Value Ideas Blog
Hargreaves Services PLC, a diamond in the mud?

Disclaimer: This is not an investment advice, please do your own research and don’t follow anyone blindly. Furthermore, it has to be mentioned that the author don’t have a position in Hargreaves but affiliated parties may have. Thus they participate if the share price increases. Additionally, the author and related parties may sell their shares without further notice.

 

We wrote about Hargreaves two times in the past, since then the stock price tanked another 50%. Here you can find the first and the second writeup about the company. In the meantime, we visited the company in the UK and more recently, Hargreaves published a trading update in which it basically revealed all cash which can potentially be realised within the next 5 years. After this update the share price rose ~20% within a couple of days.

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Today we would like to provide further insides into our hidden Asset valuation of Hargreaves Services plc, where a friend of us, Daniel Gilcher helped us.   According to the annual report of 2014 the book value of land assets are carried at cost: 8,418m GBP. The problem is, that we don’t have a lot available information on the different land patches across the country nor the status and information of the plan projects.     Her is what we know: Where the old mines are and that 300 acres (1% of overall land) is developed towards a residential area. A minimum of 1600 housing units will be erected. The cost for development remains unknown. Please see below the landbank of Hargreaves around Edinburgh.   land portfolio around Edinburgh And in the next picture the landbank around Westfield. read more

Today we would like to present you METKA, which is probably one of the cheapest stocks in the world. Before we start with actual valuation, we provide an executive summary as this is a rather long post. Afterwards we would like to highlight the history of this over 50 year old company.

 

1. Executive summary

 

The share price is € 8.60. The company was founded in the year of 1964 in Volos Greece and was floated in 1973. In 2008 METKA’s share price hit a high of € 17,50 and slumped in the aftermath of the financial crisis to a share price level of around € 5.50. Since 1999 the Mytilineos Group owns 50.4% of Metka. Ioannis (current CEO of METKA) and his brother Evangelos Mytilineaos together own 31.8% of Mytilineos Group, split almost evenly.

 

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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