Update KWG / bought Flughafen Wien / Macro Enterprises

KWG

After selling most some of my other real estate holdings (IMW,Sirius), the first idea is of course to increase positions, which have not performed according to my expectations.

The LTV is still in the green:

	31.12.2013	30.06.2014
Borrowings	235,475	229,977
Financial Liabilities	4,248	3,440
minority interest book	5,879	6,038
accrued taxes	166	312
1/2 pension liabilites	832	849.5
heating equipment PV	812	812
Cash/Marketable Securities	(7,043)	(6,427)
Financial Assets	(996)	(852)
sum	239,373	234,150
Current/Non-Current/Property	424,476	421,133
LTV	56.39%	55.60%

The problem with KWG is the low FFO cashflow:

	H1/2013 restated	H1/2014	normalized	annualized	2015*
Vermietungserlöse	22,513	22,156	22,156	44,312	46,158
Veräußerungserlöse aus zum Verkauf gehaltenen Immobilien		2,621		0
Veräußerungserlöse aus als Finanzinvestitionen gehaltenen Immobilien	9,186	5,383		0
Umsatzerlöse	31,698	30,160	22,156	44,312	46,158
Immobilienaufwendungen	-9,925	-10,375	-10,375	-20,750	-20,750
Aufwendungen aus dem Abgang von zum Verkauf gehaltenen Immobilien		-1,326		0
Aufwendungen aus dem Abgang von als Finanzinvestitionen gehaltenen Immobilien	-9,225	-5,326		0
sum	12,548	13,133	11,781	23,562	25,408
Gewinne aus der Anpassung des beizulegenden Zeitwertes	8,896			0
Abschreibungen und übrige außerplanmäßige Wertminderungen	-105	-66		0
Sonstige betriebliche Erträge	750	435		0
Personalaufwendungen	-1,527	-1,818	-1,818	-3,636	-3,636
Sonstige betriebliche Aufwendungen	-2,355	-3,339	-2,447	-4,894	-4,894
Betriebsergebnis (EBIT)	18,206	8,345	7,516	15,032	16,878
Finanzerträge				0
Finanzaufwendungen	-5,337	-4,967		0
Finanzergebnis	-5,335	-4,959	-4,959	-9,918	-9918
Ergebnis vor Ertragsteuern (EBT)	12,872	3,386	2,557	5,114	6,960
Ertragsteuern	-2,337	-579	-405	-809	-1,101
Konzernergebnis nach Ertragsteuern	10,535	2,807	2,152	4,305	5,859
davon entfallen auf Anteile ohne Beherrschung	479	189	189	378	394
davon entfallen auf Anteilseigner des Mutterunternehmens	10,056	2,618	1,963	3,927	5,464
EPS in € / normalized FFO	0.62	0.16	0.12	0.25	0.34
number shares	15,881,234	15,881,234	15,881,234	15,881,234	15,881,234

After looking at the new numbers, one can expect an FFO of 0.34 per share for 2015. This would justify a price of 6.80 at a yield of 5%. For 2015, I expect rents to increase 2% and 60*12+20*12 increase in cold rents due to renovation projects. I think an increase of 2% is prudent:
"As of 30 September 2014 the vacancy rate of the KWG portfolio improved by 10.4% to 12.9% (30/09/2013: 14.4%). At the same time, average portfolio rents rose slightly from €5.00/sqm/m to €5.10/sqm/m."
After finishing renovations vacancy will drop further, which is party included in the expected new lettings.

source H1/2014 report

Conclusion
Properties are valued at 421 and net cold rent is ~ 31 mio, which implies a yield of 7.4%. The book value is 10.80/share. But as long as recurring cash flows do not improve the share price will not rise sustainably. Compared with my investment in IMW (purchased at 2.5-3.3 and sold between 7-9.20), KWG was a drag on performance YTD. I will hold on to my position. Maybe some cost savings materialize as the company moved headquarters to Berlin nearer to its parant company, although I have modeled none.

Flughafen Wien is a short-term speculative bet on a tender offer not being accepted by too many shareholders. You can read a write-up at one of my favourite blogs.

Macro Enterprises has announced a buy-back today. You can read more at their website, red corner blog or Corner of Berkshire.  Macro is a Canadian construction company in the ressource industry. I hope not to be too early as with Sberbank, but believe Macro's balance sheet will shield the company from an outright bancruptcy in 2015 and the company is worth multiples of the current price if the situation improves. It is no compounder, but more a kind of an option like Sberbank but less risky. The position is about 2.5%, but this can change quickly.

Sold IMW/Sirius bought sberbank

IMW

The rest of the IMW position was sold at current prices of ~9.18€.

	#shares	equity	deferred tax	P/EQ	P/(EQ+DT)	price
3/31/2014	16,466,666	8.57 €	1.07 €	1.07	0.95	€ 9.18
pro forma	16,466,666	9.21 €	1.07 €	1.00	0.89	€ 9.18
9/31/2014	16,466,666	€ 8.83	€ 1.09	1.04	0.93	€ 9.18

weight		9/30/2013	3/31/2013	3/31/2014	pro forma	09/31/2014
1	Borrowings	180,449,546	182,090	180,347	146,500	150,156
1	Financial Derivative Liabilities	6,389,003	9,399	3,507	3,507	0
1	minority interest book	3,884,795	3,720	4,295	4,295	4,429
0.5	Pension/Employee Liabilities	470,181	455	430	430	445
1	Remaining purchase price liability Dukes Court	2,700	9,700	0	0	0
1	Cash/Marketable Securities	-11,710,354	-26,297	-10,684	-48,754	-47,511
1	short-term financial assets	-7,294,944	-5,476	-2,742	-3,990	-2,392
1	other long-term assets ( pledged bank deposits)	0	-1,000	0	0	0
sum		172,190,927	172,591	175,153	101,988	105,126
	Current/Non-Current/Property	321,965,040	315,427	341,806	277,598	276,138
	LTV	53.48%	54.72%	51.24%	36.74%	38.07%

My pro forma estimate was quite near the real numbers. As the price has risen there is no clear margin of safety left in the stock, albeit I believe it to be still undervalued a little bit.

An other way to look at the situation is as follows, if IMW would consider selling itself:
net debt = 105,126
mcap= 9.18x16,466,666= 151,164
ev= 256,290
- non Valbonne@book = 3,488 (Vorratsimmobilien)+22,440 (Austerlitz)+10,700 (Industrieweg)=36,628
= 219,662 (implied value Valbonne)

cold rent 2015* = 17,600
multiplier Valbonne = 219,662/17,600= 12.5
realistic multiplier Berlin property = 18
Value Valbonne = 316,800
- 219,662 (implied value Valbonne)
= 97,138 or 5.90 per share
fair value = 5.90+9.18= 15.08€
upside = 64%

As I don't believe a sale is imminent, the position was sold. Management has now the opportunity to destroy value, because of the cash balance.
  

Sirius 

The price has risen. The stock was listed in Johannesburg, too. The current price is 5.93 or 0.41€. In London 0.405. The new listing and the announcement of an accreditive aquisition have driven the stock price higher. As I have no faith in management to outperform, this was a good oppurtunity to sell. Looking at assets and current earnings there is no satisfactory margin of safety left for me.  The dilutive capital increases without issuing rights have favoured the investors with large stakes. The interest of small investors like me seem to be of little interest.

Sberbank

A very small position in Russian sberbank was established. The rest of the cash will propably be deployed in other east european assets and in commodities stocks, as there seem to be bargains in the markets today. Sberbank is sensitive to the ruble and thereby to the price of oil. All Russian stocks have of sort of an commodity angle. A valuation of sberbank does not make a lot of sense to me. This is a contrarian bet and kind of a binary option on the common sense of the Russian authorities. A total loss is not implausible.

Links Sberbank:
Investor relations
Kerrisdale Capital letter for Q3 2013 @beyondproxy.

Update IMW Immobilien

Sale of Dukes Court
On 16.09.2014 IMW informs about the sale of Firefly Ltd., the company which owns IMW's UK property Dukes Court, for about GBP 60m. The sales price translates into roughly €75.2m. At the time of the sale Dukes Court was fully let.
At the last balance sheet date (31.03.2014) Dukes Court was valued at €67.7m, using a discount rate of 7.38%.  The vacancy was 3.4% at the time of the valuation (now fully let). The corresponding debt was €36.2m, which means IMW can expect a residual cash flow of about €39m. The profit is ~€7.5m less corresponding cost. Because the sale was a share deal, I do not expect significant cost. IMW intends to invest the proceeds into other real estate projects.

Approximation of IRR for Dukes Court Investment
Dukes Court was bought for GBP 52m or €61.1m in 2012. It generated a profit of €0.7m for fiscal year 2012/2013 and €1.4m for 2013/2014. Investments into Dukes Court were €3.8m and €4.0m respectively. Plugging the numbers into a table results in this unlevered return:

	Cash flow
year 1	-61,1
year 2	-3,1
year 3	72,6
IRR	6,5%

We know this is not the right IRR due to ignoring derivatives, debt and timing of cash flows. Additionally no G&A expenses and transaction cost were allocated. But overall the investment was not as bad as expected by me in 2012. Although concentrating on Berlin residential properties would have yielded better results. A buy-back would have yielded the best returns for shareholders.

AGM on 29.09.2014

• dividend of 0.04€ per share rejected
• renewal of the right to purchase own shares

The company intends to downgrade their listing from the general to the entry standard of the Frankfurt stock exchange.

Asset based valuation
This is just my estimate of pro forma LTV and could be off:

weight		30.09.2013	31.03.2013	31.03.2014	pro forma
1	Borrowings	180.449.546	182.090	180.347	146.500
1	Financial Derivative Liabilities	6.389.003	9.399	3.507	3.507
1	minority interest book	3.884.795	3.720	4.295	4.295
0.5	Pension/Employee Liabilities	470.181	455	430	430
1	Remaining purchase price liability Dukes Court	2.700	9.700	0	0
1	Cash/Marketable Securities	-11.710.354	-26.297	-10.684	-48.754
1	short-term financial assets	-7.294.944	-5.476	-2.742	-3.990
1	other long-term assets ( pledged bank deposits)	0	-1.000	0	0
sum		172.190.927	172.591	175.153	101.988
	Current/Non-Current/Property	321.965.040	315.427	341.806	277.598
	LTV	53,48%	54,72%	51,24%	36,74%

IMW is not distressed and can be valued as a going concern. LTV has improved from 53.5% since my last post on IMW due to earnings and the sale of Dukes Court.

	#shares	equity	deferred tax	P/EQ	P/(EQ+DT)	price
3/31/2014	16,466,666	8.57 €	1.07 €	0.82	0.73	€ 7.00
pro forma	16,466,666	9.21 €	1.07 €	0.76	0.68	€ 7.00

 IMW is not as cheap in the past, but still trades under book at a price of €7.00. At a p/b of 1.0 IMW would trade at €9.21.

Earnings based valuation

A valuation based an earnings/cash flows is difficult because of the uncertainty regarding the reinvestment of the proceeds of the sale of Dukes Court.

Outlook for 2015:

Zu Beginn des neuen Kalenderjahres 2015 fallen rund 1.900 Wohneinheiten aus der bisherigen Nachwirkung der Förderung des sozialen Wohnungsbaus. Dies versetzt uns in die Lage, moderate Mietpreisanhebungen vorzunehmen, die auf Jahressicht zu einem Anstieg der Mieterlöse im Konzern von rund 6 % auf etwa € 19,3 Mio. führen sollen.

IMW expects to increase gross rental income from € 18.2m 2013/2014 to € 19.3m. Let us assume € 1.1m will flow right to the bottom line. The revaluation of the Vorratsimmobilie and 50% of "Risikovorsorge für Betriebsprüfungen" was added back as these items are non-recurring. For the tax audit I was not sure and added only 50% back.  € 3.1m maintenace cap-ex is included in the following figures for continued operations:

	2013/2014	2014/2015*
EBIT from continued operation before revaluations	9,916	11,016
add back revaluation Vorratsimmobilie	300	300
add back 50% of "Risikovorsorge für Betriebsprüfungen"	400	400
Interest expense	-6,249	-5,600
add back interest expense due to tax arrears	548	0
normalized income before tax	4,915	6,116
theoretical tax @15.825%	778	968
normalized earnings	4,137	5,148
per share	€ 0.25	€ 0.31

Taking into account the cash proceeds of ~€ 39m or € 2.4 per share due to the sale of Dukes Court is difficult, as we do not know on which projects the money will be spend. Investments into the Valbonne portfolio in Berlin will be self-financed.

Putting a multiple of 20x on earnings, not outlandish for Berlin residential property, and adding € 2.4 would imply a price of € 8.6 per share.

In November 2013 IMW signed a € 136m loan for ten years at 3.6% p.a. The spread to the 1.705% of the 10-year Bund was 1.9%. With the Bund (risk-free rate) now at 1.1% this implies a pre-tax cost of debt of 3.0%. The labor cost of € 2.5m for fiscal 2013/2014 will not rise proportionally with new investments. That is why I was against the dividend, which was not approved at the AGM. Taking into account the cost basis adding back the € 2.4 may be too low. But the management team in place has not earned the capital cost for the business.

For the time being I will hold on to my remaining position. At a price of 8.6€, I would sell. As my position was very big, the position was trimmed significantly above 7€ already.

Sold Covidien / Better timeline for UMS special situation

Covidien

Having bought the Covidien at discounts well above 10% I have exited the position completely. The situation looks like this as of now 10/28/2014:

		covidien
cash	35.19	35.19
medtronic	0.956	63.49
	implied value bid	98.68
	price covidien	90.12
	discount	-8.67%
	upside	9.50%
medtronic break-even price		57.46

If the spread to the implied value of Medtronic's bid to aquire Covidien rises again, the position will probably be established once again. On the Ideas tab of the blog you can follow my trades in Covidien, which I try to update regularly. As the situation at Shire has shown this type of investment is no true value investment, but more speculative.
I have been long Covidien before the bid of Medtronic and think the long-term downside if the bid does not go through and the market closes for the next 10 years is not huge.

UMS

I have updated my expected IRR due to UMS providing more visibility re the timeline of its liquidation. You can find the CEO's speech in German here. Pre-tax the situation could look like this:

	buy	dividend 1	dividend 2
cashflow	-9.55	7.5	3.6
date	10/28/2014	5/31/2015	5/31/2017
pre-tax IRR	13.54%

If one includes the effect of taxes of the typical German retail investor the situation could look like this:

	buy	dividend 1	dividend 2	tax refund
cashflow	-9.55	7.5	3.6	-5.8
date	10/28/2014	5/31/2015	5/31/2017	3/31/2018
tax on 1/2		0.9890625	0.9495	-1.52975
net cashflow	-9.55	6.5109375	2.6505	1.52975
taxrate	0.26375
after-tax IRR	8.15%

Instead of 2016 for the second dividend I have used 2017 to be on the safe side, because there could be obstacles to liquidate the whole company already on 2016. Additionally I do not know how much of the dividends will be tax exempt, so I have modelled for the dividends to be half tax-exempt. Depending on the individual situation the timing of the tax refund will differ of course. If I am right the situation is more interesting for tax-exempt investors than for retail investors. Liquidity is way lower than for e.g. Covidien and I plan to actively trade around the position. The upside is capped, but the downside is still there in these situations. If the pre-tax IRR falls below 10% I would start to sell.

The current IRR looks promising compared to 5yr Bunds with 0.16% YTM.

As always: Do your own research and use limit orders for UMS.

Update Sirius Real Estate

After the last blogpost about Sirius and selling part of the position at prices a little bit lower than € 0.35, the price has come down to € 0.30 despite a positive trading update.

Should the shares be repurchased at the lower price or the position be exited enterily? What has changed?

Dividend
Sirius plan to pay out a larger part of their profits. Instead of paying 65% of  recurring earnings after tax, the company intends to pay out 65% of Funds From Operations ** ('FFO).Per this interview this means the prospective dividend will be ~1.6c instead of 1.3c. At the current price of 30c this implies a forward dividend yield of 5.3%. I conservatively expected a dividend of at least 1.2c would be sustainable based on the results for the last year and the higher share count. In the end the dividend policy does not affect my valuation, but other investors value dividends highly and may pay a higher price for Sirius after delivering a little bit of dividend growth.

Land sales
The company has completed and notarised land sales to the value of € 4.541m in the period to 30/09/2014. Based on 522,075,395 shares this comes to 0.9c per share:

"In the period under review, the Company has completed the sale of 4,736 sqm of non-income producing land in Bremen to Aldi for €2.15 million, as well as a separate 2,743 sqms of non-income producing land in Bonn Siemmenstrasse for €186,725, in addition a further 27,000 sqm of land at the back of the Berlin Gartenfeld site has been notarised for €2.205 million. The Gartenfeld Land was contributing €22k of income per annum. The three aforementioned transactions amount to just under 35,000 sqms of land at an average price per sqm of €130."

They exchanged €22k of income for € 4.541m in cash. I believe the excess land sales to be value accretive. The Company has over 80,000 sqms of non-income producing land from which management has identified a number of additional opportunities within the portfolio that can be considered for sale in the future. Assuming €130 per sqm for the whole remaining land, this would add 2c per share cash.

Investment for organic growth 
The company  planned to convert 100,000 sqm of currently vacant space into lettable areas for an investment of € 9m. The following table dated from end of August 2014 was provided in the trading statement. 

Captial Investment Programme Progress	Area	Investment		Rental Increase
				€		Occupancy		Rate
	Sqm	Budget	Actual	Budget	Achieved to Date	Budget	Achieved to Date	Budget	Achieved to Date
Completed	26,818	€2,197,000	€1,823,610	€1,358,559	€678,653	80%	33%	5.27	6.40
In Progress	7,680	€1,687,000		€392,902		75%		5.70
To be Commenced This Financial Year	15,009	€1,481,766		€663,444		72%		5.11
To be Commenced Next Financial Year	23,301	€2,431,000		€1,148,508		80%		5.13
Total	72,808	€7,796,766	€1,823,610	€3,563,413	€678,653	78%		5.24

26,818 sqm are already completed.This looks promising. Investments were under budget and achieved higher rates. On the other hand an investment of € 7.8m or 1.5c per share for two financial years is lower than the 1.6c expected dividend for this financial year alone. There is only so much vacant space one can convert.
The budgeted rental increase for this financial year of €2.415m and €1.149m the year thereafter compares to an annualised recurring rent roll of €41.3m (31/03/2014). This is rater unimpressive.

Aquisitions
Nothing has changed. Mngmt is still looking for atractive business parks.Financing is available at 3.5% and net yields of 8-10% are offered as per this interview. This could possibly create value for shareholders. I would prefer a more opportunistic instead of the new deterministic dividend policy (65% of FFO).

Conclusion
Despite the positive results Sirius is a hold for now. The new initiatives will not create enough earnings to make up for the dilution and the now higher share count. On the other hand raising equity and refinancing debt has materially derisked Sirius' operation which implies a lower cost of equity. From an asset perspective the company trades at 30c with a discount to its NAV (~44c per share). A dividend yield of 5.3% makes waiting for this gap to narrow worthwile.

site note: How can the selling/buying in increments be implemented in this blog's portfolio? Under the "idea" tab, the sale for 35c was not reflected as the position is still active. I will think a little bit about this.

Event-driven: UMS and Covidien

Potential liquidation of UMS United Medical Systems International AG

On August, 14th, the company announced  the sale of all shares in United Medical Systems (DE), Inc., Massachusetts, USA for €56.4m. With 4.757.668 shares this equals €11.85 per share compared to the share price of €9.56. Although "customary transaction expenses will be deducted hereof."

For the sale to go through an approval at the  extraordinary shareholders' meeting on September, 25th is required. The company has already secured about 38% of the total votes:

Major shareholders of the Company, namely (i) Thomas J.C. Matzen GmbH, Hamburg, (ii) Jorgen Madsen, Bolton (Massachusetts, USA), (iii) MaWoBi Beteiligungsgesellschaft mbH, Hamburg, (iv) Marina Bello-Biedermann, Hamburg and (v) Norbert and Bärbel Heske, Türkenfeld, who in all hold about 38 % of the shares of the Company, have on the initiative of and vis-à-vis the Company (in each case individually) expressed their intent to support this transaction and to vote in favor of the sale of UMS USA to the Purchaser on the upcoming EGM.

If the sale goes through UMS AG will be left with no operation and just one employee (as of 12/31/2013).

simplified structure [UMS AG]

 In this case the management plans to put the liquidation to vote at the 2015 AGM and wants to pay a  substantial dividend and the rest in the course of the liquidation. This means the time value is unsure as we don't have a clear schedule with time and amounts for the time being.

Chart UMS AG [yahoo]

As the price is not much above the undisturbed price on August, 13th of €9.29 the downside seems to be limited. Given the low interest rate environment of today not much time value will be lost in the potential liquidation. Additionally one gets the optionality of something however unlikely better happening. A position in UMS AG was initiated at €9.40.

write-up from 2012 (value uncovered) for general information on the business
documents regarding the proposed sale

Covidien: Merger-arbitrage

I recommend reading the seeking alpha article of Mr Teicher

Google spreadsheet with implied discount: Link

For the portfolio a position in COV was established at a discount larger than 10%.

****Update****
The COV position was sold today at prices above $91, because the discount has fallen below 7%. If the deal fails, which I view as low probability, there would be some downside for COV. All in all the risk-reward was not as attractive as before. If the spread to the implied value of COV widens again, the position will be rebought.

The IMW Immobilien position has been trimmed in the last weeks at prices above €7. A updated post may follow. 

Update: Asseco Central Europe

The net cash position is actually 3.8m better than expected for 1Q2014.

The remaining financial liabilities relate mainly to the purchase of the shares of Asseco Solutions AG (principal EUR 6,000 thousands + interests EUR 48 thousands, interest rate 6M EURIBOR + 1.3% p.a., maturity in December 2014).

The selling price of 51 shares of Slovanet a. s. has amounted to 11m. Asseco Central Europe shall receive payment in cash in three instalments within three months from the date of the transaction.
At 30.06.2014 there were 10m receivables, which are lower now and have been added to cash in the following table:

	1Q2014	1Q2014 ex Slovanet	1H2014
Cash and cash equivalents	36.0	45.8	28.9
receivables sale Slovanet			10.0
Total liquidity	36.0	45.8	38.9
financial liabilities	16.4	16.4	6.5
Debt	10.0	1.5	0.5
Minorities	3.7	-0.3	0
Total interest bearing liabilites	30.2	17.7	7.0
Net interest bearing liabilites	-5.8	-28.1	-31.9

As you can see the performance from continued operations deteriorated in H1 2014, but Q2 is already improved y-y. The restatement for 2013 excludes 0.8m Ebit and 0.3 net profit from the sold company Slovanet.

With mcap of 80.5m (08/15/2014) and EV of 80.5-31.9=48.6m and H1 2014 EBIT from continued operations of 6.2m:

EV/2x H1 2014 Ebit = 3.9

I think this looks very promising. Keep in mind two major logistics projects were sold in 3Q 2013 and did not contribute in 2014. Because of this logistics and outsourcing services dropped significantly in 1H 2014 by EUR 2.5 million (5% and 11.5% proportion on total revenues in 1H 2014 and 1H 2013).

Additionally Asseco Solution's integration may bring some benefits in the future:

"Aim of the transaction is to utilize the synergic effects of combining the forces in ERP business. Cross-border collaboration – particularly in implementing new trends – can shorten development cycles and allow innovative concepts to be turned into reality more quickly. Moreover, it creates a solid foundation for preparing and making strategic acquisitions in the future."