Monday 5 December 2016

SAPEC (or looking for 75% return in less than a year)


A few weeks ago SAPEC announced the sale of their main business (agriculture business – AB):
 At 03/11/2016 they announced they were considering offers to sell that business for “an amount equal to 11 to 12 times its recurring EBITDA” of 39.5M and four days later they announced  the sale to Bridgepoint for 456 million enterprise value (11,55 x EBITDA).
To quote “The sale of AB was made on the condition of obtaining the approval of the Portuguese and Spanish competition authorities” “ there are no overlappings between the activities of Bridgepoint’s subsidiaries and those carried out by the Sapec’s AB sector, and a clearing is expected within two months of submitting the dossier, which will take place by the end of November”.
So the likelihood of the deal closing seems very high (it is a small deal to Bridgepoint).

What if?
The 03/11 announcement is somewhat reassuring. In my interpretation it is implied that there was more than one offer between 11 and 12 times recurring EBITDA. The deal can fall anyway, but I would guess the likelihood of no deal happening is very low.

What will they do with the money?
“Sapec intends to strengthen its other activities in Portugal and Spain and, once the transaction has been completed, to distribute to its shareholders a substantial part of the cash received, under specific terms and timing still to be considered.”

So here come the numbers:
SAPEC net debt as of 06/2016: 162,5M (according to the statement 137,6 M in AB)
Cash to receive + debt assumed from AB: 456M

SAPEC after closure:
Net cash: 293,5M

Industrial chemicals (2015 EBITDA: 1,059 k€)

Environment 2015 EBITDA: -29k€ (they are planning the sale, negotiations were underway for a management buyout)

Agro commodities distribution (2015 EBITDA: 969K€)

Logistics (2015 EBITDA: 1389 k€)

Assets held for sale: liquid bulk terminal in Cadiz (at the books for net 7M)
Real estate:
-          100 hectares of the industrial park in Setubal (www.blueatlantic.pt)
-          100 hectares for tourism in Lousal  
Other positions: ENERGIA LIMPIA INV., THARSIS AND NATURENER: they explain extensively in the annual report (note 14 a pages 70-72). SAPEC guarantees 36M of debt to a bank, so in the worst case they lose 36M


To be conservative I would argue that all these assets are at worst canceled by the 36M guarantee, but they are probably worth a few millions more, at least.

CONSERVATIVE EQUITY VALUATION
Net cash after closure of 293,5M (which I believe will mostly be distributed to shareholders)

MARKET CAP: 168M (124€/share)

Conservative upside: 75%


Expected period of realization: 6 to 12 months

Disclaimer: I own shares of SAPEC. This is not an investment advice and I am not a professional adviser. Always do your own research. I am and will be wrong about many things, it is possible that this is one of those.

Sunday 28 February 2016

Berkshire Hathaway: update after the annual report

On the previous post on Berkshire Hathaway, I pointed my view on BRK valuation under the two-column method and the return it implied. Under that calculation, the expected return is somewhere around 10% a year. Taking into account that I expected year end 2015 intrinsic value under this formula to be about 181,5$ per B share. Now we have definite results:
Earnings (excluding underwriting gains): 11.186$ per A share
Investments:  159.794$ per A share

Which result in 271.654 per A share or 181,1 per B share

It seems I wasn't that far.

But this year Warren Buffett proceeded to update on his view of intrinsic value:

1- Underwriting gains are now fairly stable and should be considered for intrinsic value purposes. He event told us that while this year underwriting result was 1.118$ per A share the average result for the last 10 years was 1.434$ per share (telling us the normalized underwriting gains)

2- As happened before he excluded some intangible write off from the earnings, but he also told us that since BNSF implied spending in excess of depreciation at all times, we should consider BNSF earnings to be lower than they actually are (6.775 million pre-tax earnings or 4123.6 per A share with depreciation of 1,932 and capex of 5,651)

About this:
1-  The purpose of excluding underwriting gains for me was
a) how stable are those in case of catastrophe? Since for 13 years they have been positive I was inclined to believe that they were to be expected on average (negative underwriting income in a year should give them the possibility of raising prices which would compensate on the following years). Warren Buffett just confirmed that and since he has a better understanding of their exposures I believe I should confirm my prior belief
b) Investment deferred taxes and float were not being discounted and BNSF earnings in excess of depreciation (point 2) were not being discounted also. So excluding underwriting gains was an overly simplified way to do that. However, that was (knowingly) incorrect because it is inaccurate. 

2- He mentions spending in excess of depreciation but doesn't mention:
a) BRK is able to defer taxes to compensate (at least in a big part) for that, as long as he keeps spending in excess of depreciation  (which he tells us is forever)
b) A big part of that spending is growth capex be it to: create new routes, to increase existing routes capacity or to maximize efficiency and thus get better pricing than competition and steal business (about this last point he does mention the difference in prices versus the competition: under 3c per ton mile versus 4.2-5.3c; a huge difference)



To make the calculation more accurate I should instead of ignoring underwriting gains:
1-Take them into account
2- Discount the excess value of float. However:
a) float is growing, which simultaneously further reduces the chance of it having to be paid back and if it grows a lot we should, instead of discounting it, increase its value due to its growing ability
b) Float implies excess cash (point 3) and implies fixed income investments (instead of more equity investments).
3- Discount the excess cash needed: float implies at least a 20 billion cash cushion (which Warren has stated he views as at least 25 billion since going under 20 would make him take emergency measures to sell). It actually doesn't. He proceeded to explain that part of it was because of the financing method at Clayton Homes. In addition at least part of it is needed for other businesses regular working. But these 20 billion whatever they are needed for they should be discounted. However.
a) They should not be discounted in full because: the cash still belongs to Berkshire and gives a cushion to the investor that most other equity investments don't by allowing survival to 1 in 100 year events;  
4- Discount excess debt: not applicable
5- Discount investment deferred taxes: a good part of it might never be repaid because he views it as businesses purchased (just like BNSF). However taking them as nonexistent is somewhat aggressive
6- Discount BNSF earnings (which as explained before is quite complicated, or impossible).

1- Plus 14.340 per A share (23.560 million or 9.56$ per B share)
2 and 3- Probably 2 a) nets with 2 b) and 3 on zero, but it could go to either side
4- not applicable, the business could take some more debt (in fact we could assign a positive value to the capacity to increase leverage but they do not intend to increase it much so it is more conservative not to)
5 and 6- Are very hard to discount. The appropriate discount might be much lower than the value in 1, but I always found it more conservative to simply ignore, but I am probably being too conservative


However by changing the provided values Warren in fact updated his estimate of current intrinsic value, stating it to be higher than the standard two column method would say. Most likely he is the one who is right. Anyway, the price is still much lower than the two-column price, why should I worry if the intrinsic value is higher 9,5$/B share? And anyways, even if I took that into account that would probably change the 10% price to the 9,5% price or something similar.

ps: the share repurchase value has increased to 124.4$ per B share (very near the price it was trading at the time of my first post a month ago)

Disclaimer: I own BRK-b shares. This is not investment recommendation. Always do your own research. Always read the introduction post.





Monday 25 January 2016

Berkshire Hathaway at 68% of fair value?

Warren Buffett proposes the two column method to value Berkshire Hathaway. He seems to believe it is appropriate to gauge the intrinsic value of the company. He seems to believe paying fair value is the same as getting a first day 10% pre-tax. Here is the table







Per share investments Per share pre tax earnings Automatic IV IV/B share
2007 90343 4093 131273 87
2010 94730 5926,04 153990,4 102
2011 98366 6990 168266 112
2012 113786 8085 194636 129
2013 129253 9116 220413 146
2014 140123 10847 248593 165


Peak to peak (not saying that 2014 was a peak) in these seven years this estimate of intrinsic value has risen at compounded rate of 9,6%. If we fast forward to 2015 it should go nearer the 10% compounded rate (the Heinz deal had a huge impact in per share investments since I believe it is appropriate to include Heinz there, even if he doesn't). So it seems he is approximately right in his intrinsic value estimate. So 165x110%=181,5$. It is trading at 124,1 meaning a 32% discount to the value where it would yield (theoretically) 10% peak to peak. Additionally, since they do not pay dividends this is an extremely tax efficient investment if we believe this is right (all numbers I have reached always go somewhere near this two column approach so I believe this right)

Disclaimer: I own BRK-B shares. This is not an investment recommendation. Do your  own due diligence. Always read the introduction post



































A safe bond yielding 6% in less than 2 months: too good to be true?

First of all the link:


As you can see this bonds yield 6,75% per annum and are trading at 95% of par value, and are to be repaid in 18 March 2016, the coupon is paid half yearly. Accrued interests are currently 2,436%. So, you would pay 97.436€ today to receive 103.375€ in less than two months (54 days), approximately 6,1% (approximately 49% compounded annualized yield).

So the return is great. What about the safety?

This is a Mota Engil SGPS bond. They are a construction company with lots of sub-companies.
They have about 1600M in debt with parent company warranty. This emission represents only a very small part of their total debt.
They have loads of short term debt that are part of their normal activity.
They have a huge business in Latin America and Africa (especially in Angola), since it is a construction business they might have difficulty collecting.

However, they released a statement last week saying:
1- Their collections were positive in last quarter 2015 in most countries where they have activity, resulting in a significant debt reduction
" the receivables flow was positive in the three regions (Europe, Africa and Latin America), which allowed for a significant decrease of the consolidated debt level between the period ending in September 2015 and the period ending in December 2015"
and
" it is important to highlight that almost all countries have contributed to this trend, mainly Mozambique, Mexico, Poland, but also Angola, Czech Republic and Portugal."
2- They have continued with their policy to extend maturities and reduce debt cost
"Mota-Engil has been executing the refinancing of its debt in line with its plan and strategy, having closed several operations during the fourth quarter of 2015 and during the first days of 2016. Accordingly, Mota-Engil financial strategy mainly focuses at decreasing the debt cost and extending the debt maturity."
3- They maintain their strategic objectives
"from a strategic standpoint and as previously stated, it is worth mentioning that the focus on the waste collection and treatment businesses will allow the segment to grow and to expand in the international markets (namely with new operations in Latin America and in Oman). Besides, the disposal of highly mature assets (namely in transportation concessions and ports) has been proceeding successfully."

a) It is important to mention that this waste collection business was acquired in Q2 2015 and has already been paid for (and is included in the debt mentioned above, a good part of the non guaranteed debt is also in this company)
b) The mature businesses are
       i) transportation and ports business: sale to Yildirim agreed. Will result in a debt reduction of 330M (275 equity + 55 debt)
       ii) Ascendi: An investment of 300M for 50% of some concessions by Ardian is expected to close this month. Additionally, they are in negotiations to sell Ascendi final proposals planed for the end of this month and a conclusion reached in February. Mota Engil owns 60%, expects to sell at least 40% (and ideally maintain the remaining 20% as a strategic partnership for their construction business). Santander apparently values Ascendi at 326M, and BPI values it at over 600M€. If they were cash starved they would agree to sell the 60% which would mean approximately 200M (according to portuguese newspapers)
       ii) Indaqua: said to be in advanced negotiations with closing expected to the end of this month. They own 50,06% (a control position) which are seeking to sell. (according to portuguese newspapers). The non controlling half is held by Falanx (german), which bought it in 2014 for 52M. Obtaining the same 52M for the controlling 50% seems reasonable


So the say they reduced debt last quarter and they are selling assets which should result in a near term cash receival 585M to be used in reducing debt. So the likelihood of missing payment on this bond seems reduced.

risks:
a) New government in Portugal says they are monitoring Yildirim transaction. It is hard to believe they would interfere but not impossible
b) New government in Portugal is canceling some deals by the last government. One of them involves a Mexican company which is arguing their investment is contemplated in bilateral deals between the two countries. Mexico is a key market for Mota Engil
c) New government in Portugal and general investment feeling globally is weak this month. The proposals for Indaqua and Ascendi might be lower than expected or deemed inappropriate
d) They might have difficulty in collecting receivables


It seems unlikely all this risks would pose a problem for a small bond due in 55 days


Disclaimer: I could not buy this bond. Asked for it and was informed that my broker did not currently trade bonds. So I have no positions. This is not an investment recommendation. Do your own due diligence. Always read the introduction post

edit: spelling