Tag Archives: Italy

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.

Gruppo Sol SPA part 2 – balance sheet, qualitative aspects and weaknesses

After the initial post about Gruppo Sol SpA, let’s look at some other standard issues which are important for a “value investment”:

1. Balance Sheet quality

Gruppo Sol is definitely not an asset play, as the main value lies in at least some local competitive advantages, mostly in it’s homecare business. However it makes nevertheless sense to check the quality of the balance sheet, as a solid balance sheet significantly decreases the downside in those cases where the investment thesis doesn’t play out.

a) Goodwill

Good news here: Gruppo Sol has only a very small amount of goodwill (22mn EUR out of 375 mn EUR equity). In comparison to AIr Liquide or Linde, this looks quite good. Air Liquide has only half of its book value in tangible assets, whereas Linde has negative tangible book value due to its past acquisition. Tangible book value in itself is definitely not a guarantee for success, but it limits the downside to a certain extent.

b) Debt

Debt is unfortunately not insiginifcant. With around 170 mn net debt as of 31.12.2011, debt to equity is around 50%. Although this is exactly the same ratio as Linde and slightly better than Air Liquide, for an Italian based company with most likely Italian bank as creditors, this is something to monitor closely.

Interestingly, they provide a very detailed overview of financial liabilites in the 2010 report on page 54. The good news is that very few loans contain covenants and there are no critical maturities, the “roll down” seems to be very conservatively structured, the bad news is that some of the loans are quite expensive. In total I would judge this as a rather well managed conservative financing structure.

c) Extra assets, Pensions, operating leases, depreciation etc.

There are basically no other assets on the balance sheet than those required for running the business, so no big minority stakes etc. On the one hand, this doesn’t leave any potential for “extra” assets like Autostarada, howver on the other side its a good sign as the comnpany seems to be focused on its core business and not trying to play the typical Italian pyramide structure games.

The company doesn’t seem to have off-balance sheet operational leases. A smaller amount of the assets are financed through financial leases which are included in the nebt debt

They don’t really show pension liabilites which is due to the fact that defined benefit plans are unusual in Italy anyway. However the show a 10 mn EUR reserve for “employee severance and other benefits”. Interestingly they seem to discount this with 1.30% p.a. which is a very very conservative assumption.

A quick view into fixed assets shows that plant and machinery of Sol SpA show a cummulated depreciation of ~2/3 of historical values. Land and building values are only a small amount of fixed assets, so I would not expect any “hidden reserves” there.

So overall, I would consider the balance sheet of Sol SpA as conservative but without significant hidden value.

2. Shareholders & Management

Large shareholders are:

59.98% are held by a Dutch entity called “Gas and Technolgies world” whcih is the vehicel of the founding Fumagali family. The CEO of SoL SpA, Aldo Fumagalli Romario is currently CEO of Sol SpA, so SOl is both, family owned and also actively managed by a family member.

7.35% are held by Tweedy Browne
5.05% are held by Bestinver
4.50% by Stefano Bruscagli, a board member of Sol SpA
3.00% are held by Alberto Tronconi, a former Sol SpA director.
1.13% owned by Leonardo Alberti, a current director of Sol Spa

So in total, 60% are held by the family and further 8.6% by active board members which in my opnion is a good sign.

Board compensation

For some reason I didn’t find director’s comp in the report, so I rely on the FT information. However 500 k compensation for the top officers seem to be OK.

Corporate Governance

The only thing I can say about this is that I am not aware of anything yet. So no dealings between main shareholder and company or directors and company whcih is very good for an Italian company.

Weaknesses and known problems

At some point in time one should also consider the main weaknesses as you rarely find the “perfect” company at hte perfect price.

Capital intensity

As mentioned in the first post, especially the industrial gas business is very capital intensive. So no nice free cashflow franchise busienss but “real investment” business. If Sol was an Anglo Saxon company, they would have spun off Vivisol a long time ago and milking the cash from the gas business without reinvesting.

I am not sure if Vivisol relies to a certain extent on facilities from the industrial gas segment, this is something to explore further. Also, in the Vivisol segement, receivables started to grow. At some point, manngement mentioned that public health insurers, which usually pay for the home care services are paying slower espacially in Italy.

Italian exposure

This brings us to the next obvious point: Especially the industriel gas division is naturally exposed to Italy and a possible further detoriation of economical activity. As of 2010, Sol made 60% of sales within Italy and 40% outside, with outside sales growing by double digits. Although the business should be more stable than other businesses, this risk is definitely there.

2011 preliminary results and intra year reporting

During the year, Sol is only reporting EBIT. For Q3 for example, Sol reported 13.3% increase in YOY EBIT increase, a really strong double digit growth number.

So it came as a surprise that in the preliminary 2011 full year numbers, 12 M EBIT suddenly wnt flat agains the year before and EPS actuall decreased slightly.

As there is no segemnt reporting in the preliminary release, we cannot see if this is an issue for both segments. My assumption is thta the bad Q4 comes from the Italian industrial gas side but it is not really explained and one has to wait for the full annual report.

Investor relation / reporting

This brings us directly to another weak point. Quarterly reports do not include EPS and explanations are short. The last inevstor presentation is from 2003, so they seem to save a lot of money on investor relations if we look at the bright side. Tehy don’t even show up at the “Star” conferences.

Research Coverage & Index

For Sol SpA, analyst coverage is very low. Only one small shop covers them (“EVA dimensions”, whoever that is) with an overweight rating but noprice target. They are also not included in any index, and trading volume with around 200 k paer day is too low for many funds.

For larger institutionals with shorter time horizon, the stock is most likely not interesting.

So lets stop here and summarize part 2:

+ on the plus side, Sol seems to have a relatively conservative balance sheet
+ company is family owned and family run
+ management compensation is OK, managers have relevant stakes in the company
+/- corporate governance is good for Italian standards, however neutral for objective standards
– business is capital intensive
– significant exposure to Italy
– reporting during the year only on EBIT basis, very limited information

So far no “deal breakers” but also some significant general issues. I will have a final post up if to invest and at what price.

Catching the Italian knife again ? – Piquadro SpA (ISIN IT00042405443)

On my hunt for cheap PIIGS or GIPSI stocks, I basically “tripped” over Piquadro SpA. I wanted to share my first impressions while looking at the share:

Company description
The company produces and distributes travel and business luggage. According to the website, the comapny exists since 1987 and sells under the current brand since 1998.

In October 2007 the company went public at a share price of EUR 2,20.

Basic Financials

Piquadro has exactly 50 mn shares outstanding, at the current price of EUR 1,24, the market cap is ~ 62 mn EUR.

Current multiples are:

P/B 2.4
P/S 1.0
P/E 6.8
Div. Yield 8.1%

So apart from P/E and dividend yield, the company looks expensive. Howver this can easily be explained by the profitability measures (FY 2011):

ROA: 16.2%
ROE: 38,9%
ROC: 25.9%
Pretax Margin 22.7%

So we can clearly see that the business at least up until recently is rather high margin, high return on capital business.

Warning signs:

Despite the recently positive market trend, the stock price still drops like a stone:

Especially compared to example Tod’s it is interesting to see that since last November, the chart “decoupeled” from the market. One thing that one should keep in mind is: In “falling knife” situations, you will always invest too early in the short term !!!!

Shareholding / Management

CEO founder and main shareholder is Marco Palmieri with 67,0% shareholding, other big shareholders are Mediobanca (6%), Fidelity (5%), Cominvest 1.2%. Well known US value shop Royce has a tiny position which was slightly increased in Q3 2011.

According to the last annual report, Palmieri paid himself 407 k EUR, total board compensation incl. Directors was 1 mn EUR. This looks OK, Palmieri receives much more money through the dividend than through the salary, so incentives with shareholders should be aligned to a certain extent.

Cashflow generation and use

What attracted me immeadiately is the fact that free cashflow generation was excellent in the years since the IPO compared with earnings.

EPS FCF Dividend Net debt per share
2008 0.129 0.06 0.06 0.23
2009 0.151 0.12 0.06 0.21
2010 0.145 0.18 0.08 0.11
2011 0.182 0.13 0.11 0.07
Total 0.607 0.48 0.31 0.16

We can see that over the last 4 years, Free cashflow was 78% of reported earnings, which is pretty good for a growing company. 2/3 of the free cashflow was paid out as dividends, 1/3 to reduce debt. Net debt at 7 cent per share seems to be easily managable.

The cash generative structure of the business is also emphasised in the latest Investor presentation.


So far, everything looks almost to good to be true. One big issue however is obvious: Up until last year 75% of sales came from Italy, the international expansion is just starting. If Italy really goes into a deep recession, sales and profits in Italy could get hit hard. It would then be questionable if the international expansion could offset this.

I just saw that Piquadro issued a sales update for the 3rd quarter (financial year ends in March on January 10th. Sales ytd still show an increase of 5%. Howevr compared to the Q2 numbers this is definitely a pretty sharp contraction.

However I have to keep in mind that I already own Buzzi, EMAK and Austostrada. From a risk managament perspective I will have to think about some hedging against specific Italian risk.

Summary: On a first glance, the company looks extremely attractive: Good grwoth, high margin business, low capital requirements, excellent free cashflow and a conservative balance sheet at bargain prices. Howver the stock is tanking as I write. So I will have to dive deeper into the business model in order to identify potential hidden risks. But for now it looks like a potentially very attractive Core Value investment.