Tag Archives: Special Situation

SAPEC SA (ISIN BE0003625366) Still an attractive Special Situation despite +350% YTD ?

Disclaimer: This is not investment advice. The stock mentioned is relatively illiquid and potentially risky. Please do your own research !!!!

Management Summary:

SAPEC SA, despite having gained already 350% YTD is in my opinion still a highly attractive special situation. The company is in the process of selling its main business which will result in around 230 EUR net cash per share compared to a share price of 135 EUR. Deal closing is very likely and management promised to distribute a “significant amount” of the proceeds. For me this is very attractive as I expect this to happen in the first half of 2017.

SAPEC is a somewhat strange company. Although the company is listed in Belgium, business activities are almost exclusively in the Iberian Peninsula (Portugal & Spain). This is how the company describes itself:

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Uniper/E.On Spin-off: Take one ugly duck and transform it into ….. 2 really ugly ducks ?

Background:

Monday, Sep 12th will be the first trading day for Uniper, the E.On spin-off. E.On shareholders will get one Uniper share for each 10 E.On shares they are holding.

Just to recap: Uniper will contain all the (unwanted) power generation assets of E.on, so all the “fossil fuel” power plants, the Russian assets and the Swedish nuclear plants plus some other stuff. The German Nuclear assets (and the corresponding liabilities) will remain at E.on due to the reasons I mentioned in the last post.

Uniper is clearly an ugly Duck, maybe the “most ugliest spin-off” I have seen since I started the blog. If we look into the most recent investor presentation, it is clear that you have a problem when the 3 listed growth projects are a German Hard Coal Power plant, q Russian power plant closed due to an accident which will reopen in 2018 and some strange dealings around the North Stream gas pipeline (page 9.). It doesn’t help either that Uniper had to take a 3,8 bn EUR pre tax write down in the first 6 months of 2016.That makes the duck still uglier.

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Short cuts: Installux, Kuka, Aixtron

Installux:

Installux is surprisingly one of my best performing stocks this year, including dividends the stock is more than 30% and is at an all time high.

installux

I did not fully understand why until I read the 6 month report.

Sales are up ~7% yoy, 6M earnings per share are 17,16 EUR vs. 14,37 EUR, an increase of almost 20%. Profit improvements happened across most of their sectors, so it doesn’t look like single special effects or so. Despite the recent run-up, the stock remains exceptionally cheap.

Kuka & MDAX exit

For those who did follow my comments on the original Kuka post, they might have noticed that I sold the stocks 2 days ago and bought them back yesterday slightly cheaper.

The reason was that in the meantime, the tendered shares were kicked out of the MDAX, the popular German MID Cap index.

As I was not sure how the shares would react I decided to manage the risk by staying out.

At the end of the day not much happened:

mdax kuka

Nevertheless I was able to cheapen my purchase price from ~107,5 to 106 EUR. As the deal now is more attractive, I invested a total of 4% of the portfolio.

 

Aixtron – another special situation (with a Chinese buyer)

Aixtron, a former TECDAX star has fallen on hard times. However a few weeks ago, a Chinese buyer showed up and finally made an offer for the company at 6 EUR per share.

With a share price at currently 5,53 EUR, the discount is similar to Kuka at around 8,5%.

The situation differs slightly from Kuka:

  • the buyer is a financial buyer, not a strategic one (more opportunistic ?)
  • The purchase price is “optically” not as rich as the one for Kuka (below book)
  • they require at least 60% acceptance as closing condition (vs. 30% for Kuka)
  • within the offer they have a “put” if the index (DAX or TEcDax) goes down more than 30%

On the plus side, there is little risk that anyone complains about the deal as Aixtron was not doing well anyway and they are not deemed “strategically important”. The time horizon here should be shorter than for the Kuka deal.

The offer runs until October 7th. So far, the acceptance is low, as of today, only 1,64% of the shares have been tendered.

I think the risk is slightly higher than in the Kuka case as they might not reach their threshold, on the other hand there might be a chance for a better offer.

Although the situation is less clear for me as in the Kuka case, I start here with a 1% position at 5,53 EUR and will monitor it closely.

 

 

 

Old Mutual Plc (ISIN GB00B77J0862): Buy one, get four ?

In the blog I looked in the past at a couple of “sum of parts” situations (Alstom, Viel, CIR SpA but I never invested in one. Why ? Because if nothing happens, a perceived discount can remain for a long time. So for a sum-of-part investment, a “catalyst” has to be on the horizon.

Old Mutual

As many other Emerging Market exposed financial companies, Old Mutual did not create a lot of shareholder value over the last couple of years as the chart clearly shows, although they performed better than the overall index:

old.

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Special situation quick check: Syngenta & ChemChina

Syngenta ChemChina offer

After the failed attempt of Monsanto to buy Syngenta last year, Chinese conglomerate ChemChina made an offer for Syngenta a couply of weeks ago. Other than with Monsanto, the Syngenta board already approved the take over.

The offer itself is as follows:

ChemChina will pay 465 USD. On top of that, anyone who buys Syngenta shares now, will receive the normal dividende of 11 CHF and a 5 CHF special dividend.

If we expect closing at the end of the year, the potential return would be (in CHF) at a current price of 400 CHF:

-400+(465*0,994)+11+5= +77,75 CHF or a potential 19,4% return for 10 months.

This looks very attractive. However the merger arbitrage/event  market is a very competitive one and those spread usually don’t come “for free”. So why is there such a large spread ?

US regulatory risk

I guess the most obvious reason is that investors fear that US regulators will try to kill the deal. Syngenta has a signifcant US business. There are several rumors around why the US authorities might challenge the deal, most recently some in connection with the Zika Virus.

The Committee on Foreign Investment in the US (CFIUS) will review the deal because Syngenta, through its US research and production facilities, plays a key role in the US food industry.

The Zika virus problem could force CFIUS’s hand, sources said.

“CFIUS focuses solely on whether an acquisition represents a national security risk,” a Beltway CFIUS expert not involved in the merger told The Post. “I certainly think Zika will be a factor.”

From what I found on the net, the problem is that the CFIUS never really explains their actions, so it is very difficult to judge as an “amateur” what the chances will be. A professional hedge fund clearly has the money to pay for advice, most likely from former members of the CFIUS. This is clearly an information disadvantage form me as small investor.

China FX issues

Another problem I could see is the fact that ChemChina needs to come up with around 44 bn USD in USD financing and this could be difficult if there would be really turmoil in China in the meantime.

They haven’t even refinanced their Pirelli bridge loan yet and at least in the Pirelli case they don’t seem to guarantee those loans:

The new refinancing will be non-recourse to ChemChina, but will have elements of support from Pirelli’s Chinese owner, bankers said.

So I guess the ~20% discount is basically a mixture of regulatory risk and financing/China turmoil risk.

On the plus side, even if the ChemChina deals would fall through, there still could be other players interested such as German chemical Giant BASF.

Is Syngenta then an interesting special situation investment ?

What is bothering me is the following: As I said before, this area is very competitive and Syngenta is a liquid stock (50-100 mn CHF a day) and I do not have any special insights into the situation.As discussed before, I guess I have even an information disadvantage.

The potential downside for a failed bid is at least -25% when we look at what happened after the Monsanto bid:

syngenta

So if I assume a simple 50/50 probability, my expected value is negative.

Every “event driven” fund is clearly looking at Syngenta which in turn means that they seem to price the risk at the current price and assume a slightly better chance than 50%.

However I clearly have no basis to assume any higher percentage for a succesful outcome.

All in all, in the past it never had paid out to invest into such a situation with an information disadvantage, so I will stay away from this one.

 

 

 

 

 

 

 

 

 

 

 

 

Updates: MAN SE & Sold Trilogiq

MAN SE “Special situation”

In November 2013, I entered a special situation investment with MAN AG, arguing that the proposed compensation payment of Volkswagen might be too low and the court may decide to increase it.

Last week, the Munich court now decided to increase the compensation payment from 80,89 to 90,29 EUR. This is less than some investors hoped for, in the past 100 EUR or more were assumed to be realistic.

In my understanding, together with regulatory required interest and minus the already paid annual amounts, the fair value of the MAN share is around 95 EUR which is where the stock trades at the moment.

At ~95 EUR, this results in a yield of approx. 13,5% over 18 months, not spectacular but with very low risk as we can see in the chart:

I don’t think that there is much further upside although some hedge funds seem to be keen to get even more. I will wait and see but I think I will exit the position rather sooner than later.

Trilogiq

Trilogiq is a stock which I bought 2 years ago as a potential “hidden champion” and based on very good historic profitability.

However, pretty soon after I bought, things turned south. The official explanation was that they introduced a new product made out of graphite instead of the metal tubes they used before which should replace most of the existing installations. Sales went down by around -7% in 2014 against 2013 and profit halfed.

Lats week, Trilogiq released 2015 numbers (Year ends at 31.03.).

At a first glance, things seemd to have picked up sligtly. Sales are up slightly and also profit is up from 0,94 EUR per share to 1,06 EUR per share. Cash and Cash equivalents are at a healthy 23,7 mn EUR or ~6,35 EUR per share.

At currently 15 EUR per share, this results in a P/E ex cash of around 8. Still very cheap.

At a second glance however, things don’t look as good. The operating result (EBIT) actually deteriorated by -17% from 4,9 mn EUR to 4,1 mn EUR. Only a swing of +1,1 mn EUR in the financial result driven by FX gains led to a higher EPS.

What irritated me even more was that in they mention in this document that only 7% of sales in FY 2015 were the new graphite products. They way they presented it before one had the impression that more or less the majoriy of sales would have been switched.

Although the second half year looked better than the first, I do think that they have some fundamental problems in their business. Many of their clients (EADS, German automakers) work at full capacity and many automotive suppliers are doing very well.

At Trilogiq however, this is not the case.The US business for instance shrank if one accounts for FX movements. Wages and Salaries increased significantly, not really a sign of tight cost control.

Overall it is not easy to understand what is going on because they don’t provide a lot of information.

My initial thesis relied on the implicit assumption that if their clients are doing well (EADS, automakers), Trilogiq should do well. It looks however that this is not the case and Trilogiq does have individual issues.

As a consequence, I sold the position in the last few days at an average price of 15 EUR per share, realizing a loss of -17,88% against my purchase price as I do not have any visibility on what’s going on at Trilogiq.

It still could be that Trilogiq could be a good value investment as it is still cheap but now it looks rather like a potential turn around case which is very different from the assumed “hidden champion” I was hoping to invest in.

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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