Author Archives: Fit Investment Ideas

Fondul Proprietatea (Buy, RON 1.05 PT, 31% upside)

NAV at the end of November stands at RON 1.1074, the discount to NAV is at 27.2%.

What are the catalysts for the discount to NAV to narrow? More disposals of assets followed by cash distributions.

Asset disposals:

• Potential sale of stakes held in Electrica subsidiaries to the mother company to be decided by 31 March. The stakes are priced in the NAV at RON 841m (7.2% of the NAV).
• The listing of Hidroelectrica, the Bucharest Airport, the Constanta port or Salrom could move another 22% of the NAV from the unlisted part to the listed part, adding confidence in the NAV.
• Disposals from the unlisted part of the portfolio are also possible (e.g., the minority stakes in Enel, E.ON GDF) but more difficult to realize as the fund is captive minority shareholder. The fact that the state is also a minority shareholder could help.

Cash distributions:

• RON 548m to be paid via a par value decrease to be approved on the AGM on 27 January (6% yield) to be paid on 27 June 2016.
• Seventh buy-back is approved by the GSM in 29 October 2015 and 742m shares still left to be bought (7% of shares). An accelerated buy-back is possible.
• RON 1bn can be drawn from Citibank (nothing drawn as of the end of the year after repayment of the previous loan in October when the Romgaz placement took place) and about RON 300m is available in cash.
• Can still cash in at least RON 400-500m from the companies in the portfolio, even with the lower dividends paid by Petrom.

What are the catalysts for changes in the NAV?

• Current oil prices still indicate downside for Petrom, according to our model (if the oil price does not rebound). For Romgaz, even the lower gas prices still provide an upside according to our estimates (and a high dividend yield in the range of 10%). A favorable decision regarding the oil and gas royalties’ regime in Romania could help the valuation of both companies. Gas prices liberalization and further announcements related to Petrom’s Black Sea gas discovery also should help the valuation of the two largest holdings which account for 38% of the NAV.
• An increase in Hidroelectrica’s profit, which is reporting above RON 1.1bn pre-tax profit in 2015 even if the meteorological conditions have been poor last year, with volumes down 13.5%  yoy at 15.9 TWh. Hidroelectrica represents 18.5% of Fondul’s NAV.

Why should there be a discount to NAV:

• The level of taxes paid by the Fund is almost zero due to the high accounting costs of the holdings and the holding periods of over two years. We do not see the taxes as generating any discount.
•  The time value of money generates a discount, but this is not material either. At the NAV value, the largest 20 holdings (94% of the NAV) generate a weighted average yearly earnings yield of 8.5% (for 2014) and the dividends cashed in by the Fund represent a 6% yield on the NAV value. Our implied cost of equity in Romania is 9%.
• The discount offered when selling larger stakes could be a reason for a discount. This has been the case for the transactions executed so far below 5% of the previous 30 days’ average price.
• Uncertainty regarding the unlisted portfolio: out of the 48.9% unlisted part of the NAV, a plan exists for 28% for the next 12 months related to disposals (Electrica) or listings (Hidroelectrica, Bucharest Airport, Constanta Port, etc.).

Adding all of this together, we see the current discount to NAV as too high.

Lucian Albulescu, CFA

Equity Research

WOOD & Company Financial Services, a.s. Palladium, Námìstí Republiky 1079/1a 110 00 Prague 1 Czech Republic

Direct: +420 222 096 273

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My latest article on Seeking Alpha

http://seekingalpha.com/article/3757246-invest-with-paul-singer

If the problem is the investment bank, hire an investment banker. Jes Staley, an American investment banker, looks like a good fit for Barclays, then. Subject to regulatory approval, he is likely to be the bank’s next boss.

But the arrival of Mr Staley raises a big question: is he going to put more money into the investment bank, or continue the process started under former chief Antony Jenkins, and take costs and capital out of it?

The right answer is the latter. In the first half, Barclays’ investment banking division had a cost-to-income ratio of 66 per cent; earned a return on equity above 10 per cent; and employed 31 per cent of the group’s risk-weighted assets to generate 35 per cent of its profits.

All of this sounds good. But remember that investment banking is volatile. Last year’s results were awful. ROE was 2.7 per cent. With the crisis seven years gone and the US and UK economies relatively resurgent, this should be the sweet spot in the investment banking cycle. A 10 per cent ROE is not sweet enough. Barclays has not nearly proven that its investment bank can earn back its cost of capital across the cycle.

The investment bank is not even the biggest challenge Mr Staley faces. Something must be done about Barclays’ structure. It is a misbegotten hybrid: a US/UK investment bank, a UK retail bank, a credit card issuer, and an African bank. No one has ever made a strong case that the benefits of having these units together outweigh the costs in complexity, regulation, and investor confusion. Barclays trades at 0.8 times book value. It is unlikely to close the gap in its current form.

The conventional view is that an investment bank cannot function without an implicit subsidy from retail banking’s lower cost of capital. But the ringfencing of UK retail banks weakens that argument.

Investment bankers usually earn a fat fee advising on a break-up. If Mr Staley does the right thing, his reward will be running a smaller company — and the gratitude of investors.

source: LEX, FT

• EL RO: On the EGSM of today, shareholders agreed to resume negotiations with Fondul Proprietatea for the acquisitions of the Fund’s minority stakes in distribution and supply subsidiaries and to increase the number of Board members from 5 to 7.
• Resumption of talks with FP, which failed because on transaction price disagreements, was requested by a group of shareholders including Newtyn, ING and EBRD. Shareholders will meet again on December 14, 2015 to elect a new Board.

Fund sees potential listing of Enel, E.ON Romanian units

Fondul Proprietatea SA, Romania’s largest closed-end fund, is waiting for the price of oil to start increasing and open a window of opportunity for listing some of its shares inOMV Petrom SA in London, saidGreg Konieczny, the fund’s manager.

Petrom, Romania’s largest oil company that received shareholder approval for a secondary listing in London on Sept. 22, has its shares currently trading at a three-year low as the price “has been hit more than it should,” Konieczny said in an interview in Bucharest on Wednesday.

“I don’t think it makes sense at the current valuation levels of Petrom, at
least from my perspective, to think about selling shares,” Konieczny said.

Fondul Proprietatea, which was set up to compensate citizens for property confiscated during Communism and holds shares in Romania’s biggest companies, has been trying to secure liquidity by selling some of its assets to fund share buy-back programs aimed at boosting is share price.

The fund’s shares fell 0.3 percent to 0.787 lei at 5 p.m. in Bucharest, while Petrom shares rose 0.2 percent to 0.33 lei, after trading at the lowest level since Jan. 2012, according to data compiled by Bloomberg.

Fondul Proprietatea plans to lower its Petrom holding below 15 percent from the current 19 percent but it will be “mindful of where the market is,” Konieczny said.

The fund is also ready to resume talks with Electrica SA on selling its minority stakes in power distributors’ units afterfailing to reach an accord on a deal in April because of the price, he said.

Shareholder Interest

“It looks like the minority shareholders of Electrica are interested in
this transaction, we are too, but I think the discussion can really start when both
parties are ready to enter these negotiations,” Konieczny said.

With no initial public offerings conducted on the local capital market this year, Fondul is considering urging the government to askENEL SpA andE.ON SE to agree on listing the shares of their local units, in which both the state and the fund are minority shareholders, according to Konieczny.

“It’s also in the interest of the government to have a firm market price for
these holdings,” he said. If ENEL and E.ON “receive a request from the government and based on the privatization agreement, they cannot say no.”

Romania failed to deliver on pledges to sell at least three companies on the stock exchange this year, which was part of an agreement with the International Monetary Fund and the European Union, because of legal issues or accumulating losses. That agreement expired last month and the government plans to ask for a new deal by the end of this year. The delays are harming the Fund’s plans, Konieczny said.

“It’s a big issue,” Konieczny said. “For us it’s a problem because if the local capital market doesn’t grow, the fund will have to get smaller and smaller.”

The fund is also pushing for the listing of Salrom, a salt producer, in which it has a 49 percent stake, with the state holding the rest of 51 percent, according to Konieczny. A new shareholders meeting will take place in about 30 days to vote on the listing, he said, adding that he hopes the Economy Ministry will agree with the plan after receiving “some new information.”

The sixth buyback programme kicked off on the 9th of September. FP aims at repurchasing 891,770,055 shares (and the equivalent GDRs representing) 7.97% of the outstanding shares. The Fund may not hold more than 10% of its own shares and currently own 227,572,250 titles (2.03% stake) acquired in the context of the fifth programme, completed in late July. The launch of the sixth round became possible after FSA approved in August the cancellation of 990,855,616 shares bought back during the fourth acquisition programme. The maximum unfolding period of this buy-back expires on 15 November 2016.

• FP is confident in raising sufficient cash to finance the programme mainly through holdings disposal, as it declared that leveraging is not seen as a long-term plan. In August, FP reported available funds of RON 839m, out of which RON 450m represented the short-term credit facility from Citibank that will expire at the end of 2015.
• As the 15% discount to NAV objective has not been met, we estimate that FP would need a tender offer of RON 1.4-1.5b in order to reach it by year-end.
• • If the tender offer would be made for 100% of the shares to be repurchased during the sixth buyback, the cash return would need to stand at RON 1,514m implying a tender offer price of RON 1.6976 per share that would reduce the NAVPS to RON 1.0985 and would raise the market price to RON 0.9337.
  • If the tender offer would be made for 80% of the shares to be repurchased, the cash return would need to stand at RON 1,418m implying a tender offer price of RON 1.9873 per share that would reduce the NAVPS to RON 1.0884 and would raise the market price to RON 0.9252.
• With the funds available at the end of August, FP would be able to reduce the discount to NAV to some 25% through a tender offer by year-end. 
• • If the tender offer would be made for 100% of the shares to be repurchased during the sixth buyback, the cash return would need stand at RON 854m implying a tender offer price of RON 0.9581 per share that would reduce the NAVPS to RON 1.1664 and would raise the market price to RON 0.8748.
  • If the tender offer would be made for 80% of the shares, the cash return would stand at RON 759m implying a tender offer price of RON 1.0637 per share that would reduce the NAVPS to RON 1.1551 and would raise the market price to RON 0.8663.
• We estimate that FP would need a tender offer of RON 1.1b in order to reach a discount to NAV of 20% by year-end.
• • If the tender offer would be made for 100% of the shares to be repurchased during the sixth buyback, the cash return would need stand at RON 1,194m implying a tender offer price of RON 1.3389 per share that would reduce the NAVPS to RON 1.1315 and would raise the market price to RON 0.9052.
  • If the tender offer would be made for 80% of the shares, the cash return would stand at RON 1,098m implying a tender offer price of RON 1.5392 per share that would reduce the NAVPS to RON 1.1208 and would raise the market price to RON 0.8966.
• Our view. Given the cash return and offer price implied, we do not believe that the 15% discount target would be reached through a tender offer by year-end. The other two scenarios are more plausible in case the Fund targets the discount reduction this year. FP RO is currently traded at a 30% discount to NAV. For further information pls contact Daniela Mandru +4021.408.4216.
• Please see the computation in the attached excel spreadsheet.

Fondul just announced that the 6th buyback programme will commence tomorrow Sep 9th; up to 891.7mn shs may be bought back until Nov 15 2016; buyback is applicable to both shares and DRs. Goldman Sachs is the agent for the buyback. THey can buy up to 25% of daily volumes

Getinge announced its restructuring plan today. The stock reacted +8%. In the comming days the analysts updates will push the stock further up. See my article :

http://seekingalpha.com/article/2882916-getinge-a-restructuring-play

http://www.opap.gr/en/c/document_library/get_file?uuid=8036cb5b-36e2-4e47-9c1b-0563f552a1cb&groupId=11503