Thursday, 28 February 2013
Yesterday Elbit Imaging, who own c60% of Plaza Centers, announced a debt for equity swap it had negotiated with two debt holders - both US distressed funds. These funds will now have a roughly 90% equity stake. Why is this good? Well these funds aren't investing in Elbit because they like the stock as a long term business. They will be looking to extract as much value as possible as quickly as possible. Most of that value is in Plaza Centers. Their interests are therefore aligned with mine, and I'm hoping for some significant positive developments in the next six months or so.
Tuesday, 26 February 2013
I have added TLI LN and FBD Holdings to the portfolio. TLI now makes up over 25% of the portfolio, and I'm very happy to hold an asset with fixed income like safety, and equity like returns. During times when the market is falling, the portfolio should outperform. If the market rises very sharply indeed, the portfolio should lag. I think the risk/reward characteristics of TLI make it a great asset to own regardless of whether one has a view on the overall market and what that view is.
Sunday, 24 February 2013
Thanks to Wexboy (http://wexboy.wordpress.com/), who alerted me to this idea:
Trading at *7.5 expected earnings, the market is discounting FBD Holdings (Irish P+C insurance) at an extremely high rate, and not giving it the benefit of any growth prospects. This seems overly conservative considering that it has weathered one of the greatest stress tests of all time (the Irish financial collapse) with only two (ok 3, but the last one was tiny) years of losses. It would appear that the only balance sheet mistake it made was the curious direct ownership of a hotel and leisure complex in Spain. But there was barely anyone in Ireland who didn't have property interests in the mid 90s, so I don't hold this against them too much. That property interest has been put into a JV, and the balance sheet is now de risked, with no debt.
What of the earnings? Well peak after tax was €250mln pre crisis but FBD are unlikely to get back to that level any time soon. Why? Well their investment portfolio is now largely in cash, bunds, and high grade corporates - the investment portfolio is earning very little even if there is very little risk. There is an argument for moving back into Irish government bonds, which I sympathise with, but let's assume they make no money on their asset portfolio going forward. Also, the fact is that with property falling greatly in value and people having far less money to buy things, there is far less stuff in Ireland to insure.
What are we left with? Well the company earned €53mln on €281mln of equity in the last 12 months, post tax, unlevered. And this is after a period of unprecedented business disruption. Revenues were flattish to slightly down, but this is to be expected for the reasons above. Going forward, I suppose the Irish economy and asset values could deteriorate further, but there seems to be a fair bit of that priced in. What could happen on the upside? Well this is a company that is uniquely focussed on Ireland, in an industry where most of the competitors are subsidiaries of multi nationals. These are multi nationals who are struggling in their home countries, possibly retrenching, and probably not concentrating too much on Ireland. We know how helpful an Irish focus can be, because FBD has been growing market share for ten years. In addition, it has a competitive advantage through its chain of rural offices, and has now launched some direct selling internet platforms. It's loss and combined ratios are outstanding. It really is very good at what it does and it's aiming to pay out 50% of earnings in dividends. There are no expansion plans beyond additional market share at the right price.
So we have an opportunity to buy a quality company that earns a high RoE, has competitive advantages and is focussed on one country at a time when the economy has probably troughed. That's good enough for me. I don't need the economy to grow, or the company to seize market share, or interest rates to go up, but this is where there is potentially significant upside.
Trading at *7.5 expected earnings, the market is discounting FBD Holdings (Irish P+C insurance) at an extremely high rate, and not giving it the benefit of any growth prospects. This seems overly conservative considering that it has weathered one of the greatest stress tests of all time (the Irish financial collapse) with only two (ok 3, but the last one was tiny) years of losses. It would appear that the only balance sheet mistake it made was the curious direct ownership of a hotel and leisure complex in Spain. But there was barely anyone in Ireland who didn't have property interests in the mid 90s, so I don't hold this against them too much. That property interest has been put into a JV, and the balance sheet is now de risked, with no debt.
What of the earnings? Well peak after tax was €250mln pre crisis but FBD are unlikely to get back to that level any time soon. Why? Well their investment portfolio is now largely in cash, bunds, and high grade corporates - the investment portfolio is earning very little even if there is very little risk. There is an argument for moving back into Irish government bonds, which I sympathise with, but let's assume they make no money on their asset portfolio going forward. Also, the fact is that with property falling greatly in value and people having far less money to buy things, there is far less stuff in Ireland to insure.
What are we left with? Well the company earned €53mln on €281mln of equity in the last 12 months, post tax, unlevered. And this is after a period of unprecedented business disruption. Revenues were flattish to slightly down, but this is to be expected for the reasons above. Going forward, I suppose the Irish economy and asset values could deteriorate further, but there seems to be a fair bit of that priced in. What could happen on the upside? Well this is a company that is uniquely focussed on Ireland, in an industry where most of the competitors are subsidiaries of multi nationals. These are multi nationals who are struggling in their home countries, possibly retrenching, and probably not concentrating too much on Ireland. We know how helpful an Irish focus can be, because FBD has been growing market share for ten years. In addition, it has a competitive advantage through its chain of rural offices, and has now launched some direct selling internet platforms. It's loss and combined ratios are outstanding. It really is very good at what it does and it's aiming to pay out 50% of earnings in dividends. There are no expansion plans beyond additional market share at the right price.
So we have an opportunity to buy a quality company that earns a high RoE, has competitive advantages and is focussed on one country at a time when the economy has probably troughed. That's good enough for me. I don't need the economy to grow, or the company to seize market share, or interest rates to go up, but this is where there is potentially significant upside.