I bought 6 stocks in the past 6 months – a European family holding company, an extremely undervalued net-net, a high-quality bank, 2 M&A special situations, and an incredibly illiquid stock that I’m slowly building a position in. The last one is the best of the bunch. But my buying has been glacial at best. I have started a detailed write of this stock because it’s a very interesting situation, but that’s for another day.
The Dietails
European stock markets are a wonderful hunting ground for holding companies trading at wide discounts. I managed to find one that I particularly liked trading in Brussels back in October, namely D’Ieteren (DIE). The company traces its roots all the way back to 1805 in the horse and carriage trade. Now it’s a collection of 3 wonderful businesses and a bunch of cash trading at a 40%+ SOTP discount.
The company is majority owned and controlled by the D’Ieteren family who own 57.5% of the economic rights and 60% of the voting rights. As European family holding companies go, it’s fairly simple to understand and to value. D’Ieteren owns 3 companies: D’Ieteren Auto, a 54% stake in Belron and Moleskine. It also has around €900m in cash lying on its balance sheet.
D’Ieteren Auto is by far the most dominant car dealer in Belgium, has a local moat, is gradually consolidating dealerships, consistently produces high ROIC (27% in 2018) and is highly cash generative. It may not grow too much going forward but will continue to reliably throw off cash.
Belron is the worldwide leader in the vehicle glass repair and replacement industry. It has unrivalled scale, a very strong competitive position in its industry and stands to benefit from the increasing sophistication of car windshields. DIE sold a 40% stake to CD&R last year for an EV of €3 billion (making valuation rather easy).
The final business is luxury lifestyle brand Moleskine which they took private a few years ago. While I personally wouldn’t be caught dead with a €25 notebook, Moleskine is an exciting growth story posting great sales numbers worldwide (double digit growth across the board in 2018) with innovative products, apps, cafes and experiences. There’s also a €900m war chest of cash waiting to be deployed. I’m particularly encouraged by management’s reluctance to engage in acquisitions at current inflated prices, but I’m slightly wary of CEO Axel Miller (of Dexia Bank fame). All in all, you’re getting a collection of quality businesses housed in a 200-year-old wealth generating machine with a long-term focus at a bargain price.
The Frost
December’s market pullback gave me the perfect opportunity to buy Cullen Frost Bankers (CFR) at the extremely reasonable price of $88.90 per share. It quickly traded up to over $105, but I got another chance to buy last Friday for $93.58. I think I should trade for at least $130.
The investment case for Frost Bank can be summed up in a single word: deposits. In the spread banking business, there are 2 ways to earn superior returns: (1) superior lending/investing skills; or (2) access to cheap money. Frost falls into category 2. Frost is a commercial bank in the state of Texas with a tremendous (and conservative) culture, best in class customer service and an absurdly low cost of funding. People are willing to receive lower (or zero) interest rates to bank with Frost Bank. As a result, it can fund itself more cheaply than pretty much any bank you can find (including Wells Fargo).
Of course, any bank can be undone by risky lending. Frost is as conservative a lender as you’ll find. Its lending culture focuses primarily on safety. The bank has been around for over 150 years, successfully weathered the 1980s oil bust and refused TARP money during the financial crisis. The reason is because of its very low lending rates and tough lending standards. Furthermore, management has continued to reduce the bank’s exposure to the energy sector, traditionally the biggest source of risk for Frost.
CFR will be a home run if interest rates rise. Due to the composition of its balance sheet, Frost will earn 20%+ ROE if Jay Powell continues to raise rates to historical norms. I have no idea where interest rates will go, but the risk reward is compelling. I don’t usually like banks, but I really like CFR. If you want to do a deep dive into CFR, I recommend that you read everything that Geoff Gannon has written about Frost over the years on his various platforms. Jim Cramer has also recommended Frost. You should probably ignore him. But what the hell… https://www.cnbc.com/video/2013/06/12/buy-equity-one-or-cullenfrost-.html?play=1
The Offers
I bought into two M&A related special situations recently. One was Radisson Hospitality (RADH) back in December. It worked out nicely with an 11% return in 2 days. The other is Duncan Soukup’s hostile takeover of The Local Shopping REIT (LSR). I had originally thought this was one of the best merger situations I’ve seen. I was wrong about that. But the situation was still compelling enough for me to go ahead with the trade.
Soukup’s Thalassa Holdings Ltd (which trades at a substantial discount) made a truly bizarre offer of 14.64p in cash and 0.26 Thalassa consideration shares for every LSR share that it doesn’t currently own. This is an alternative to the winding up of LSR which Thalassa previously managed to block. My original thesis was based around the deal’s mix and match facility which allows for accepting shareholders to elect for more shares or cash. I thought that the acceptance rate for this deal would be low and that the facility would allow me to receive all consideration in cash. However, after reviewing the merger documents (and some company law books), the mix and match facility appears to be only available to the extent that other accepting shareholders have not taken their full entitlement to that form of consideration. I don’t expect many other shareholders to elect for the more shares option.
Nonetheless, this still seems like a good opportunity. I would expect the acceptance rate to be low (below 50%). The LSR board have strongly recommended that shareholders reject the offer. Several prominent UK commentators (including Simon Thompson of Investor’s Chronicle) have advised against the deal. UK investors are generally very wary of Duncan Soukup. Furthermore, Thalassa have announced a buy back program to aid liquidity post completion. Therefore we will have some protection against significant selling pressure when unloading Thalassa shares. At an average purchase price of 27.60p, Thalassa shares will have to drop by over 30% for me to start getting into trouble.
On a side note the Offer Letters and Responses from the boards of Thalassa and LSR where they all-out trash the other’s record are worth the price of admission alone. Let’s just say that both sides haven’t covered themselves in glory in terms of maximising shareholder value. You should also read Daniel Sims’ great blog https://hiddenvalue.blog/ who writes very well on special situation opportunities in the M&A area.
The Horror
KDM Shipping (KDM) is without doubt the worst company mentioned in this post (including LSR and Thalassa). It has pretty much every problem under the sun: poor quality shipping business, disastrous losses, no free cash flows in years, old/rusty shipping assets, terrible corporate governance, sparce financial reporting, untrustworthy management, political risk in Ukraine (I could go on and on…). KDM has exactly two things going for it: (1) It’s not an outright fraud; and (2) it sells for an outrageously cheap price.
I had a small position in KDM from a while back. It fit my quantitative criteria at the time and I bought a small position. It was a terrible investment. But in early January it actually traded for 13% of net cash! This is truly ridiculous pricing. KDM’s market cap fell from $60m during the time of its IPO to just north of $2m in January. So it’s either worth nothing or something much higher. I think minority shareholders have an outside chance of extracting value out of it (at least more than 13% of net cash). Or else it is worth $0.
KDM is so diseased that nobody wants to touch it. Its big institutional backers have long departed. It’s a super micro cap now. There are no Polish retail investors posting about it anymore on www.bankier.pl. And believe me, people post all kinds of babble on even the smallest Warsaw listed micro caps on there. When stocks are this overlooked/dismissed, opportunity can rear its head for a shameless bargain hunter. But KDM is not without its risks. While the stock price has gone up by over 50% since my January purchase, I could lose 100% on my position here. But I think the odds are in my favour.
The Bottom Line
I’m particularly happy about the diversity of these recent purchases (one of which I haven’t named yet). 5 different types of investments, 5 different strategies, 6 different countries, 6 different industries (you get the picture). I have always said that I will invest in any financial asset so long as I’m buying at big discount and there is a genuine margin of safety. These purchases hopefully demonstrate that principle.
I own positions in DIE, CFR, LSR & KDM at the time of writing. None of the above is investment or legal advice. Do your own research.