the ulitmate goal of Isalm. Terrorist attacks stop, the Middle East stops fighting and an “all around” peace treaty gets signed. Ultra orthodox muslims and Kurds get their own countries. Immediate rebuild of destroyed cities starts, driving growth for a decade.

9. Kim Jong-un in North Korea decides that he prefers a life as team manager of a US NBA team together with Denis Rodman as coach. North and South Korea are peacefully reunited. United Korea will grow by 10% plus for the next 10 years.

10. Donald Trump decides after 10 months that being President is boring and also bad for his Golf handicap. Vice President takes over.

Deeply discounted rights issues – Serco Plc (ISIN GB0007973794)

Serco Plc, the British outsourcing company, used ro be a stock market favourite for a long time. Especially in the 2000s, Serco was able to increase its profit ~10 fold from 0,04 pence per share in 1999 to around 40 pence in 2012.

Then however, a little bit similar to Royal Imtech, problems and some scandals piled up and culminated in an accounting bloodbath for 2014. Serco showed a total loss of 2,09 pounds (!!) per share, eliminating pretty much all profits made from 1999.

After raising a smaller amount of capital last year, Serco announced a large 1:1 capital increase at a sharp discount in early March, the rights have been split of on March 31st. Serco wants to raise some 500 mn GBP with the majority being used to lower the outstanding debt (currently around 600-700 mn).

Looking at the stock chart, Serco shareholders have suffered a big loss, especially compared to competitor G4S which, despite relatively similar problems, has recovered well:

Normally, I would not look at a “turn around” case like Serco at all, but in this case it might be different. The difference is the new CEO, Ex Aggreko CEO Rupert Soames:

Soames surprised everyone in early 2014 when he left Aggreko after leading the company for 11 years and with great success. For anyone who has read an Aggreko annual report, one knows that Soames was not only a succesful CEO but also a very good communicator. I can highly recommend to read those reports as they are very interesting.

Before asking for shareholder money, he actually said that he will not take his guaranteed bonus for 2014 which I found was a very good gesture.

After enjoying the Aggreko reports I decided to look into the 2014 annual report and especially the “CEO Letter” from Soames to see what he has to say.

I was positively surprised by the openness how Serco’s problems were adressed, both from the Chairman and Soames himself. It is the classic tale of too much growth through acquisitions combined with a lack of integration and bad execution. Other than at Royal Imtech, it doesn’t involve outright accounting fraud.

One rarely gets to read such a good description of the problems of a company and the historic context (page 9 of a turnaround case. This is then followed by a clear change in strategy, namely to focus on Government services and get out of “private” contracts altogether. Overall the strategy section looked very well thought out and not unrealistic to me.

Further in the report, I found this interesting statement:

Historically, the key metrics used in forecasts were non-GAAP measures of Adjusted Revenue (adjusted to include Serco’s share of joint venture revenue) and Adjusted Operating Profit (adjusted to exclude Serco’s share of joint venture interest and tax as well as removing transaction-related costs and other material costs estimated by management that were considered to have been impacted by the UK Government reviews that followed the issues on the EM and PECS contracts). We believe that in the future the Group should report its results (and provide its future guidance) on metrics that are more closely aligned to statutory measures. Accordingly, our outlook for 2015 is now expressed in terms of Revenue and Trading Profit. The revenue measure is consistent with the IFRS definition, and therefore excludes Serco’s share of joint venture revenue. Trading Profit, which is otherwise consistent with the IFRS definition of operating profit,adjusts only to exclude amortisation and impairment of intangibles arising on acquisition, as well as exceptional items. Trading Profit is therefore lower han the previously defined Adjusted Operating Profit measure due to the inclusion of Serco’s share of joint venture interest and tax charges. We believe that reporting and forecasting using metrics that are consistent with IFRS will be simpler and more transparent, and therefore more helpful to investors.

This is something whcih I haven’t seen before that actually a company is going back from “adjusted” reporting to statutory which I find is very positive.

Another good part can be found later in the statement from the CFO (by the way another Aggreko veteran) regarding the implementation of ROIC:

A new measure of pre-tax return on invested capital (ROIC) has been introduced in 2014 to measure how efficiently the Group uses its capital in terms of the return it generates from its assets. Pre-tax ROIC is calculated as Trading Profit divided by the Invested Capital balance. Invested Capital represents the assets and liabilities considered to be deployed in delivering the trading performance of the business.

I always like to see return on capital as an important measurement for businesses and implementing this is clearly a great step forward.

Another interesting fact from the Renumeration report: Both new board members have significantly lower salaries than the old, outgoing board members. Soames has a 800 k base salary, Cockburn 500 k. both pretty reasonable numbers.

However the big problem for me is that I know next to nothing about the business of Government outsourcing. So for me it is at this time very difficult to assess how attractive the stock is and how long it will take to recover.

The current management is clearly a good one but I am not sure if the underlying business is a good one as well. Especially those long-term contracts do seem to contain significant risks. Page 50 and following pages in the report provides  a very good view in great on what can go wrong with long dated contracts. In many cases, Serco was locked into fix price contracts and costs went against them without having a chance to do anything about it.

On the other hand, the 1,5 bn write-off for sure is conservative and one could/should expect that it contains some “reserves” which might be released in coming years.

Deeply discounted rights issues in general

Another word of caution here: A couple of discounted rights issues I looked at in the past were actually not very good investments.

Severfield was a good one with around +50% outperformance against the Footsie since the rights issue in March 2013. KPN even outperformed the Dutch Index by ~+62% in the two years and Unicredit even more than 70%.

On the other hand, Monte di Pasci underperformed by -70% against the index since their rights issue  and Royal Imtech by -45%. EMAK finally performed more or less in line with the index over time after the capital increase.

So overall, the score of outperformers to underperformers would be 3,5:2,5. With Royal Imtech it was pretty easy to see that it would be difficult, as there was a significant accounting fraud involved. BMPS also looked like a big problem as the rights issue was to small and another one is in the making.

So the question is clearly: Is Serco more like Severfield/KPN or Royal Imtech ? For the time being I would rather look at Serco more positively, mostly due to management.

Not surprisingly, analysts hate Serco. the company has one of the lowest consensus ratings within the Stoxx 600. This alone is not a reason to buy, but at least might explain a potential under valuation. A final note: Soames might not be a bad choice for running a Government outsourcing company. His ancestry should ensure some viable contacts at government level:

Rupert Soames can just remember his grandfather, Sir Winston Churchill. His earliest memories are of playing cowboys and Indians with Britain’s wartime prime minister – and of not being allowed to attend his state funeral. He was six at the time and furious: “Watching it on TV was a very poor substitute,” he once said.

His family has long been part of the political establishment: his father Christopher was the last governor of southern Rhodesia, now Zimbabwe, who served in Margaret Thatcher’s cabinet and was also a European commissioner, while his brother Nicholas is a current Tory MP.


Overall, the Serco case does look interesting. A brilliant management team is trying to turn around a troubled Government contractor with a transparent and plausible strategy. On the other hand, the business is a difficult one or at least I do not have a lot of knowledge about this sector so I need to digg more into it.

So for the time being, I will watch this from the sidelines and maybe try to learn more about this sector in general.

Update: Portugal Telecom & Oi Merger & Oi capital increase

DISCLAIMER: The stock discussed is again very risky and not a typical “value stock”. Please do your own homework and never commit large amounts of your capital to such investments. The author might buy or sell the shares without giving advance notice. Do your wn homework !!

Last year I had a mini series (part 1, part 2, part 3) about the merger between Portugal Telecom and the Brazilian Oi. My initial idea was a long PTC / short OI deal as the mechanics of the merger seemed to imply a signifcant dilution for OI shareholders.

Interestingly, since I wrote the first post in October 2013, both shares lost siginficantly, however Oi with around -37% more than double than PTC with -15%.

Oi is now in the process of preparing the planned capital increase and it looks that they did push through the share offering though there have been some hickups along the way.

Just as a quick reminder:

Oi was supposed to do a big capital increase first before then the company gets merged with PTC.

Oi seems to have priced the new shares aggresively at the bottom of the expected range:

Grupo Oi SA, Brazil’s largest fixed-line telephone carrier, priced an offering of preferred shares at 2 reais each, at the bottom of the indicative range set by bankers, sources said on Monday.

So at current prices with PTC at ~3 EUR and OI common shares at 2,50 Reais (or ~0,81 EUR) PTC sharesholders will receive “new shares” of OI at the value of 2,2911 Euros plus 0,6330 “CorpCo” shares which should equal common shares. So at 3 EUR there seems to be a small discount but I think this is hardly exploitable as an arbitrage situation.

For me, the current situation is an interesting combination of a special situation (capital increase regardless of price) and Emerging Markets exposure.

However, much more interesting for me is that aspect:

It is pretty clear that Oi wanted to raise a defined amount without really caring about the share price. This looks similar to EMAK and Unicredit in Italy 2 years ago. This is one of the rare cases where we clearly have a seller who does not care about the price but just wants to raise a fixed amount of money.

The “special-special” aspect of this one are the following feature:

1. We do not have subscription rights despite the massive amount of new shares
2. We have the additional complexity of the subsequent PTC merger

In such a situation, it is extremely hard to come up with a solid valuation of the business. Both, OI and PTC look very cheap on a trailing EV/EBITDA basis but honestly, i did not try to figure out how the combined entity will look like. Oi minorities clealry got screwed by this transaction whereas PTC shareholders had been protected to a certain extent.

The good part of the this capital raising is that the entity will have some fresh cash which will allow them to operate for some time. Although there is clearly the risk of further dilutions if they want to bid for instance for additional businesses in Brazil.


For me, the Oi capital increase looks very similar to situations like EMAK and Unicredit, where the companies issued new shares regardless of price. This increases the possibility that the price has been pushed significantly below fair value. Buying PTC now looks like an interesting way to get exposure to the merged entity at a depressed price. I will therefore invest a 1% position into PTC at current prices (3 EUR) for my “special situation” bucket.


So this is part 2 of the post about Sistema, the Russian conglomerate, part 1 can be found here…

Sistema offers quite a lot of material for investors on their website, including some nice investor presentations, including a relatively recent one from November 2013. As with Koc Holdings, I found the material surprisingly good for a Russian conglomerate.

Some positive aspects (compared to other Russian companies):

+ clear financial targets in place (Cash flow to HoldCo, ROI above CoC)
+ focus on cash generation and shareholder return
+ compensation of management linked to share price development
+ clear split of corporate center financials esp. debt. Again, this is more transparent than for instance with the Belgian HoldCos I have been looking at

Interestingly they seem to follow a little bit the “Koc playbook” by teaming up with foreign companies and listing their subsidiaries. They do claim that the Sistema Holding company acts as a “private equity” investor, although some of their “Monetization strategies” (dividends) are not really private equity style. Also they can show some significant disposals, such as the Power Generation business last year or their insurance company in 2007, so “empire building” is clearly not their highest priority.

Major businesses:

Sistema has two major businesses which are both listed:

Bashneft, one of the larger Russian oil explorers and refiners active in Bashkortostan (west of the Ural, European part of Russia) & & the Arctic region.

MTS is a large Russian mobile phone company with more than 100 mn clients in Russia and neighbouring countries.

Bashneft is owned 75% by Sistema, MTS 53,4%. Now comes the interesting part: The value of the two stakes (MTS 5,5 bn EUR, Bashneft 5,4 bn EUR) is already significantly higher than Sistemas Market cap plus holding debt. With Holding debt of around 0.6 bn EUR, total Holding EV is 7,7 bn EUR vs 10,9 bn EUR market cap of those two holdings.

Their other participations include Rail cars, a toy retailer, a local power grid, a hospital chain, a retail bank, farmland,and finally a struggling Indian mobile operator. Most of the other stuff made losses at least in the first 6 months in 2013, but even if we attach zero value on that, Sistema trades at a significant discount to its sum of parts.

Most of the other businesses are relatively new, for instance the Rail car business has just been bought and combined in 2013. A very interesting subsidiary is the toy retailer Detsky Mir which seemed to have just more than doubled profits from 14,7 mn USD to 36 mn USD. This proves to a certain extent that they are able to grwo new bussinesses and create value. Assuming a 10X P/E multiple for a fast growing retailer, this would add another 250 mn EUR or so to the valuation. They initially planned to IPO Detsky Mir in March 2014, but I am not sure if they might postpone it for the time being.

The Bashneft acquisition in 2009

The EPS development of Sistema clearly correlates to a large extent with Bashneft and MTS plus any realized gains from disposals. If we look a the last couple of years, we can see that the overall increase in Sistema’s earnings per share correlates mostly with the significant increase in earnings at Bashneft. Bashneft has grown very quickly over the last years with a significant increase in output.

Much more interesting is the timing and the price paid. Sistema acquired the majority in Bashneft in March 2009 for 2,5 bn USD. Remember, this was the time when the Russian Index had lost 2/3 of his value within 15 months or so. In their 2009 annual report, one can clearly see that the transaction was a “bargain” purchase at around 50% of “tangible” book. If we look at Bashnefts financials, we can see that the timing was really good. According to the 2010 Bashneft presentation, Bashneft made around 420 mn USD profit in 2009, so Sistema was buying it around 6x P/E. Already a year later net income was around 1.4 bn, a nice 240% increase, and despite the rouble losses, Bashneft will again earn more than 1 bn USD in 2013. So clearly, this 2.5 bn USD investment has more than paid off for Sistema so far.

One interesting aspect about Bashneft: The reserve replacement ratio, which shows if an oil company is discovering more new oil than it takes out of the ground, is around 800-900% for Bashneft. To put this in perspective: Most major Oil companies have ratios slightly above 100%, BP’s for instance went down to 77% two years ago. So overall, Bashneft seems to be a pretty attractive asset for Sistema. Even Lukoil for instance, another big & cheap Russian oil company has a replacement ratio of only slightly above 100%.

Bashneft got the rights to 2 very promising oil fields in the region in 2010. According to this article, this might be part of a strategy not to allowing any Russian oil company becoming too big.

Although there are clearly risks as well. There seemed to be a rumour, that state controlled Rosneft was “interested” in Bashneft but this was denied by Sistema.

Bashneft itself last year paid significant divdends. The 220 rubles per share would be a dividend yield of more than 12% at current prices. This seems to be a confirmation of Sistema’s strategy to upstream cash into the holding. Unfortunately, Bashneft is only traded very illiquid outside Russia on the German stock exchange, with bid/ask spreads of around 10%. Otherwise, Bashneft would be a very interesting additional investment as well.

Rusneft transaction

Another example for a succesful “private Equity” style transaction ist a smaller Russian oil company, Rusneft. In 2010, Sistema bought 49% of the highly indebted company for 100 mn USD. 3 Years later in June 2013, Sistema sold the very same stake for 1,1 bn USD. An 11-bagger in three years, not that bad. One could consider this as a “proof of concept” regarding their private equity business model.

Comparison Sistema with Koc:

After investing in Koc Holding from Turkey, I think it makes sense to make a quick comparison:

– Sistema doesn’t have the same long-term track record as Koc (20 years against 3 generations)
– the Russian market is clearly even “more dangerous”
– Sistema is less diversified than Koc, mostly Oil and Telco
– until now no proof that they are a “value adding” HoldCo

+ they do not have a political problem with the current local leadership
+ no fx issues (oil revenues are in USD anyway), only small exposure to financials
+ Sistema is much much cheaper, both compared to sum of parts and P/E etc.
+ from a true contrarian perspective, Russia is even more interesting than Turkey
+ they seem to be able to pull off really lucrative deals like Rusneft and Bashneft with “eye watering” ROIs

Is a Russian stock really “investible”

This is a big question for me. A couple of months ago, I wrote a post why I would not invest in Greek stocks (mistake !) or German-Chinese companies (score).

Honestly, a Russian stock is clearly in general much more a “speculation” than a German or French one. Compared to Italian stocks however, I am not so sure anymore, as the EMAK and ASTM example clearly showed that Corporate Governance for instance in Italy is not that much developed.

The two most relevant questions in my opinion are:

a) Are the managers fraudsters or thieves ?
b) Can someone else easily interfere and take away assets etc. ?

In the case of Sistema, I do not have the impression that management are explicit fraudsters or thieves. I have certainly no prove for that, but the effort they make with con-calls etc. indicates a certain interest in shareholders and a higher share price. Ron Sommer, the former CEO of Deutsche Telekom is actually the boss of the supervisory board of MTS. They never sold any new shares to the market since the IPO, so the motivation behind the German-Chinese frauds seems not to be relevant here.

The majority owner Vladimir Yevtushenkov is clearly a typical “Russian Oligarch” (but he looks like Bill Gates 😉

However, he seems to be among the more “moderate” Oligarchs, as for instance this NYT article describes.

Another factor “pro” Sisteam is the fact, that both major subsidiaries are listed as well with separate, audited statements which increases transparency a lot and makes it easier to validate the “sum of parts” valuation. On the other hand one could argue: Why don’t they pay higher dividends ? They do have a dividend policy, however they promise to pay out only a minimum of 10% of what they can stream up to the HoldCo. According to this research from Gazprombank, rising dividends can be expected, but still we are talking only about 4-5% if this turns out to be correct. Not much for a company in a country with interest rates above 10%. On the other hand, if they are able to to investments like Bashneft and Rosneft, it doesn’t make a lot of sense to pay out huge dividends but rather to reinvest the money in such “multi baggers”.

The second point is harder to answer. It looks like that Sistema is at least on neutral to good terms with Putin. In the case of the Indian Mobile subsidiary for instance, Putin put the problems of Sistema on the table when he visited India in 2012. From the NYT article linked above, I think this quote from Sistema’s owner is revealing:

And business can only prosper, he added, if the size of business is commensurate with the owner’s political influence. “We didn’t understand it” at first, he said. “Many businessmen grew their portfolios very fast but didn’t understand that one must invest time in connections, human relations, invest in human capital.”

Mr. Evtushenkov is not alone in operating along Western lines. One Russian billionaire who also did was Mikhail Khodorkovsky, the oil tycoon arrested in 2003 who has been in jail ever since.

As Mr. Evtushenkov told the Russian Web television station Dozhd recently, he knew Mr. Khodorkovsky when the latter was a young man and worked for him at a Moscow plastics factory. “He was terribly hyper, ambitious,” Mr. Evtushenkov said — and thus, he implied, forgot the rule about operating commensurate with political influence.

This sounds like a guy who knows how to maneuver (so far) within the harsh Russian political and business climate. So the risk should be a lot lower than for instance for Pharmstandard, but clearly, a dispute with government (see Rosneft/Bashneft) or a more powerful oligarch could change this real quickly.

Does Value Investing and investing in countries like Russia contradict each other ?

I want to make one thing clear here: This is no Warren BuffetT “great investment”. It is maybe an “above average” or even “quality” company in a really tough country.

On a pure stand-alone basis, there is clearly no Margin of Safety. As discussed above, certain things outside the perimeter of the company could happen which could impair the value of the stock severely. On the other hand, Value Investing is not only about Warren BuffetT style concentrated portfolio of great companies. There is another style with a more diversified “deep value” approach. I think Sistema clearly fits the “Deep Value” bucket. With this approach however it would be stupid to invest a large portion of the portfolio into a single company. The “Margin of Safety” in those cases comes from investing in a “Bucket” of extremely cheap companies where you can afford that 20-30% will actually turn out worthless, 50-60% are doing Ok and the remaining 10-30% will turn out spectacular.

Sistema in my opinion is a potential stock with a low weight for such a contrarian Emerging Market “bucket”. Yes, a lot of things can happen, but the stock is so cheap that if things turn out positive, the stock could easily tripple or quadruple.

I do have sometimes the impression that especially in the last few years the “BuffetT & Munger” approach is hailed as the ONLY way of value investing. But there are a lot of other succesful investors you had very similar track records with radically different approaches. Among them for instance were John Templeton and Mark Moebius. This ise an excerpt of the 16 investing rules from Sir John Templeton:

3. Remain flexible and open-minded about types of investment.
4. Buy low.
5. When buying stocks, search for bargains among quality stocks.
6. Buy value, not market trends or the economic outlook.
7. Diversify. In stocks and bonds, as in much else, there is safety in numbers.

This is quite different to “buy concentrated and only what you know best”. Just out of interest I have looked into the Templeton Emerging Markets funds. Mark Moebius only owns two Russian stock, Sberbank with a weight of around 3% (7th largest position) and Lukoil (2,7%). Interestingly, Mark Moebius even seems to have a blog with a recent comment to Ukraine. Personally, I would not invest in Sberbank as this could be one of the easier targets for sanctions.

Timing and other considerations

Looking at the 5 year chart one could think that Sistema would have a lot of space to fall further:

But one should not forget that from 2009 to current, Sistema turned a 2.5 bn USD investment in Bashneft into a stake currently worth 7,5 bn USD….Clearly the risk is real that I am much too early.

To give an example: In February 2010 I wrote in my home forum that Public Power Co., the Greek utility looked like a good risk/return situation at around 12 EUR per share (and a P/E of <5). I even said that it looks like that the stock is bottoming out. This is the stock chart:

Although the stock is now back at that level, the stock bottomed out -90% lower at around 1 EUR per share. Luckily I got out pretty soon before disaster struck, but this should be clearly reminder that it can always get worse.

Where is my “edge” ?

Cleary, I do not have any direct “edge” with regard to Russian stocks. I do not speak Russian, I have never been there and I have only access to published reports and research. I am as far from being an insider as one can possibly be. On the other hand, I do have one valuable advantage (as any private invetsor): I do not need to explain this to clients or bosses. I do not have to fear to loose my bonus or even my job if anything goes wrong. Ok, the readers of my blog might think of me as a gambler and my portfolio will suffer but that’s about it.

The biggest risk

A final remark on risk. I have gone through many of the risks related to a Russian stock and I am sure I obly scratched the surface. Nevertheless, I think the biggest risk is not an escalation in the Ukraine. This would be rather a buying opportunity. The biggest risk in my opinion is a hard landing in China. Russia is completely dependent on their natural resources exports. Lower prices for Oil, natural gas etc. will kill the investment case for Sistema. So this is to watch out for.

Summary and what to do

The main attraction of Sistema is clearly the valuation, comparably transparent reporting, professional management and (for a Russian company) shareholder oriented approach. The downside is, on the other hand, that Russia is dangerous for investors which explains the low valuations along the curent political turmoil.

Koc from Turkey is clearly the better company, but Sistema is only half as expensive. In building up my “basket”, I think Sistema has a place, although with a relatively small weight.

Additonally and most important to me, Sistema has shown in the past that they are able to pull of ridicoulusly succesfull deals in tough times as Bashneft and esp. Russneft have shown. So the possibility is high that Sistema again might be actually a winner from the current Russian crisis if they are able to close some more deals at “rock bottom” valuation levels.

The only thing which is really annoying to me is the fact that the spread between the GDRs and the Russian shares has now reached ~13%, a lot higher than a few weeks ago. Still, I am prepared to get my feet wet and will therefore invest into a 1% position for the portfolio as part of my “Emerging Market” basket along Ashmore and Koc holding. The low percentage reflects the (much) higher risk for Russia.

Some thoughts on discounts for Holding structures (Porsche SE, Pargesa, Autostrade Torino)

In my post about Porsche SE, I concluded the following:

However on a relative basis I don’t think that there is a lot of upside in the Porsche shares, as I don’t see a quick “real” catalyst and a certain structural discount (20-30%) is justified due to holding structure and non-voting status of the traded shares.

Geoff Gannon used this summary to come up with his view on holding company discounts:

I do know something about holding companies that trade at a discount to their parts. And I don’t agree with that part of the post. If the underlying assets are compounding nicely – you shouldn’t assume a holding company discount is correct just because the market applies one to the stock.

So he is basically saying one should ignore the holding structure and look at the underlying only.

Interestingly, we had such a discussion on the blog about the same topic in the Bouygues post. Reader Martin commented that “one usually applies a 20-30% holding/conglomerate discount” which I didn’t apply in my sum-of-parts valuation.

So far this seems to be quite inconsistent from my side, isn’t it ?

I have to confess that especially for Porsche, I did not mention all my thoughts about why I applied a discount there. However maybe I can shed some light on how I look at “holding structures” and when and how to discount them.

For myself, I distinguish between 3 forms of holding companies:

A) Value adding HoldCos
B) Value neutral HoldCos
C) Value destroying HoldCos

A) Value adding HoldCos

This is in my opinion the rarest breed of HoldCos. Clearly, Berkshire Hathaway is an example or Leucadia. Those HoldCo’s add value through superior capital allocation capabilities of their management. In those cases I would not apply any discount on the underlying assets, however I would be hesitant to pay extra.

B) Value neutral HoldCos

Those are holding structures which exist for some reason, but most importantly are transparent and do nothing stupid or evil to hurt the shareholder. Ideally, they are passing returns from underlying assets to shareholders.

A typical example of such a company would be Pargesa, the Swiss HoldCo of Belgian Billionaire Albert Frère. They are quite transparent and even report their economic NAV on a weekly basisandpass most of the dividends received to the shareholders. Nevertheless, the share trades at significant discount to NAV as their own chart shows:

At the moment, we see a 30% discount for Pargessa. So one should ask oneself, why such a discount exists for such a transparent “fair” holding co ? I can think of maybe 3 reasons:

– The stock is less liquid than the underlying shares
– people do not really trust Albert Frere despite being treated Ok so far
– no one wants to invest into this specific basket of stocks

Nevertheless, one has to notice that even for such a transparent company like Pargesa, a 30% discount does not seem to be the exception.

C) Value destroying HoldCos

Here I have the privilege to have documented such a case in quite some detail, Autostrada Torina, the Italian Holding company for toll road operator SIAS SpA.

As I liked the underlying business, I thought buying at a discount, following Geoff Gannon thoughts that a nice compounding business at a discount is an ever nicer business.

However, I had then to find out the hard way that the discount of the holding company was clearly a risk premium. In this case, the controlling Gavio family “abused” the holding to buy an interest in another company (Imprgilo far above the market price. They couldn’t do this in the operating subsidiary, as the sub was subject to regulation. The Holding co stock recovered to a certain extent but in this case the underlying OpCo was clearly the better and safer investment

My lesson in this was the following: Stay away as far as possible from such “value destroying” HoldCos. They are totally unpredictable and doe not have any margin of safety.

So going back to our Porsche example, what kind of Holding company is Porsche ?

Well, it is definitely not a “value adding” holding. The question now would be if it is a “neutral” or potentially even “value destroying” hold co ?

In my opinion there are already some warning signs:

– Porsche SE already communicated that they will not distribute the cash, but build up an additional portfolio of “strategic participations”
– Porsche only issues detailed reports twice a year, accounting is rather “opaque”
– in my opinion, Volkswagen has a lot of incentives to achieve a weak Porsche SE share price in order to then acquire their own shares at a discount (and swap them into VW pref shares if possible) at a later stage. Common shareholders (Porsche & Piech family might get a better deal. Under German law it is possible to treat pref holders differently

Compared to Pargesa for example, I would definitely prefer Pargesa with a 30% discount to a Porsche pref share at 35% discount.

So to summarize the whole post:

– With holding companies, it is very important to determine the intention and risks of the holding structure
– neglecting or even “evil” holding management can quickly turn a “discount” into a real loss
– better err on the safe side in such situations
– in doubt, assume there is a reason for the discount if you cannot prove the opposite
– however for skilled activist investors, those situations might create potential. So maybe Chris Hohn has a different game plan.But don’t forget that a lot of famous Hedgefund managers (incl. David Einhorn lost a lot of money with Porsche/Volkswagen already in the past.

Magic Sixes Portuguese companies : Conduril (ISIN PTCDU0AE0003) – Too good to be true ???

Although my last “Magic Sixes” (P/B < 0,6, P/E 6%) Investment, Autostrada was not a runaway success, I still use the screener from time to time to see what companies are “really” cheap.

It might not be a big surprise that some Portuguese companies are among those “cheapies” now. As of today, the following Portuguese Companies are “magic Sixes”:

P/B P/E Div Yield
Ramada Invest 0.380 2.68 10.45%
Orey Antunes 0.440 5.11 15.48%
Grupo Soares 0.400 3.30 7.48%

Ramada is a steel company, Orey a shipping company and Soares a construction company.

As discussed before I also run a “Magic Sixes light” screener with slightly relaxed rules (P/B < 0.7, P/E 5%).

Here we get an additional 5 companies:

P/B P/E Div Yield
Corticeria Amorim 0.67 6.78 7.09%
Sonae 0.66 0.66 7.39%
Sonaecom 0.67 0.43 5.71%
Conduril 0.66 1.50 6.82%
Espirito Santo 0.47 3.44 5.28%

One has to keep in mind that only around 65 Portuguese companies are actually listed, so 8 “dirt cheap” out of a total 65 is quite significant.

A relatively well known problem of most Portuguese companies is their relatively high debt load. With Portuguese banks in trouble (not to speak of the Government), it is intersting to look at debt levels. I usually look at nebt debt / market cap in combination with EV/EBITDA:

Net debt per share Share price Net debt/Marcet cap EV/EBITDA
Ramada Invest 3.03 0.67 452% 6.52
Orey Antunes 0.55 1.15 48% n.a.
Grupo Soares 4.87 0.29 1679%  
Corticeria Amorim 1.01 1.41 72% 4.35
Sonae 0.62 0.45 138% 4.33
Sonaecom 0.76 1.23 62% 3.38
Conduril -33.8 22 -154% 0.55
Espirito Santo 313 5.3 5906% n.a.

Ratios above 100% are very critical in my opinion, because then a capital increase to “save” the company needs to be above current market cap which is highly unlikely.

Based on this list, Conduril looks like a ” bad data” input.

A P/E of 1.5, EV/EBITDA of 0.55 and Net cash above current market cap must surely be a mistake or ?

However a quick look into Conduril’s 2010 annual report shows an amazingly profitable company.

In 2009 and 2010, the company earned net margins 13-14% and ROEs of 30-40%. .

So how comes ? The answer seems to be relatively easy: Conduril is very active in the “hot” African markets Angola, Mozambique and Botswana. I only have 2009 figurtes, but of the 250 mn EUR sales in 2009, 167 mn were in Angola and only 45 mn or less than 20% in Portugal.

Of course doing business in those countries will be quite risky, but nevertheless it is a very intersting case.

Trading seems to be relatively strange. As far as I can see, 1000 shares are traded most of the days at 22 EUR per share, the chart doesn’t really look like a stock chart:

However it is definitely a stock I want to research deeper.

It might also make sense to look at the other less indebted comapanies at some point in time. If one wants to bet on a Portuguese Non-default, those stocks might be more interesting than Portuguese Govies.

EMAK SpA – The paranoia edition

In the last days I analysed the strange behaviour of the EMAK shares since the subscription rights started to trade (Part 1, Part 2).

Just to remember: On Friday 18th, before the subscription period, the Stock traded at ~ 2,10 EUR. This equals 0,75 EUR after the split of the subscription rights.

Since then, the stock systematically trades down towards the exercise price of the subscription right (0,425 EUR).

Remark: A lot of the available charts do not correctly adjust for the subscription right. The correct historical chart can be found for instance at Borsa Italiana directly.

So what is happening here ? In my opinion one has always to ask: Do I miss something here ? Or to put it another way: Does someone have a strong incentive that the price will go below the subscription price by the end of the subscription period ?

If we go back one step, we should ask addtionally: What was the purpose of the whole exercise anyway?

When I read the announcement that the majority shareholder Yama SpA wants to sell his other holdings to EMAK, my first reaction was: they need cash. However after disclosing that they will take up their share of the capital increase, the cash effect for the shareholder was relatively small.

Another reason could be the following: Maybe Yama’s real intention is to scare away minority shareholders and take over the minority shares as cheap as possible ?

Lets consider the following:

For a squeeze out in Italy , they need according to this document 95% of the company.

Before the rights issue, Yama held 74% or 20.5 mn shares of a total 27.6 mn shares.

After the exercise of the subscription right, we will hav a total amountof 163.9 mn shares (5 new for 1 old minus Treasury shares).

In the past trading days since beginning of the subscription period, a total of 1.05 mn shares have been trades for around 600 Tsd EUR which resulted in a drop from around 0,75 EUR to 0.48 EUR (low intraday today)

So in theory (paranoia scenario), the following could happen:

– Yama is currently selling its own shares to depress the share price below the subscription price of 0.425 EUR (only 4.5 cents to go, they have plenty of material).
– most shareholders then will not exercise the subscription right. Normally the unexercised subscription rigths will be sold for almost nothing in an closing auction at the last day
– Yama buys all the subscription rights and exercises them

This would result in the following change in percentage ownership, assumed that Yama needs to sell another 1 mn shares, to reach this target:

Yama: 20.5 mn shares, 74%
Minorities 7.1 mn shares, 26%

After: (total 163.9 mn shares)

Minorities 7.1 + 2 mn = 9.1 mn shares or 5.5%
Yama: 20.5 – 2 mn + all new shares (~136 mn) = 154.8 mn shares or 94.5%

So if this works out, YAMA almost reaches the threshold for a squeeze out. If they tehn achieve to hold the shareprice down for a further few months, the might be able to purchase the remainder for a relatively small fee.

Summary: There could be a downside scenario where the majority shareholder has structured this whole exercise to be a clever way of squeezing out minorities at a depressed price level. I am not sure how possible this is, but it should definitely be considered in any investment decision.

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