In the second quarter the portfolio gained 0.9% while the benchmark lost 0.9%.
Largest contributors to portfolio performance were AO Johansen (+0.9%) and AGCO (+0.6%). Largest detractors were Fairfax (-1.0%) and Microwave Vision (-0.4%). Trading activity during the quarter was relatively high. I completed the acquisition of a position in JZ Capital, Microwave Vision and Minds + Machines. I started to build a position in Bellevue Group. I added to my position in UMS and reduced my position in Microwave Vision after the release of disappointing earnings results. Consequently, the cash rate declined to 21.7%.
As almost every quarter there is noteworthy news about BHF Kleinwort Benson Group (BHF KB). This time, BHF Bank’s CEO Björn Robens was dismissed by the bank’s board of directors. BHF KB owns a 100% share in BHF Bank. Björn Robens is said to have close relationships with Fosun. Fosun is holding 28.6% in BHF KB (but is not represented on BHF Bank’s board).The dismissal seems to be related to Fosun’s interest in the acquisition of German private bank Hauck & Aufhäuser. These plans caused distrust from other BHF Keinwort Benson Group shareholders. Together with disagreements between Björn Robens and Leonhard Fischer (chairman of BHF Bank) “about the future strategy” of the bank, the CEO’s days were numbered. Fosun did heavily disagree with this decision. Before the removal of BHF Bank’ CEO, Fosun decided to increase its stake in BHF KB from 19.6% to 28.6%. Hence, it will be interesting to watch whether Fosun will take further action to strengthen its position in BHF KB.
From an operational point of view, good progress has been made in the first quarter supported by buoyant markets. In addition, the company announced a deal with Samena Capital buying a 31.2% stake in one of Kleinwort Bensons’ subsidiaries.
Finally, things start moving at Retail Holdings:
First, the company announced the sale of its entire stake in Singer Thailand. I like the decision because of Singer Thailand’s weakening competitive position relative to the other Singer companies in India, Sri Lanka and Bangladesh. However, in hindsight this move should have been made much earlier given that Singer Tahiland has lost roughly one third of its market cap since I made my investment in Retail Holdings (during the same period the combined market value of the other major holdings in Sri Lanka, Bangladesh and India increased by roughly 35%).
Second, the Sri Lanka business unit has been restructured by selling the stakes in Regnis and Singer Industry to Singer Sri Lanka.
Both transactions prepare the ground for management’s announced goal to dispose the company’s assets and return capital to shareholders. However, so far management has not reported on the use of the cash proceeds from these two transactions. From my perspective there are only two options: either return the cash to shareholders immediately or buy out minorities in the other Singer companies to facilitate a transaction with interested buyers. My estimation of Retail Holding’s NAV is way above USD 30 per share providing substantial upside potential in case of additional asset sales and cash returns to shareholders.
A&O Johansen is my second largest position after Fairfax Financial. The share price increased by almost 60% year-to-date. Still the company appears to be cheap.
At the end of the quarter, they announced the acquisition of BilligVVS, Denmark’s leading online supplier of plumbing, heating and sanitary ware products and among the leading online providers of the same products in Sweden and Norway. BilligVVS will team up with AO Johansen’s existing online presence AO.dk and the company plans to generate synergies with regard to warehouse/logistics and product range. AO Johansen paid a 14 times multiple on earnings before tax and 1.2 times last year sales. The addition increases AO Johansen’s projected 2015 pretax profit by 15%. From my perspective the acquisition makes perfectly sense and it should further strengthen the company’s competitive position in Denmark.
Shares of AGCO soared after the “friendly activist investor” Blue Harbour announced that it had increased its stake in the company above 5%. With AGCO’s Indian JV partner TAFE holding more than 13% in the company a potential “resource conversion” could unlock value for shareholders.
The majority shareholders acting in concert of Eredene Capital made an unconditional mandatory cash offer of 5.5 pence per share. I will publish on a separate note my decision whether to tender my shares after receiving the final offer document and the 2014 accounts.
My addition to UMS was badly timed. Shortly thereafter the company announced that the financial authorities are of the opinion that the deductibility of the value added tax for 2014 is not granted. According to the company, this presents a financial risk of EUR 0.7 m. In addition to that, the financial authorities gave notice to extend the audit also for the period from 2010 to 2013. The total financial risk for the period from 2010 to 2014 is EUR 1.4 m. Management is of the opinion that the value added tax deduction has been justified and they are actively working against a final disapproval by the financial authorities. Currently, management does not expect that the distribution of the next/final payment to shareholders will be postponed.
Consequently, in a worst case scenario the downside risk to the liquidation proceeds is EUR 1.4 m or EUR 0.33 per share. Taking into account the company’s net assets and administration expenses until the company’s wind down, this reduces the expected net proceeds to shareholders to EUR 14.5 m or EUR 3.39 per share. However, this does not include any payments from the former tax advisor with regard to the ongoing legal proceedings. From my perspective, it is likely that the company will receive an indemnity. While my initial estimate of up to EUR 0.8 m or EUR 0.19 per share might have been too optimistic, a final compensation payment to UMS in a range between EUR 0.3 m or EUR 0.07 per share and EUR 0.6 m or EUR 0.14 per share should be realistic. As a consequence, final liquidation proceeds between EUR 3.46 and EUR 3.53 can be expected in the given scenario.
This reduces my return expectations with regard to the part of the position I added to the portfolio at the end of June (not the total position). The expected IRRs depending on payment date and net proceeds per share are as follows:
Volkswagen is planning to consolidate its 12 automobile brands into four operating units. In addition, the new structure will include a commercial vehicles group, consisting of VW’s Scania, MAN and Volkswagen Commercial Vehicles. Consequently, MAN will no longer operate as a separate business, but will be absorbed by the new commercial vehicles group. By now it is unclear what will happen to MAN’s non trucking units including Renk where MAN is the majority shareholder. At Renk’s general meeting, management did not comment on Renk’s future within the Volkswagen group.
However, what seems to be clear is that Renk’s large excess cash pile will not be used in minority shareholder’s interest. In 2014, Renk handed out a short term loan to MAN in an amount of EUR 80 m. Hence, a special dividend to shareholders seems off the table.
Options now include Volkswagen doing nothing, in which case minority investors would keep holding undervalued shares of a quality company which is expected to grow book value at a double digit rate paying a stable dividend (current dividend yield 2.2%).
Volkswagen can also decide that Renk will become an independent public company by either selling their shares to the public or passing them on to Volkswagen shareholders. Before, they could also merge MAN’s non trucking business with Renk. As a consequence, an increase in free float should enhance investor interest for Renk (possibly combined with MAN’s power engineering unit).
As far as I can see most market participants expect the following: Volkswagen could take Renk private first by entering into a profit and loss transfer agreement with Renk (through MAN) and thereafter squeezing out minority shareholders. They could then sell or keep Renk (perhaps together with the rest of MAN’s power engineering unit).
Overall, since my initial investment the stock has well performed. Valuation still seems to be very reasonable. Due to the planned consolidation of Volkswagen’s trucking business a corporate event regarding Renk has become more likely. However, the consequences of this potential event for minority shareholders are not clearly defined and contain certain risks. However, due to the company’s strong market position and the low valuation, I will keep my shares for the time being.
A lot of stuff has been going on recently at one of my latest investments Minds+Machines (MMX). Most importantly, Fred Krueger stepped down as executive Chairman. Moreover, he also started to sell a large part of his stake in the company. The stock reacted with volatile trading on the news. Most of Fred Krueger’s holdings were bought by two institutional investors: Henderson Global Investors (now being the largest shareholder with 19.8%) and London and Capital Asset Management (holding now 7.0%). While the market reacted negative on Fred Krueger leaving the company, I believe that this is rather good news. Fred Krueger can now concentrate on his other exciting ventures including the web tool software Mozart. At the same time, MMX’s management can now focus on the unspectacular day to day business of an operating company.
Numbers for 2014 were mostly in line with my expectations. However, what really troubles me are the very high administrative expenses for 2014. Part of this seems to be related to the set up of the registrar business and there might have been some payments for the development of the Mozart tool. Still, also in relation to the company’s revenue expectations going forward, this level of operating expenditure is way too high. On a positive note, management seems to be aware of that and is willing to take action.
Q2 2015 Portfolio
Q2 2015 transactions
Below you can find an overview of the transactions taken place during the quarter:
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