Search Results for: unicredit

Deutsche Pfandbriefbank AG “forced IPO” – “Superbad” or interesting special situation ?

Management summary:

Oh my god, a bank again…. But Deutsche Pfandbriefbank is actually a pretty simple case: As a “forced IPO” of the good part of Hypo Real Estate, the bank is comparable cheap (P/B ~0,61) against its main peer Aareal bank (P/B 1,0). In my opinion, the risk is limited despite the recent HETA losses as the German Government has absorbed all of the really bad stuff in the bad bank. Similar to cases like Citizen’s, NN Group and Lloyd’s, PBB offers an interesting and mostly uncorrelated risk/return profile for patient investors provided that valuation multiples normalize at some point in time. Positive surprises like M&A are potentially on the table as well.

DISCLOSURE: THIS IS NOT INVESTMENT ADVISE. Do your own research. The author might have bought shares already.

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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.

Some links

A great (long) article on Shell, drilling in the Arctic, proven oil reserves and some more.

The WertArt blog likes Italien closed end real estate funds

A few nice graphs on oil demand.Hint:It is lower than expected.

An interesting essay about the “out-of-control” art market

On the advantages of bottom up stock picking against top down market timing

Eddie Lampert (Sears) explains the trial and error nature of retail.

Nate from Oddball with a great post on he advantages of a consistent (and boring) style of investment

Banca Monte dei Paschi Siena (BMPS)- Another deeply discounted rights issue “Italo style”

Capital Raising in Italy is always worth looking into. Not always as an investment, but almost always in order to see interesting and unusal things. I didn’t have BMPS on my active radar screen, but reader Benny_m pointed out this interesting situation.

Banca Monte dei Paschi Siena, the over 600 year old Italian bank has been in trouble for quite some time. After receiving a government bailout, they were forced to do a large capital increase which they priced in the beginning of last week.

The big problem was that they have to issue 5 bn EUR based on a market cap of around 2,9 bn.

After a reverse 1:10 share split in April, BMPS shares traded at around 25 EUR before the announcement. In true “Italian job” style, BMPS did a subscription rights issue with 214 new shares per 5 old shares at 1 EUR per share, in theory a discount of more than 95%.

The intention here was relatively clear: The large discount should lead to a “valuable” subscription right which should prevent the market from just letting the subscription right expire. What one often sees, such as in the Unicredit case is the following:

– the old investors sell partly already before the capital increase in order to raise some cash for the new shares
– within the subscription right trading period, there will be pressure on the subscription right price as many investors will try to do a “operation blanche”, meaning seling enough subscription rights to fund the exercise of the remaininng rights. This often results in a certain discount for the subscription rights

In BMPS’s case, the first strange thing ist the price of the underlying stock:

BMPS IM Equity (Banca Monte dei  2014-06-16 13-51-34

Adjusted for the subscription right, the stock gained more than 20% since the start of the subscription right trading period and it didn’t drop before, quite in contrast, the stock is up ~80% YTD. As a result of course, the subscription right should increase in value. But this is how the subscription rights have performed since they started trading:

MPSAXA IM Equity (Banca Monte de 2014-06-16 13-59-10

It is not unusual that the subscription rights trade at a certain discount, as the “arbitrage deal”, shorting stocks and going long the subscription right is not always easy to implement.

At the current price however, the discount is enormous::

At 1,95 EUR per share, the subscription right should be worth (214/5)* (1,95-1,00)= 40,66 EUR against the current price of 18 EUR, a discount of more than 50%. The most I have seen so far was 10-15%. So is this the best arbitrage situation of the century ?

Not so fast.

First, it seems not to be possible to short the shares, at least not for retail investors. Secondly, different to other subscription right situations, the subscription right are trading extremely liquid. Since the start of trading on June 9th, around 560 mn EUR in subscription rights have been traded, roughly twice the value of the ordinary shares. The trading in the ordinary shares themselves however is also intersting, trading volume since June 9th has been higher than the market cap.

Thirdly, for a retail investors, the banks ususally require a very early notice of exercise. So one cannot wait until the trading period and decide if to exercise or not, some banks require 1 week advance notice or more. My own bank, Consors told me that I would need to advice them until June 19th 10 AM, which is pretty OK but prevents me from buying on the last day.

In general, in such a situation like this the question would be: What is the mispriced asset, the subscription right or the shares themselves ? Coming from the subscription right perspective, the implicit share price would be 1+ (18/((214/5)*1,95-1)))= 1,44 EUR. This is roughly where BMPS traded a week before the capital increase.

For me it is pretty hard to say which is now the “fair” price, the traded stock price at 1,95, the implict price from the rights at 1,44 or somewhere in between. As the rights almost always trade at a discount, even in non-Italian cases, one could argue that there might be some 10-15% upside in buying the shares via the rights. On the other hand, I find the Italian stock market rather overheated at the moment and the outstanding BMPS shares are quite easy to manipulate higher due to the low market cap of the “rump shares” at around 200-250 mn EUR.

The “sure thing” would be to short the Stock at 1,96 EUR, but that doens’t seem to be possible.


Again, this “Italian right” capital raising creates a unique situation, this time with a price for the subscription right totally disconnected from the share price.

Nevertheless I am not quite sure at the moment what to to with this. One strategy would be to buy the subscription right now and then sell the new shares as quickly as possible, but it looks like that this is exactly what the “masterminds” behind this deal have actually want investors to do. They don’t care about the share price, they just want to bring in 5 bn EUR in fresh money and an ultra cheap subscription right is the best way to ensure an exercise. In this case we should expect a significant drop in the share price once the new shares become tradable. So for the time being am sitting on the sidelines and watch this with (great) interest as it is hard for me to “handicap” this special situation at the moment.

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.

Exotic Securities: Piraeus Bank Warrants (ISIN GRR000000044)


First of all a hat tip to Profitlich & Schmidtlin which had mentioned this idea in their first quarterly letter.

Piraeus Bank is one of the “survivors” of the Greek Banking sector. As with other Greek banks, the bank was “rescued” by the Government via a dilutive capital increase, with the Greek Government as a majority shareholder. Those private investor who participated in the capital increase got as a kind of “compensation” (and exit vehicle) some Warrants “for free” which allows them to buy back the shares until 2018 from the Greek Government. Those Warrant are traded quite actively on the Athens Stock Exchange.

Maybe in order to make it more fun, the Greek Government spiced up the Warrants with some extra features which are ( a kind of term sheet can be found here)

one Warrant gives the right to purchase 4,476 shares from the Hellenic Stability Fund (so its non dilutive”)
– the final maturity is 02.01.2018, however there seems to be a kind of “forced” exchange possibility on 02.07.2016
– the Warrants can be exercised every 6 months, so its technically a “Bermudan option”
– the strike price increases every 6 months after a predetermined formula

At a first glance, this “thing” seems to be really hard to value. Bloomberg for instance does not offer to value “Bermudan Equity options” in its standard option valuation tool (OVME).

Bermudan Option

Let’s take a step back and look at principal option types. The two classical types are:

European Option: This option can only be exercised at the final maturity date
American Option: This option can be exercised on every day during the term of the option

Nevertheless, there is normally very little difference in the value of an European option and American one if all other things are equal. The main reason for this is that in normal cases, the “time value” of an option is usually positive until the very last day. Exercising an American option early and “throwing away” the time value normally doesn’t make sense. For “normal” stock options, the only reason to exercise early would be a large dividend payment before maturity which will reduce the value of a (long Call) option, but in most cases one can ignore the valuation difference between an European and American option.

On the other hand, the increasing strike price of the Piraeus Warrant is economically equal to a dividend, so we cannot just ignore this feature and value it as a European Option.

This is the call schedule and the corresponding strike prices for the Warrant:

Call Date Strike Delta
02.01.2014 1,734  
02.07.2014 1,768 0,034
02.01.2015 1,811 0,043
02.07.2015 1,853 0,043
02.01.2016 1,904 0,051
02.07.2016 1,955 0,051
02.01.2017 2,015 0,059
02.07.2017 2,074 0,059
02.01.2018 2,142 0,068

From what I know, Piraeus Bank is not supposed to pay out any dividends in the foreseeable future. So in order to replicate the increasing strike, we could assume that the increasing strike is similar to a dividend assumption and we model this as an option with a strike of 1,734 EUR and dividends as shown in the column “Delta”.

Using the Bloomberg Option Valuation tool “OVME”, the same volatility and the assumption of a July 2016 maturity, the value difference between an European and American Option would be almost 20%, i.e. the American Option with the possibility to exercise at any day is 20% more valuable than the European one. This is due to the fact that I can basically wait until the last day before the synthetical dividend is paid an exercise then. So I don’t lose any time value and save myself the full dividend compared to an European exercise.

In our case however, I have to exercise 6 months earlier. With the OVME tool, I can for instance also calculate the value of an American vs. European Option for 6 months, “simulating” the time between for instance 03.07.2014 and 02.01.2015. For those 6 months, the valuation difference between an American and an European Option is only ~ 10%. Again, the “Bermudan” option is worth less than an American.

If I am actually in the last 6 months of the warrant maturity, the day after the last exercise possibility, the option will be exactly worth the value of a European Option. The day before it will be worth slightly less.

Anyway, as a very simple working assumption, I will assume that the “Bermudan” feature overall is worth 5% more than a European option.

Valuation of Piraeus Warrant

In order to value the Pireaus Warrant, we will have to make one further assumption: What is the final maturity ? If I understand correctly, the Greek Government has the possibility, to sell the shares after July 2016 without compensation to the Warrant holders if the Warrant holders do not convert. So as a realistic assumption one should use July 2016 as final maturity and not January 2018.

By the way, this “mechanic” of selling the shares without compnesation is a very strange featre for a Warrant.

In the following exercise I will use as the share price for Pireaus the level of 1.73 EUR, for the warrant 0.94 EUR (price at the time of writing)

As the first valuation steps, we can now do the following:

1) calculate the price of the warrant per share which equals the current traded warrant divided by 4,475. This would be 0.94/4,475= 0,21 EUR per share
2) “plug in” the price into the option calculator and solve for implied volatility (based on the current strike of 1.734 EUR and the “synthetic” dividends)

As a result we get an implied volatility of ~31.3% for the European Option, 26.2% for the American . This is rather at the low side for Piraeus. It is always a big question which volatilities to use, short-term (10 day) or longer term. Only 10 day historical volatility would justify such levels, trailing 305,50 and 100 day volatility is more in the 40-50% range.

We can now do a third step and

3) plug in for instance 45% as volatility and add 5% premium on the price of the European option to get to our value estimate. In this case this would result in a fair value of 0.33*1.05= 0.35 EUR per share or ~1.56 EUR for the Warrant. Compared to the 0,94 EUR per share, this would mean that the warrants trade at around 40% discount to their “fair value” which is quite significant.

So should one now run out and buy this undervalued security ? I would say: Not so fast, we need to consider at least one other factor

Potential shortening of maturity

The Greek Government as counterpart has quite a bad reputation for sticking to its terms. By googling a little bit, i found this quite revealing story from Reuters.

Two quotes here:

Some of Greece’s biggest banks and their advisors are starting to press the country’s banking rescue fund to look at ways to speed up their return to wider private ownership, banking sources say.

“They recognize that there are arguments to support the early retirement of the warrants,” he said, adding that the proposals would be favorable for the HFSF because it would no longer face a ‘cliff’ of all the warrants being exercised together.

However, any changes would have to be approved by the troika of European Commission, European Central Bank and IMF officials overseeing Greece’s bailout, who would be keen to make sure any changes did not disadvantage the HFSF or gift overly generous terms to the private investors.

In my opinion, this should make any holder of the Warrants really nervous. Currently, the Piraus Warrants do not have any intrinsic value, as the price of the share is below the strike. So all value is time value. With the option valuation tool we can play around a little bit with the maturity. Shortening the maturity (all other things equal) by 6 months for instance reduces the value of the Warrant by -10%, shortening it to July 2015 would reduce the value by more than -20%. The “break even” based on a 45% volatility would be some kind of “forced exercise” at the end of October 2014.

I do not know under which law the warrant has been issued, but if it’s under Greek law, then anything could be possible.

Valuation of Piraeus Bank

Finally a quick glance at the valuation of Piraeus Bank itself. Piraeus is currently valued at around 1,2 times book value. This is on a level with banks like Standard Chartered or Banco Santander, high quality diversified banks. However this is much higher than other domestic or regional players like for instance Unicredit (0.74) , Intesa (0,84), Credit Agricole (0,64) or even HSBC (1.05).

So without going into much detail, Piraeus bank looks rather expensive and a lot of recovery expectations seem to be priced in already.


At a first glance and under some critical assumptions, the Piraeus Warrants do look undervalued by around 40% based on historical volatilities and the price of the Piraeus share. However there seems to be significant risks, that the terms of the Warrant could be subject to change with a negative impact on the warrant. ALso the valuation level of Piraeus bank itself looks rather optimistic.

I would not want to own the Warrants “outright”. For someone who is ale to short the shares, a delta hedged position could be interesting in order to “harvest” to low implied volatility, although there would still be the risk of the change in Warrant terms.

I haven’t looked at the other Greek banks where similar warrants have been issued.

Emerging Markets series part 2: Koc Holding ADRs (US49989A1097) – the best of Turkey in one stock ?

As this is a long post, a short summary in the beginning:

– despite the bad headline news, for me Turkey is one of the more attractive Emerging Markets, as valuations are moderate and most problems are clearly visible
Koc Holding, the holding company of the KOC family offers an interesting opportunity to invest in a portfolio of Turkish companies with dominant market positions
– further, Koc Holding seems to be a professionally managed company with good capital allocation and very good long-term track record
– nevertheless, stand-alone the investment is clearly very risky at least in the short-term and should be part of a broader EM strategy

Turkey background: Lots of problems

Turkey is clearly the Emerging market country with the most obvious issues at the moment. The decline of the Lira triggered a massive interest increase by the Turkish National Bank, which clearly is not really a tailwind for the local economy. When people now speak about emerging markets, they usually distinguish between those who are still OK like China, Mexico and the Philippines and those who have problems (Turkey, Indonesia, India etc.).

Personally, in my experience in such situations, this distinction is most often wrong. Like in the beginning of the Euro crisis, when people for instance thought that Spain is OK, usually all countries in such a “bucket” have problems and the only difference is that the problems surface quicker in some countries than in the other.

That’s why I somehow like Turkey, the current problems are clearly on the table:

– Declining Turkish Lira
– Political issues with Erdogan/Gülen
– Protests and fights in Istanbul
– current account deficit
– war/conflicts in neighbouring countries
– Kurdish minority
– FX loans from companies

Expectations are low, you hardly find anyone who is positive, the consensus view is: “It will get much worse before it gets any better”.

Honestly, I do not have a magic crystal ball to look into the future, but experience shows that once the problems are on the table, the possibility of those issues already being priced in into the stock market are quite high.

From my point of view there are also a lot of positives for Turkey

– strategic well positioned between Europe and Middle East
– no resource course, people have to work in order to get richer
– young, growing population
– main beneficiary if political situation in neighbouring countries improves
– a depreciating currency automatically improves the competitive position. During the Euro crisis, almost everyone said it would be much easier for the “club Med” if they were not in the Euro.

Just as a reminder the map of Turkey and its “friendly neighbours”:

How to invest

There are clearly several aspects to consider. Corporate governance and shareholder rights in Turkey for sure are not at levels as in Anglo-Saxon or Northern European markets. Without a local account in Turkey, it is hard to trade Turkish stocks. So either one invests into a Turkey ETF, which has the disadvantage of a rather high banking exposure (~40 percent of the main indices) or one needs to focus on the stocks traded outside Turkey. To my knowledge, only 3 stocks are traded more or less liquid outside Turkey which are:

– Turkcell (largest Mobile operator)
– Anadolou Efes (Beer)
– KOC Holding, a conglomerate

As I am not so bullish on mobile carriers (see Whatsapp), and Anadolou Efes looked a little bit too hard for me after some merger activities, I looked a little bit more into Koc Holding.

Koc Holding

Koc Holding is the Holding company of the Koc Family of various subsidiaries mostly operating in Turkey. The Koc family directly and indirectly controls ~78% of the shares, leaving a free float of only 22%.

The company looks relatively cheap, but we should not forget that interest rates in Turkey are at around 10% (at 8,10 TRY per share):

P/E 7,7
P/B 1.1
Div. Yield 2.3%
Market Cap ~ 7 bn EUR

The interesting thing about Koc is that almost all subsidiaries are listed subsidiaries. For some reason, a lot of the Koc companies are JVs with foreign companies where Koc “only” owns around 40%. I tried to compile the list of listed subsidiaries. Additionally, I added net cash at holding level and the non-listed companies at book in order to come up with a “sum of part” calculation:

Company Percentage Koc MV EUR mn P/E
Arcelik 40,5% 1.048,0 13,2
Tofas 37,6% 645,5 12,1
Turk Traktor 37,5% 366,7 10,6
aygaz 40,7% 334,6 12,2
Otokar 44,7% 173,4 12,3
Tat gida 43,7% 41,6 106,9
Marmaris 36,8% 7,7 62,0
Altinyunus 30,0% 6,8 282,8
Ford Oto 41,0% 912,7 10,6
Tupras 51,0% 1.623,6 8,1
Yapi Kredi Bank 41,4% 1.536,8 6,1
Yapi Koray 10,7% 1,5 #N/A N/A
Yapi Tipi 4,5% 1,4 #N/A N/A
Sum unlisted   602,56  
Net cash Holding   580,00  
Sum of part   7.882,81  
Market Cap Koc Holding   6.718,39  
“Discount”   14,8%

We can see, that around 86% of the total value is invested in observable, listed companies. Additionally, we can see that the “discount” is currently ~15% to the sum of part. This is not much compared to other holding companies, but we come to this later. Another important point is that financials (Yapi Bank) are only 20% of the overall value, so a lot less than in the Turkish stock index. The overall low P/E of Koc is clearly driven by Yapi Kredit and Tupras, also something which one should be aware of.

The major businesses:

Tupras is basically a refinery. Normally not a very attractive business, unless you are the ONLY refinery in a country. Tofas and Ford Oto are both car manufacturing JVs, Tofas with Fiat and Ford Oto of course with Ford. Together, they have around 20% market share in Turkey, but much more interesting, around 50% of the production is being exported. So they should make up a lot of lower domestic demand by exporting more.

Arcelik is a “white goods” household manufacturer (among others with the Beko brand) which has also significant export business. Turk tractor has 50% market share in tractors in Turkey plus a 50% export share. Yapi Kredi finally is Turkey’s 4th largest bank and a JV with Unicredit. It has average profitability compared to its peers.

All in all, Koc claims to generate 10% of Turkey’s GDP, which at least in my opinion is the highest concentration I am aware of in any country for a single Group.

So at a first glance, Koc Holding seems to be a very good way to invest into the Turkish economy with an underweight in financials and an overweight in market leading companies with a significant export share.

Qualitative assessment / other considerations:

When I looked into the 2012 annual report and also into the available investor information , I was genuinely surprised how good the material is.

Koc 2012 annual report is a must read for anyone interested in the Turkish economy although Koc clearly is subjectively maybe more optimistic. At the time of writing, Koc just issued their preliminary 2013 earnings and the results look surprisingly robust (+15% including gain on Insurance co sale, unchanged excluding)

In my opinion, Koc has many aspects which are lacking even in most developed markets companies:

– Clear targets: Grow above Turkish GDP and create shareholder value, IRR hurdle of 15%
– clear dividend policy (20% of Earnings)
– Some businesses profit from Lira weakness (50% of cars and tractors are exported, Beko white goods etc.)

I also liked how they explained their strategy: Expand into other sectors only in the home market, expand internationally only in sectors where they have significant experience int he home market

What kind of Holding company is Koc ?

I do think that Koc is actually a value adding Holdco. I make this subjective assessment on 3 major observations based on their excellent, regularly updated investor information :

First, they are not shying away from selling subsidiaries if the consider them as not good enough, such as the very well-timed sale of their insurance subsidiary at the peak in 2013 and several other subsidiaries in the last years

Secondly, especially for a Turkish company, I was very surprised how clearly they formulate their strategy. They have clear IRR target and also a clear strategy where and when to invest.

And thirdly, their track record is surprisingly good. Over the last 20 years, total return for Koc Holding was 33.8% p.a. in local currency. This translates into 7.9% p.a. in EUR or 8.6% in USD. It is slightly lower than the S&P 500 (9.5% USD) and DAX (8,4% EUR), but we need to consider that:

– Koc is currently trading 50% below their peak valuation in June 2013 (whereas both, DAX and S&P trade at all-time-highs
– in the last 20 years, Koc had to withstand, among other issues a hyperinflationary environment which culminated in a new currency in 2005 which had exactly 6 zeros less than the old one

For me, this is a quite convincing track record in generating and maintaining shareholder value in the long run. much better than anything I have seen in other “Club Med” countries.

Koc and Erdogan:

Following the protests in Istanbul, there were some stories that the Koc family took position against Erdogan. As a kind of revenge, then Erdogan sent special tax auditors to Tupras. However, as this very nuanced article points out, this could have been it already.

I am clearly no expert here, but the fact that the Koc family, among others, survived 3 military coups, the second world war and hyperinflation, the probability is maybe relatively high that they survive the current episode, but risks are clearly there.

Stock Price

Looking at the stock price, one has to look at the stock price in hard currency:

We are clearly not at the lowest level but still around -50% off the peak from June last year. Funny, how optimistic people seem to have been only 8 months ago…..


Koc currently trades at an P/E of around 7,7x 2013 earnings. Without the insurance sale, this would rather be like 9 times but still cheap.

In my opinion, under normal circumstances, a company like Koc with a lot of market leading subsidiaries and a great track record could trade easily at 10-15 times P/E. If we assume that the Lira will make back at least some of its decline (maybe 10-15%), we could see a potential upside without assuming any growth over 3 years 35%-100%. If we assume some growth, Koc could be more than a double, especially compared to current valuations elsewhere in Southern Europe.


In total, I think KoC Holding is clearly a risky but interesting stock in an interesting market. The combination of a good long term track record and a diversified group of well positiioned local companies reduces the individual risk to a certain extent, although the political issues between the Koc family and Erdogan have to be kept in mind.

At the current valuation, the upside is large enough so I do not need to try to time the market and will establish a 2.5% position in KOC Holding ADRs at current prices (USD 18,20 per ADR) for the portfolio.

Short term, the stock price could (and most likely will) go lower than the current level, when “risk off” mentality returns to the market.

A final warning: This stock is clearly more volatile than my average stock picks and should be seen as part of a more diversified “excursion” into Emerging markets. I plan to invest at least into 4-6 different EM companies with a total portfolio weight of 10-15%, the start was already made with a first Ashmore position earlier this week.

In parallel, I am also selling down most of my last Italian positions in order to derisk this part of the portfolio, as the valuations (and risk return relationships) for Italian stocks have become mediocre at best as people have become very optimistic.

Van Lanschot N.V. (ISIN NL0000302636) – High end Private Banking at a discount price ?

As this is going to be a pretty long post, the “executive summary” upfront:

– For a specialized private bank without PIIGS exposure, Van Lanschot looks extremely cheap (P/B 0,5 vs. 2.0 for other private banks)
– negative 2012 result is very likely „kitchen sink“ result in order to give new CEO a head start
– turn around story. Strategy change under way, goals look achievable
– Van Lanschot has no controlling shareholder, a potential M&A transaction likely if turn-around is sustainable
– potential secular tail wind because of crack down on Swiss Private Banks and regulation for large international banks
– negative overall sentiment vs. Dutch real estate market could explain very low valuation

Read more

Slovenia: The next Cyprus or contrarian opportunity ?

I bet that many people could not point out on a map where Slovenia actually is located. Many people also don’t really know the difference to Slovakia.

So lets look at Wikipedia:

Slovenia is a small part of Ex-Yugoslavia. It has a population of around 2 mn and covers 20 thsd square kilometer. The history can be read extensively via Wikipedia. Most importantly, Slovenia was the first part of Yugoslavia which became independent. The next few years, Slovenia was seen as one of the big success stories in Europe, which resulted in Slovenia joining the EU and adopting the Euro already in 2007.

Last year however, Slovenia joined the European countries hit hard by the recession. The prior EUR fueled construction boom resulted in shaky loans, declining GDP, Rating agency downgrades, increase in interest rates etc. Starting last year, there was big fear that Slovenia was headed towards a “Greek style” restructuring.

Lately however, things look better. SLovenia has presented a restructuring plan which among others, includes the sale of a couple of state-owned companies. One should also note, that debt to GDP looks rather manageable:

On top of that, Slovenia’s economy is good at exports, but still, they are struggling in 2013. Nevertheless, Slovenia got 2 years “probation” in order to fix their problems, which they hopefully use.

The latest export vs. import data looks OK, nevertheless, 2013 will show a deficit of around -8% for the Government including bail out costs.

Slovenian stock market

From Bloomberg, one gets ~45 stocks from Slovenia with a market cap larger than 1 mn EUR, and 24 with a market cap bigger than 10 mn EUR. The major Slovenian stock market index only consist out of 7 stocks which are the following:

Ticker Name % Index Weight EV/EBITDA T12M P/B P/E
SBITOP Index          
KRKG SV Equity Krka dd Novo mesto 29.7 6.311327 1.32 10.39
PETG SV Equity Petrol DD Ljubljana 21.4 8.988676 0.98 8.35
TLSG SV Equity Telekom Slovenije DD 19.7 4.734508 0.89 16.89
MELR SV Equity Mercator Poslovni Sistem 13.5 N.A. 0.60 N.A.
ZVTG SV Equity Zavarovalnica Triglav DD 11.8 N.A. 0.76 5.96
GRVG SV Equity Gorenje dd 2.9 5.500231 0.18 15.94
KBMR SV Equity Nova Kreditna Banka Maribor dd 0.9 N.A. 0.08 N.A.

Quick check of the companies:


I have written about Krka already, a generic drug company similar to EGIS. I think this is a very interesting company,. Minimal home country exposure, consistently profitable. Not “extremely cheap” but good value for money. I would buy this company directly (if I could).

Petrol Ljublijana

This is the national refinery plus gas stations owner. Also active in Croatia and Bosnia. High “mean reversion” potential in my model.

Telekom Slovenije

Local telephone company. P/E 15 looks expensive, but company pays 15% dividend and has a 20% FCF yield. Significant debt reduction


Supermarkets, Shopping centers. High debt load, large loss in 2012. However major shareholders sold out to Croatian company Agrokor in June.

Zavarovalnica Triglav

Major Slovenian insurance company, interesting, as valuation is really low for an insurer. 10.5% dividend yield. I would buy this stock if I could.


Household appliances. Has made losses but very cheap (P/B 0.2).

Nova Kreditna

One of the 3 problem banks, the only listed one. Most likely insolvent without Government support

The problem:

There is almost no way to directly buy Slovenian stocks. Only Krka and Nova Kreditna have secondary listings in Poland, but even there it is difficult to trade them. I asked several retail brokers in Germany and only SBroker (where I don’t have an account) told me I could trade the 2 stocks in Poland.

The alternative:

Although I usually do not like certificates issued by banks, in this case this would be the only alternative. I found several of them:

1. RCB7J9 / AT0000A038L9 from Raiffeisen International
2. AA0DMM / NL0000762557 from RBS
3. HV2AXY / DE000HV2AXY3 from Unicredit

The RBS paper seems to have the lowest bid/ask spread. As far as I have seen, they are all without maturity and track the SBI.

The opportunity /upside

For me the Slovenian index is quite interesting due to the following points:

+ there is almost no banking exposure left in the index. the only remaining financial is a cheap insurance company which i would buy outright
+ the Government has to sell some of their stakes, including among others the Telephone company. I am pretty sure that for the time being they will do nothing to punish the TelCo in order to get a price as high as possible
+ the largest stock in the index is Krka with ~30% which I want to buy anyway
+ once the Euro recovery story gets played more seriously (Goldman is already starting to “promote” European stocks), markets like Slovenia will follow with a certain delay.
+ Slovenia did never piss off other countries like Cyprus which supported tax dodging or Hungary which runs on a political amok course. In my opinion, they will be “well” treated by the ECB, EU and IMF.

Nevertheless for the time being I will not invest but look a little bit more into the other large index constituents, especially the TelCo and Oil company.

Deeply discounted rights issue watch: KPN NV (NL0000009082)

I had briefly covered deeply discounted rights issue as a potential “special situation” opportunity a couple of weeks ago.

Now, with KPN, we have an interesting non-financial candidate. This is what KPN issued today:

Dutch telecoms group KPN confirmed a €4bn rights issue to shore up its capital position after heavy expenses on bandwidth that have led to dividend cuts and lower profit margins.

The company announced the move along with its 2012 annual results, which showed a 3.5 per cent drop in revenues and a 12 per cent fall in earnings from the year before.

As one might expect, the stock tanked some 16% or so. Currently, at around 3.45 EUR per share, KPN has a market Cap of only 5 bn EUR, so raising 4 bn via a rights issue might require a large discount on potential new shares.

The “wild card” in this game will be Mexican Billionaire Carlos Slim who owns currently 27.5% of the company. If he fully participates as lead investor and even taking up more than his share, then the “forced selling” aspect might not be too relevant.

If for some reason, he would refuse to participate, the situation will become very interesting.

Just for fun, let’s look how the performance was for Unicredit. I would distinguish the following events / time periods:

– 4 weeks before announcement
– announcement day
– period between announcement and price setting (for new shares)
– price setting day
– period between price setting and start trading of subscription rights
– trading period
– 4 weeks after end of trading period

First the relevant dates:

Announcement first trade date 14.11.2011
Price setting of rights issue 04.01.2012
First trade date subscr. rights 09.01.2012
Subscription trading until 01.02.2012
Discount 43%
New share 2 new for 1 old

Now the relative performance:

Performance UCG MIB Relative
– 4 weeks before announcement -18.35% -4.98% -13.37%
– Date of announcement -6.18% -1.99% -4.19%
– announcement until price setting -14.40% 2.95% -17.35%
– day of price setting -17.27% -3.65% -13.62%
– price setting to start trading -26.46% -4.45% -22.01%
– trading period 73.75% 12.94% 60.81%
– 4 weeks after trading period 0.05% 2.82% -2.77%
– 6 months after trading period -32.25% -11.39% -20.86%
– 12 months after trading period 12.53% 9.53% 3.00%

In the Unicredit example, clearly the period where the subscription rights were traded showed the best relative performance of the shares. Interestingly, on the announcement day, the price drop was much less in percentage points than KPN. This might have to do with the short selling ban which was in place (at least to my knowledge) when Unicredit announced the rights issue.

Again for fun, a quick look at Banco Popular’s rights issue from the end of last year.

Again the dates first:

Announcement first trade date 01.10.2012
Price setting of rights issue 10.11.2012
First trade date subscr. rights 14.11.2012
Subscription trading until 28.11.2012
New share 3 new for 1 old

and then relative performance to the IBEX:

Performance POP IBEX Relative
– 4 weeks before announcement -3.95% 5.11% -9.06%
– Date of announcement -6.17% 0.98% -7.15%
– announcement until price setting -29.95% -1.71% -28.24%
– day of price setting 4.56% -0.90% 5.46%
– price setting to start trading -8.86% 1.39% -10.25%
– trading period 8.12% 2.16% 5.96%
– 4 weeks after trading period -6.71% 3.74% -10.45%

One can see a similar pattern first, with the stock losing 4 weeks before announcement, as well as on the announcement date until the final price setting. However of the date of price setting, the stock jumped, until loosing only a little bit until starting of the trading period.

Then however, the gains within this period were relatively low compared to Unicredit. Overall it looks a lot less volatile than Unicredit, so maybe less forced selling here.

Back to KPN:

Other than Unicredit and Banco Popular, KPN had outperformed the AEX almost +11% in the last 4 weeks, so today’s large drop might compensate for this (unjustified) outperformance.

If the other two stocks are any guide, one could still expect lower prices until the price for the new shares will be set.

The stock price of KPN look really really ugly long term:

But make no mistake, any company which needs to go into deeply discounted rights issues is in trouble. This is “distressed” territory.

(…to be continued….)

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