Value Ideas Blog
3u Holding – Selling at 1/3 of the current book value?
Today we want to take a look at 3U Holding (ISN: DE0005167902, Symbol: UUU). It’s a small cap enterprise that caught our attention. The book value at the end of Q3/13 was about three times the current shares price, i.e. 1.29 EUR (by our calculations) vs. 0.42 EUR on Jan 10, 2014! In the chart below you can see that the company is today 80% equity financed, up from 36% in the year 2006. So, let’s take a closer look to find out if this is an investing opportunity from a value investing point of view or a potential value trap… (This is the first part of the analysis, keep in mind that you should do your own research and that this is not a selling or buying advice)    Equity development  

History

  3U Holding aka “3U Telecom” was founded in 1997 to take advantage of the upcoming liberalization of the German fix line telecommunications market in 1998. Because of high margins between monopolistic consumer prices and regulated purchase prices many successful resellers emerged at the time. However, with changes in regulation and competition getting fiercer margins became tight and only a few players survived. Hence, in 2008 3U Holding decided to build a new business line in the renewable energy sector and benefit again from regulation. Its principle is that energy prices are guaranteed for 20 years and the difference to the market price is basically paid by all consumers. In other words, consumers subsidize the profits of investors. In this light the company has grown its book value by 11,4% since 2008.   Book Value    

Structure and Approach

  The holding has grouped its investments into three segments, i.e. telephony, so called “services” and renewable energy, and holds (mostly majority) shares in around 30 firms (see chart below). Unfortunately, the company is reporting on holding level only, i.e. financial statements are consolidated. Hence, to estimate the fair value, we chose to start with the holding’s assets on the balance sheet book and adjust the valuation by strategic considerations, that is
  1. Rough valuation of assets from the holding’s balance sheet
  2. Adjustment based on strategy assessment and outlook
  3U Holding  

Part 1: Rough Valuation of Assets

  We value each asset’s book figure at a certain percentage in order to get to our estimated value. These valuation factors are taken out of an example used by Warren Buffet at the time, apart for the solar park in Adelebsen, which is a very special type of asset. So, we have chosen to take a very conservative valuation approach. It was built in 2012, cost roughly 17 million Euro and produces around 10.000kWh/a. The German government guarantees a price of around 17 Cent per kwh until 2032. Therefore, an annual revenue stream of roughly 1.7 million Euro can be expected. Comparable solar parks work with an OCF margin of roughly 80% resulting in annual cash flows of 1.4 million Euro. Discounted back with a cost of capital of 12% we would arrive at an NPV of 11.7 million Euro. However, as the current, subsidized price is around 3-4 times the market price and the annual subsidies are piling up to 21 billion per year, the political pressure is about to increase. Hence, there is a certain risk, that the government might reduce the guaranteed prices over the next years. We assume this risk with 20% and adjust the NPV accordingly.   NPV   Adding the solar park back to the balance sheet we would arrive at valuation of still 0.75 EUR per share, hence still 79% above the share price. Now, keep in mind that the share price has been on a low level for about two years already.   balance sheet   And now, a well-known quote regarding the situation:  
If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the ”cigar butt” approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the ”bargain purchase” will make that puff all profit. (Warren Buffett)
  Well, is there a puff left? And is the stock really as cheap as it looks at the first glance? Find out more about the company and the current condition as well as our conclusion in next week’s update! Disclaimer.

4 Comments

  • Thanks for your post on 3U Holding. This company was not on my radar screen, so it was good to get an initial input. I like to look at investment companies, holding companies, listed funds, especially if they trade at large discounts. From my experience with this kind of companies, it is very important to look at the cost structure of such vehicles as this can be a substantial drag on performance especially over the long term. And quite often these companies are used by management teams to enrich themselves by paying out high management fees, salaries, consulting fees.
    I quickly had a look at the Q3 report as well as the FY 2012 annual report of 3U Holding. Over the last 9 months the consolidated EBITDA was -2.8m of which -3.2m came from the Holding (overhead). I was also surprised to see that despite the massive cost cutting and headcount reductions within the different operating segments, the personnel expenses at holding level actually grew by around 20% from 2.1m to 2.5m. A quick look at the compensation report in the annual report revealed that CEO Michael Schmidt received a compensation of €458K in 2012 (at least it was down from €608 in 2011). With this kind of substantial holding costs it could make sense to capitalize them and deduct them from the estimated NAV. It also raises the question if the management team is really trying to create shareholder value or just tries to maximise its own payouts.
    Looking forward to part 2 of your post.

    Cheers Kiskosky

    • Hey Kiskosky,

      thanks for your comment, you are actually talking about some of our findings that will be revealed in the second post. So yes, it is very important to take a close look at the cost structure of such vehicles because of the facts you mentioned.

      “These companies are used by management teams to enrich themselves by paying out high management fees, salaries, consulting fees.” Very good point, we think this is especially dangerous when the management owns a big chunk of the outstanding shares, as it is the case with 3U Holding and its CEO Michael Schmidt.
      Furthermore we have some other points about the strategy, business fields and the recent cost cutting program.
      We hope to be able to answer the most crucial questions in our next update. Otherwise, feel free to send us an email!

      Cheers, Nils

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