Frenzel & Herzing Value Investment
Hornbach Baumart AG First Quarter Update and potential catalyst

Since our last post some interesting things happened which we think are still not reflected in the share price of the Hornbach Baumarkt AG.

Hornbach-Treppe

 

1. The representatives of Kingfisher, which had owned 25% of the common stocks of the holding and 5% of the Baumarkt shares have left the supervisory board and have sold the shares back to the family and the Baumarkt shares to institutional investors. Kingfisher is now entering the German market. But I think that was not the main reason why they sold their shares and here is a very good article of the FAZ over the reals reasons.

 

Kingfisher would like to target the “professional” market and not the retail sector. I think that Hornbach has a little stronger position in the professional market than in the retail sector, but in total we are not concerned about this development due to the fact that Kingfisher’s major markets are in UK and France. At the moment you can observe what happened to Tesco etc. when Aldi and Lidl entered the UK market due to the fact that the German retail market is one of the most brutal markets in the world; our players know how to play the game.

 

2. A few days ago Hornbach Baumarkt was announced to become a SDAX member, this will attract new investors for the share.

 

3. Hornbach announced incredibly good Q1 numbers. EBIT nearly doubled for the Baumarkt and same store sales increased by more than 15%, this development actually exceeds our own expectations and you can observe a really big “Schlecker effect”.

 

But a really interesting thing is the development and valuation gap between the holding and the Baumarkt shares. What you can observe is that the Holding nearly performed twice as good as the Baumarkt shares did. We think this is due to the fact that if a bigger fund would like to establish a position it prefers to buy into the more liquid Holding.

 

Hornbach

 

So what can be a potential catalyst to change this valuation gab? We heard some rumors from knowledgable persons that the midterm perspective of the Hornbach family, now after they solve the problem with Kingfisher, would like to merger the two companies back into one company with two different traded shares. This is a logical step for the family due to the fact that they can save the money and still hold the full control over the company. So in our opinion it is way better to hold the common shares of the Baumarkt like the family is doing it, because we think the bearer shares of the Holding AG will be switched to bearer shares in the Baumarkt AG. With this move the family will also increase the free float of the total company, with this Hornbach is a clear MDAX candidate and will enhance the stock price of the Baumarkt AG shares.

 

We think these facts, the development and the future potential show that our first target price of 41,2 € was quiet conservative and still implies an upside potential of around 25% for the Baumarkt Shares which would lead to the same performance which the Holding AG shares already showed. At the moment the operational performance of Hornbach also exceeds our best case scenario which results in a share price of around 50 €. All in all we are really happy with the outcome and we think that  the future which lies ahead of Hornbach is also bright.

 

Disclosure: Long Hornbach Baumarkt AG

 

 

You can find a really good article about amazon and its business model and its long-term perspective in the latest economist, her is the link to the  “short” online version.

About the, in our opinion, value trap of taxi medallions and potential value investment in the business behind it due to disruptive innovation such as uber, and the strategy behind BlaBlaCar etc.

Related to this you can find an older business insider article about the death of Value Investing due to disruptive innovations.

A really interesting article by Wexyboy about European Islamic Bank and the value of shareholder activism. For me even more interesting due to the fact that I have written my bachelor thesis about islamic finance in germany and the potential market size for one bank.

Moatology explains you how to use stock screeners to find undervalued gems.

A great post from oddballstocks over investing styles

 

Some thoughts about entrepreneurship and what it has to do with value investing:

 

The job of an entrepreneur is to figure out where opportunities lie, they do it by tinkering with the market, learning new capabilities and creating value. Normally entrepreneurs blend strategic thinking and opportunistic actions at different junctures and become more strategically focused on a small niche (a value investor would say circle of competence) throughout this process and progress in learning within age and career stage. This extensive planning helps the entrepreneur to spot gaps in the market or simpler opportunities to invest his time and money. Realizing an investment idea for both a product for an entrepreneur or an investment thesis for a value investor which is not seen by the market – usually means overcoming significant resistance by others. The more contrarian the idea is, the greater is the natural resistance and normally the payoff. Due to the fact that entrepreneurship and value investing are an iterative, messy and uncertain process, both require a lot of effort, time and hard work.

 

Entrepreneurship and Risk taking

 

Usually everyone seems to know: Higher return = higher risk. This is essentially what every economist will tell you, but is this really the truth? I don’t think so. If you talk to entrepreneurs you will hear that they are trying to reduce risk everywhere they can (this is also called risk mitigation). The main difficulty in creating value is that you have to go against the grain, by delivering something new to the market while creating a profit. This normally includes a high level of uncertainty in the process and the outcome of your venture. Often you have to kill your most loved ideas due to the fact that you cannot sell your product in sufficient quantities to make it worthwhile. For this reason the probability that an entrepreneur will succeed with one idea is by far less than 100%. If you see some outcomes by entrepreneurs and what they initially invest into the venture in terms of money and time you will observe that this is often not the case. And in my opinion it is the same with value investing, you have to overcome many hurdles with different percentages of success. So entrepreneurship and value investing are more like poker where you are faced with uncertain outcomes which are influenced by the player’s capabilities, it is an uncertain game with skill. The game depends to some extend on the luck of the draw, but how you play your hands over time is what creates the true champions. For this reason the capabilities of an entrepreneur or a value investor determine whether he or she sits down at the table and plays at all.

 

Have a great week

 

Intro

 

This blog post will take us to a continent which is not usually our investment ground. It’s a look on possibly one of the most profitable companies emerging in Africa. It is called ‘Dangote’ and founded by Alhaji Aliko Dangote, a Nigerian entrepreneur who, after studying Economics in Cairo, started importing rice, sugar and cement. Dangote is now the biggest cement manufacturer in Africa, but does also diversify into refining of salt, milling of flour, manufacturing of pasta, noodles and poly products, logistics and real estate. Since its establishment the company has grown rapidly by providing basic goods to the populace, a mission the management is particularly proud of. We will focus on the Dangote Cement.

 

dangote

 

Dangote Cement

 

First off, I will give you the financial highlights, values are in billion Nigerian Naira.

 

2012 2013 % change
Revenue 298.4 386.2 +29.4
Cost of Sales (118.3) (142.5) +20.5
Gross Profit 180.2 243.7 +35.3
Gross margin 60.4 63.1
EBITDA 174.1 229.6 +31.9
EBITDA margin 58.3 59.5
EBIT 146.5 195.9 +33.7
EBIT margin 49.1 50.7
Net interest (10.8) (5.1) (52.8)
Profit before tax 135.6 190.7 +40.6

 

Recent reports: http://dangote.com/downloads/Dangote-Cement-Q1-2014-results.pdf, http://dangote.com/downloads/Dangote-Cement-2013-Presentation.pdf

 

The first annotation that needs to be made is that inflation in Nigeria is momentarily 7.9 percent, down from 8.5 in 2012. While it has an average GDP growth of 6.7 percent, (developing) Sub-Saharan Africa is at about 4.3 percent growth per year in average. Still this company outruns the economy and inflation significantly. That is due to several reasons.

 

Built his house on the Rock

 

The keys to success for the cement giant seem to be in my mind:

  • Clear leadership position in sub-Saharan Africa’s largest and most profitable market (62% market share, and going), enabling it to create immense brand value while facing increasing construction in the future
  • A government ban on cement imports in Nigeria, creating an oligopoly with strong pricing power
  • A 5 year tax exemption for each production plant due to the award of an entrepreneurial status from the government, in the chairman’s letter, he seems to thank the government personally for their great assistance
  • Immunity to macroeconomic shocks like recent flooding that might underpin demand in the long term while 65.2% equity prevent financial distress

 

dangote2dangote3

 

read more

After I spend a week in Omaha to attend a German value investor conference and the show of Buffett and Munger, we have a couple of more ideas to work on and even more valuable readings. Overall I can say that this week was a unique experience and I have to be deeply grateful to the organisations of the event and particularly to two persons from which I learned the most and have such a great personality. The two guys I owe so much are  M&MMI, thank you guys for all the lessons which you have taught me.

 

Created with Nokia Smart Cam

 

I bought Berkshire Hathaway`s letters to shareholders from 1965-2013  for 12 Dollar in a book form, which is a pure bargain for a guy who does not like to read so much on a screen. I will try to summarize them all (after I have finished my studies) and upload them.

 

Furthermore I`d like to highlight the book “Dream big” which was highlighted by Warren Buffett at the end of the Meeting. You can read a summary here.

 

You can read the notes of the Meeting here, I would like to highlight WBs answer to the Cost of Capital.

 

Additionally I would recommend the lessons of failure from the really good moatology blog. As a person who admits to have failed a couple times I can recommend to use such an approach.

 

Due to the fact that I like entrepreneurship and like to spend my leisure time on edx courses I only can recommend to read about entrepreneurship, strategy  and learn something new in an edx online course! And last but not least I have learned how important a franchise is, so go out and lean-to account for it! (We will try it as well)

 

And always keep in mind that the intelligent investor estimates likely returns, and invests if the returns are worth the risk.  Most profitable investing takes an uncomfortable view versus the consensus, and buys when the market offers good deals.  If there are no good deals, profitable investing sits on cash, and waits for a better day.

Have a great week!

 

 

  • Industry Map
  • IndustryMap2
  • Revenue
  • CostIncom
  • Welt
  • SharePrice
  • Zahlen
  • Ratio

Intro

The overall banking business model is simple. Banks receive money from clients which are depositors and the capital markets and lend to other clients which are borrowers, therefore banks make a profit from the interest spread. If a bank borrows money from a depositor at 4 percent and lends it out at 6 percent, the bank has earned a 2 percent spread, which is called net interest income. Furthermore banks also earn money from basic fees, assets under management (AUM) and other services, which is usually referred to as income from fees and commissions or simply noninterest income. If we combine net interest income and noninterest income we end up with the net revenues of a bank or its top line. A further point which is less obvious is that consumers are actually paying for the liquidity services as well.

The center of banking is, due to my experience of working for a bank, one thing: risk management. Banks have to deal with three different types of risk: credit, liquidity also known as “Fristentransformation”, and the interest rate environment. Borrowers and lenders pay banks through interest or fees because they are unwilling to manage the risk on their own, or because banks can do it more cheaply. There are only a few other business in the world where you can take money from people and effectively charge them to take it off their hands. That’s the banking and insurance business model in a nutshell.

But there are many banks, asset managers and insurers out there, most of them in the same country and the same business segment and after all, financial products and services tend to be generic. Despite this fact most of the banks and the finance industry earn some decent returns for themselves and their investors, which is a first sign of a potential moat.

read more

  • ccc
  • emhart
  • ccc

This will be the final summary of our Vetropack series. Here are links to the first two parts:

http://frenzel-herzing.com/investment-analysis-vetropack-holding/

http://frenzel-herzing.com/vetropack-analysis-part-2/

 

We want to start by giving you the most recent numbers (http://www.vetropack.com/htm/presse_detail_3.htm?id=159). The revenue growth was in line with our expectations, just as the decrease in EBIT matched our prediction quite closely. As we have said before, we estimated an average 2.5% revenue growth in the short term. We need to add that all calculations have been done in reporting currency, which is CHF. Most profits occur in EUR though, as one of our great readers has remarked in a comment previously. But it is even more important how the cash is pooled. The CFO has told us that the cash pool that is used for investment is also kept in EUR. So we converted our DCF model. We have made the following assumptions, using the most current numbers:

  • Revenue growth of 2.5% in the short term, 2% in the long term
  • 10.1% CAPEX / revenue
  • 0.63 operating expenses / revenue
  • 0.17 average cost / revenue
  • 0.09 average depreciation, amortization / revenue

 

read more

The book: ” The Art of Investing – How the wold’s best Investors beat the market” written by John Heins and Whitney Tilson, who also publish the Valueinvestorinsight, is a collection of value investing quotes by more or less famous investors. Overall, the book is well written and easy to read, but the price of the book is around 25 Euro which, in my mind, is quiet expensive for a collection of quotes. According to the authors the best investors can articulate in a clear and focused way what they’re looking for, why they’re looking for it and where they’re trying to find it. They have a well-defined and consistently applied process for research and analysis. Furthermore value investors understand the micro factors, such as a company’s competitive advantages and only act when they are able to draw a conclusion which incorporate a margin of safety. Because I stick with the quote of Richard Pzena, here are the best quotes of the book:

 

Charlie Munger: “All sensible investing is value investing”

 

Zeke Ashton: “I’ve heard it said many times that value investing is not as much about doing smart things as it is about not doing dumb things”

 

Lee Atzil: “The first thing is by making sure the potential downside is a small fraction of the upside. That means we avoid stocks that are cheap on an equity-value basis primarily because there’s a mountain of debt. The second important way to have a margin of safety is to have more than one way to win, through earnings growth multiples expansion or free options in the business.”

 

Seth Klarman: “People should be highly sceptical of anyone’s including their own, ability to predict the future, and instead pursue strategies that can survive whatever may occur.”

 

read more

Here are some new valuable thoughts and articles that should be worth checking out:

One last thought I want to share is that, as I have learned myself, it will always pay off to put a little extra effort into everything you do, even if it is an uncomfortable thing to do. Whenever I am confronted with a spreadsheet with hundreds of numbers and multiplicators and I ask myself whether I really see through all of this, two Einstein quote comes to my mind:

 

 Do not worry about your difficulties in mathematics; I can assure you that mine are still greater.

It’s not that I’m so smart, it’s just I stay with problems longer.

 

Have a great weekend.

This post originates by a comment of reader S., who has mentioned the book “the Outsiders, Eight unconventional CEOs”. Actually the book review was  my first blog post which I ever had accomplished, and MMI was so kind to publish it in his outstanding blog. As this book is really worth reading here is the old post again with some extensions which I have learnt in the year after having read the book. Especially I could recommend the links at the end of the post which will help you to achieve a deeper understanding of “Outsider thinking”. Perhaps William N. Thorndike Jr. itself is an outsider, he is the founder and managing general partner of Housatonic Partners a private equity firm. After Motley Fool Housatonic Partners has returned around 25% in the last 20 years, the approach of Thorndike is to spend 30% of his research time on the CEO and management of a company,

 

So first of all, let’s start with the book review and the wrap up of the idea.

read more

  • UE site

This is the continuation of our analysis of the Vetropack Holding.

 

At first, we will show you the strategic positioning of the company by giving you a geographical overview including Vetropack’s and competing sites. Keep in mind that for most products the maximum transport distance is 150 km. We also added the total sales per country in mio pieces. It has become clearer that Vetropack is in good company at almost every production site. That explains why the management announced they were not able to push thru price adjustments, competition is strong enough in most regions.

 

MAP

 

Furthermore, as you probably know, political events in the Ukraine have influenced its currency risks and Ukraine may need a devaluation in order to pay its debt and re-establish its exports.

 

read more