Frenzel & Herzing Value Investment
Update: Banque Privee Edmond de Rothschild

Recently BPER announced a change in the CEO position of the Group and the CHF jumped after the Swiss National Bank abandoned the CHF/EUR exchange rate of 1,20. Ariane de Rothschild will replace Christoph de Backer, which served BPER for three years, on the 31.01.2015. You can read the full press statement here. You can find our initial analysis here which we think is still intact despite the fact, that the new exchange rate possible decreases the Net Profit a little bit.

Ariane_de_Rothschild

Christoph de Backer was the head behind the ongoing transformation and strategic repositioning of BPER. As we have read some rumors in the newspaper, this transaction has not pleased everybody and some older employees have left the group. The change was quiet surprising for us and we already observed some recent changes in the last years and months which are probably a result of the coming change. For example a new position of a Deputy CEO was created and Sabine Rabald, who worked for the Group nearly 20 years, was announced to serve in this role. But If you read the annual statements of the past years the change is not that surprising as it looks at first. Benjamine de Rothschild mentioned several times that the lead of the group will be taken over by a women in the foreseeable future. As Ariane de Rothschild already served in different banks in New York and Paris and has an education which is focused on finance we  see the change not as a negative step towards the future.

 

Lately the Group announced the acquisition of an extra stack in OROX Asset Management which should strengthen the Property Funds business of Rothschild. The overall stack is now at 82% and the purchase price was not disclosed.

 

In our view the semiannual result of the group was quiet satisfying, the business profit which is the best proxy for the ongoing operations rose by 32,4 %. Sadly this growth was not seen in the Net Profit of the Group which dropped by 18,8% for the half year, due to the result in the extraordinary income, which was quiet high last year. The total Assets under Management in the Group rose slightly by 1% in the half year. This is not really impressive but is explainable with the sale of non-core businesses in Italy. The like-for-like AUM rose by 4%; way more in line with our expectations of the groups’ expansion into Asia. The Tier I ratio remained unchanged on 36,9% under Basel III which is a really comfortable buffer.

This year was the year with my lowest portfolio return which was till 1.12.2014 6.21% after taxes and trading costs including an average cash level of 27.8%, the final result with volatility will be send to me on the 17th of January, but I don’t think that there will be a big difference in the results. This is my weakest performance since the real start of my trading history in the year of 2008.

 

As we cannot and will not discuss our Portfolio Holdings in public we have to speak about the things which were related to the performance. In my opinion we made two major mistakes. First of all, time management. We spend a lot of our time on legal issues related to the German regulation (which did not really take us ahead). This time was missing for good analysis work to evaluate companies. But this is the price that you have to pay if you try to achieve everything on your own.
 

Second, we made fundamental mistakes like the one with Vetropack and with it and our due to our legal structure the mistake of dead money. If a company cannot achieve any growth at all the time plays against you and it doesn’t matter which price you pay. This is something which I learned over the last year and where I would like to give you a short excerpt and math example out of a presentation of RV-Capital:

 

“Whether appropriate or not, the term ‘value investing’ is widely used. Typically, it connotes the purchase of stocks having attributes such as a low ratio of price to book value, a low price-earnings ratio, or a high dividend yield. Unfortunately, such characteristics, even if they appear in combination, are far from determinative as to whether an investor is indeed buying something for what it is worth and is therefore truly operating on the principle of obtaining value in his investments. Correspondingly, opposite characteristics – a high ratio of price to book value, a high price-earnings ratio, a low dividend yield – are in no way inconsistent with a ‘value’ purchase.” Berkshire Hathaway 1992 Annual Report

 

The math example to it:

 

  1. If you buy a business with no growth and 2% cost inflation for a EV/EBIT 10 in T0 you end up paying an equivalent of EV/EBIT 38.7 in T4.
  2. If you buy a business with no growth and no cost inflation you end up with the same EV/EBIT of 10 in 4 years. (Example: Vetropack)
  3. If you buy a business with 5% growth and no operating leverage, you pay an EV/EBIT of 7.8 4 years from now
  4. If you buy a business with 5% growth and operating leverage, you only pay EV/EBIT of 5.4 4 years from now which is clearly a bargain.
  5. If you take company 4 and add pricing power to this equation you end up with an EV/EBIT of 3.2 in 4 years.

So you can see on this easy example: growth matters

“• Focus on the multiple relative to the business and not the absolute
multiple
• At nearly all times, the great business will trade on a higher multiple
than the value business
• For the truly long-term investor, the great business (properly
analyzed) beats all other businesses at almost any price.
• There is a time horizon arbitrage in great businesses trading at high
multiples
• It is perfectly valid to invest in non-great businesses, but be sure to
pay a lower relative multiple
• Longevity of growth is far more important than the rate of growth” RV Capital

 

Furthermore I learned that in investing similar to my favorite sport climbing, it is all about a good fail protection. That is also a reason for the quiet low portfolio transaction and high cash amount. We have only 5 companies from our first goal of 10-12. furthermore I would like to highlight the importance of a defensive thinking and aggressive acting. What do I mean with this? In my opinion it’s about understanding second, third and more level of influence and the time horizon which it takes to affect the underlying stock price. An example can be seen in the Oil and Gas industry where a low oil price isn’t that bad in the short term. But if the oil price stays low for a longer time horizon, like half a year or longer, Oil companies cut back production and CAPEX. As detailed budgets are normally made on a yearly basis and up to 5 years in for big projects, it takes some time till the CAPEX directly influence the earnings of companies which are related to exploration.
 

Furthermore it takes even longer to feel this influence for companies which are not directly related to the exploration. This has led some investors into paying peak earnings for a cyclical company.  Observation has tought us that many losses for investors came from the purchase of low quality companies at time of favorable business conditions. This only means that purchasers view the current good earnings as equivalent of the EPV of the company and assume that prosperity is a synonym for safety. But this is often not the case.
 

Personally 2014 was challenging for both of us: Felix was able to finish his internship, receive good grades in university and lastly score a nearly perfect GMAT score, which he needs for his further studies. For me it was all about finishing my Master, doing the CFA research challenge and the first level of the CFA.
 

In 2015, Felix is hopefully about to enter one of the top universities abroad and to improve as a value investor; the only thing that’s left of my studies is my Master Thesis which I will start in the next couple of days and the level 2 of the CFA which I hope to pass in June. Furthermore I would like to correct some mistakes in my analytical thinking to become a better value investor.
 

To sum it up: our main aim for 2015 is to get better in the evaluation of the value of growth, spend more time on companies and be more rigorous in our selection of companies which enter our portfolio. And of cause the other necessary university stuff ;)

In the first part of our analysis we explained the business model of Delticom; now we would like to give you and inside in its valuation. But before we begin with the number crunching we would like to start with a short summary of the key takeaways of our first part:

  1. Some other Value-Investors think that the problems of Delticom are only short-term issues: EBIT-Margins will bounce back to their old highs.
  2. Delticom has a really light business model: everything is outsourced to third party distributors.
  3. No use of purchase power: Delticom uses a fixed premium on the purchase price of every tire, sometimes it uses a flexible mark up to account for seasonality and inventory management.
  4. No customer captivity due to long purchase cycles of over 4 years.
  5. No lock-in of fitting shops.
  6. BBE-Study assumes that the online market share will reach 15% in 5 years, e.g. 2020. In an overall saturated market. (You can see the development of 2014 here)
  7. Bad strategic behavior in the acquisition of Tirendo and bad own brand strategy (The tires get really bad reviews.)
  8. Too high ROCE and ROIC even with small EBIT-Margins, which we will explain in the hereafter

What do we mean with too high ROCE and ROIC, and why is the biggest advantage of Delticom also its weakest spot?

Many other investors think that Delticom is able to return to its old EBIT-Margins, but we don’t think so. Why? The answer lies in the Business Model of Delticom which is extremely asset-light. As you can see in the chart below, the Capital Employed of Delticom is 7,1 % of 2013 Revenues, relatively low in comparison to other companies, but for Delticom itself higher than in the year of 2006 (6,6%) and virtually sky-rocketed from its low in the year of 2010 (0,9%) where Delticom also has shown its highest EBIT margin (11,1%).  The combination of high EBIT-Margins and low Capital Employed lead to an astonishing high ROCE of 276% in the year of 2010. Furthermore the ROCE was still high (51%) in 2013 where Delticom only had a EBIT-Margin of 3,6% and a Capital Employed of 7,1% of revenue. This high ROCE’s is also the reason why this business is so attractive for every competitor, if you cannot defend your turf with a big moat. As we don’t think that Delticom has a moat, we think that every time the EBIT-margins are high enough new competitor will enter the game.

 

CE Delticom

 

So let’s come to our valuation of Delticom.

We have explained already that we don’t think Delticom has a moat and is a pure execution business only, so we use a discount rate of 10%. If we discount our Earning Power Value, assume an EBIT-Margin of 4% in the future and subtract the debt of Delticom we end up with a fair value of 16,62 EUR per share. This is not far away from our current trading price of around 17,5 EUR and is in our opinion quiet low  for an evaluation without any future growth.

 

Delticom was able to growth its revenues by 17,7% p.a. over the last five years. If we now assume a growth of 8,8% in average over the next 5 years (10% in 2015 declining to 7% in 2018) which we think is quiet conservative, we end up with an N-EPV of 28 EUR per Share in the year of 2018 or an IRR of 13,7%. (Capital allocation is assumed to be stable: 43% dividends, 3% growth CAPEX, 2% change in NWC and no share repurchases.) If you than use the Growth Multiple of Greenwald to calculate the Terminal Value with a 3% growth rate, you end up with an N-EPV of 37,92 EUR per Share at the end of the year of 2018. Which is equal to an IRR of 20,1%.

 

We also used the approach of total Market size as an approximation but where not really satisfied with this approach. Therefore the reasonable share price of Delticom should be around 30 EUR which gives you a nice little upside. But if we think in our 3 pillars Model, we end up with a fair or cheap price but with neither a beautiful business, nor a management we would like to be engaged with. (You can inform yourself here and take a look at the insider trading)

 We wish all of you a happy new year!

Disclosure: No Position

  • Business Model
  • Umrüstquote
  • Absatz Reifen
  • Einfluss auf Marktwachstum
  • Marktanteil
  • Anteil Flottenfahrzeuge
  • Autohäuser
  • OnlineKauf
  • Entwicklung
  • Entwicklung
  • chart.gfx

In our today’s report we feature an idea which was already mentioned many times by other value investors. However, our outcome is different in one point which leads to a completely different picture. Here you can find the analysis of Profitlich&Schmidlin and from others (We have to add that these two funds share one platform). We would like to present you our 3 cents on Delticom. The online tire store Delticom was often proclaimed to be a value investment. Besides its growth rate that was because it used to have a solid balance sheet, an easily understandable business model, and because its extremely high returns on equity.

  read more

 

 

Today Hornbach announced that they consider changing the legal structure of the Holding into a KGaA. You can find the news here. The Baumarkt AG of which we are shareholders should not get affected by this considered change. This announcement happened shortly after the change of the CEO of the Group.

 

We don’t like above mentioned news due to the fact that the CEO has done a good work and that the change in the legal status to an KGaA can lead to a decrease of shareholder rights which we have already observed at STO KGaA SE (you can find our analysis here and here). But as we are not affected by the change of the legal status, no detailed information is yet available and because we think that this is only the first step to reach full controlled over the Baumarkt AG we stay long Hornbach Baumarkt AG.

 

Also, as you might have noticed, our posts have become a little less frequent recently. We apologize for this and promise improvement!

 

  • dfg_320s_s_0043
  • 1024px-Miniload_ASRS
  • PC1
  • 344369
  • Employees  Jungheinrich Frenzel Herzing
  • Global Market Handling Equipment Jungheinrich Frenzel Herzing
  • Net Sales  Jungheinrich Frenzel Herzing
  • Net Sales By Region Jungheinrich Frenzel Herzing
  • Competition Europe Jungheinrich Frenzel Herzing
  • Competition World  Jungheinrich Frenzel Herzing
  • Growth Capex Jungheinrich Frenzel Herzing
  • roic roce

Today we have a look at the German company Jungheinrich. This report was accomplished with the help of my good friend Benedikt Balthasar, who is studying Math and is currently in his last Master semester at the TU Berlin. Furthermore we would like to excuse our long absence period, this is due to the mentioned fulltime internship of Felix in an investment bank and that I had currently moved to Nice.

 

Company Overview

 

33063-logo-pressemitteilung-jungheinrich-ag

 

The forerunner of the Jungheinrich Group was established by Hermann Jungheinrich in 1908 as an import and export firm under the name H. Jungheinrich & Co. In 1953 his eldest son, Friedrich Jungheinrich, laid the cornerstone for the present company by establishing H. Jungheinrich and Co. Maschinenfabrik. After the passing away of the founder, Jungheinrich remains an independent family business owned by the shareholder families Lange and Wolf.

read more

Dear followers!

Here are once again a couple of recent links out of different areas that we found interesting.

And regarding the recent actions taken by the ECB, this could help maintain your confidence in stocks and bonds:

 

How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case. – Robert G. Allen

 

Have a great week!

m4s0n501

Here is a list of our earlier investment analyses. It will be updated on a regular basis.

 

3U Holding AG (Part 1) (Part 2) Analysis
Banque Privee Edmond de Rothschild S.A. (Part 1) Analysis
CARMAT S.A. (Part 1) Quick Check
Dangote Cement PLC (Part 1) Quick Check
Hornbach Baumarkt AG (Part 1)(Part 2) Analysis
Kabel Deutschland AG (Part 1) Analysis
Sto SE & CoKGaA (Part 1)(Part 2) Analysis
Vetropack Holding AG (Part 1)(Part 2)(Part 3) Analysis

A link can be found in the side bar menu.

  • SMT1
  • SMT2

First off, a quick note: Felix is working for an investment bank for a couple of weeks, so he will not be involved in the reporting on German stocks for that period.

Today I would like to present you, in this quick write up, the SMT Scharf AG – ISIN: DE0005751986. SMT Scharf was founded in the year of 1951 and is based in Hamm which lies in the old industrial and mining arear of Germany the so called “Ruhrpott”. SMT Scharf is listed on the German stock exchange since the year of 2008 and the first time I heard of it on a value investing conference was in the year 2012. The company and the investment case was presented by the guys of the Frankfurter Aktienfonds für Stiftungen. Since than the development of the share price looks like this:

 

SMT Scharf_hist_wallstreet_online_20090811_20140811

(Source: WallStreet:Online)

 

SMT Scharf is the world market leader for the production, installation and maintenance of underground rail-bound railway systems which are used in the hard coal mining business. Its market share in this segment is over 40%, you can find an interview with the CEO from the year 2013 here, the number of installed rialways is really interesting due to the fact that you can calculated the future service revenue with it.

Das Segment, das Scharf bedient, sind „Einschienenhängebahnen“ = „Monorails“, eine sehr spezialisierte und kleine Nische: Weltweit gibt es etwa 1200 bis 1400 Monorails, wovon etwa 530 von uns sind, daraus resultiert unser 40%-Marktanteil. Der Jahresumsatz in dem Segment sind etwa 250 neue Bahnen (100 Mio. EUR) und eben so viel Service, also ca. 200 Mio. EUR. Auch davon hat Scharf mit 77 Mio. fast 40%. [https://translate.google.com/]

You can find an older presentation for the EK-Forum here. A nice video about the product can be found here.

read more

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