Monthly Archives: December 2017

2017 end-of-year portfolio review

With the last trading day of 2017 behind us it’s time to tally up the results for the year. What I’m writing here is starting to get repetitive, but it was once again an excellent year with my portfolio up 30.12%. For US-based investors this might not sound so extraordinary given how markets performed worldwide, but remember that these results are in euro’s. With the euro appreciating 14.6% during the year I faced a significant currency headwind. Measured in dollars my portfolio is up a whopping 49.19% (while the MSCI ACWI is up 23.97% in dollars versus “just” 8.89% in euro’s). Volatility in exchange rates has a large impact on my results in the short-term, but in the long-run I expect positive and negative moves to cancel each other to a large degree.

Year Return* Benchmark** Difference
2012 18.53% 14.34% 4.19%
2013 53.04% 17.49% 35.55%
2014 27.72% 18.61% 9.11%
2015 20.23% 8.76% 11.47%
2016 43.58% 11.09% 32.49%
2017 30.12% 8.89% 21.23%
Cumulative 420.39% 109.63% 310.76%
CAGR 31.64% 13.13% 18.51%

* Return in euro’s after transaction costs, dividend withholding taxes and other expenses
** Benchmark is the MSCI ACWI (All Country World Index) net total return index in euro’s

It’s also becoming a tradition that I complain in these posts about how difficult it sometimes can be to track something so basic as your investment returns. I have complained about how CVRs, liquidation receivables and other esoteric assets make this process less than straightforward.

Another complication are taxes. I only care about after tax returns, but that is not the number that I report here. What I report is basically the aggregate of the returns as reported by my brokers, sometimes adjusted for items that they got very obviously wrong. Since we don’t have short-term or long-term capital gains taxes in the Netherlands this number matches my after-tax return pretty well. However, a large part of the dividend taxes that I pay during the year can be used as a tax credit. Normally this is all pretty small potatoes, except for this year when I had a large position in Sapec that paid a huge E150/share dividend. Not only generated this a sizable tax receivable in Belgium, it also generated a big tax credit in the Netherlands. I basically valued the Sapec tax assets in a way that they payment of the dividend didn’t generate a gain or loss compared to the previous day trading price. I think this is the most sensible approach, except now I report my performance after dividend withholding taxes with the exception of Sapec. Not a nice and clean situation, but I also don’t want to restate all my results to retroactively recognize the value of tax credits generated by dividend taxes in previous years.

As you can see there isn’t a lot I can complain about this year. Almost all positions performed pretty well, including my basket of Japanese companies and my basket of Italian real-estate investment funds. Inside the special situation basket there were a couple of big losers, but nothing too drastic. The Destination Maternity merger failed spectacularly, causing a 308bps loss while “undisclosed merger B and C” subtracted another 152bps and 52bps from the result. This was more than offset by a 788bps gain in the Sapec going private transaction and a 495bps gain in “undisclosed merger A”. I talked about all these outliers before in my half-year report, although at that point in time the Destination Maternity loss was at “just” 172bps and the merger was supposedly still on track to close. The second half of the year was characterized by smaller and steadier gains in the special situations basket.

My portfolio doesn’t contain any big surprises I think. It’s a fairly standard (for me) split between long-term value stocks and special situations. You can see a big position called “various receivables” that contains among other things the Sapec tax assets, delisted Tejoori shares and some CVRs that I managed to pick up during the year (for example, Ocera Therapeutics). My cash position is at the moment pretty big, but that’s mostly the result of a couple of deals that were completed just before the end of the year. Less than a week ago my portfolio was actually slightly leveraged, and I hope to be able to reinvest this cash soon. As you can see from the results above, focusing on special situations is proving to be a profitable activity for me, but the downside is a high portfolio turnover. You always need to find new situations to replace those that get completed. Hopefully 2018 will have a couple of nice ones in store for us! Have a happy new year, and may next year be just as profitable for you as this year was for me!


Author is long everything in the portfolio overview

PD-Rx Pharmaceuticals reports FY2017 results

PD-Rx Pharmaceuticals posted their 2017 annual report online yesterday. Last year was a pretty solid year with revenues increasing by 21% from $21.5 million to $26.0 million. Net income saw a similar percentage increase and went from 0.30/share to 0.36/share. Given that PD-Rx’s past revenues have been somewhat volatile I don’t think we should put to much weight on this growth, they are now basically back to the level they achieved in 2013. As always, the company provides a nice overview of historical annual sales in a “classic” PowerPoint look:

Besides good operating performance there were two positive developments during the year. First of all, the company paid its first ever dividend in June this year. Compared to PD-Rx’s cash balance of $4.85/share the dividend of $0.30/share was not very big, but it does represent a 82% payout ratio for the year. Hopefully this wasn’t a one-off occurrence.

Secondly, the passage of Trump’s tax bill should provide a nice boost to earnings in the years to come. PD-Rx Pharmaceuticals, like many US micro-caps, pays the full US corporate tax rate, so the drop from 35% to 21% should boost earnings by approximately 22%. If we crudely value PD-Rx at the value of its cash balance plus ten times 2017 earnings, value per share jumps from $8.49 to $9.33 if we adjust for the lower tax rate. Given that shares currently trade at $5.65 I still think they offer a pretty compelling opportunity.


Author is long PDRX

Last Primo Water shares released from escrow

Last year I participated in the merger arbitrage between Primo Water and Glacier Water, calling it the merger arb of the year. Because of the unusual deal structure it will take a long time to know exactly what the result will be, but today the last Primo Water shares were released from escrow which clarifies at least one piece of the puzzle. I expected that all the escrow shares  would be delivered to former Glacier Water shareholders, and that proved to be the case. Of course, just the fact that we did get all the shares doesn’t mean that it was a sure thing. Risks that didn’t materialize are unobservable, and are the main reason why making sense of investment results is so hard. But at least it’s a clue that perhaps I had the right idea.

With the last Primo Water shares sold my preliminary result is looking as follows:

Description Date # of PRMW shares Realized price Net cash flow
Buy 1 GWSV share 10/24/2016 -$22.98
Cash merger consideration 12/26/2016 $12.1761
Initial share payment 12/26/2016 0.252975 $12.73 $3.2204
1st escrow release 6/29/2017 0.154838 $12.83 $1.9866
2nd escrow release 9/11/2017 0.154838 $11.69 $1.8101
3rd (final) escrow release 12/20/2017 0.309676 $12.75 $3.9484
Sum: $0.1615
IRR: 1.61%

As you can see, the result so far isn’t exactly a home run, but part of the reason is that the share price of Primo Water dropped and I realized an weighted price of $12.57 which is 9.0% lower than the $13.81 the stock was trading at when the position was initiated. In theory I could have hedged my Primo Water exposure, but in practice this isn’t easy nor is it free. So this is just variance I will have to accept. Sometimes it will hurt results, sometimes it will boost them.

But more importantly, this isn’t the whole merger consideration yet. The warrants, another part of the deal, still have 4 year left till expiry, have a strike of $11.88 and are worth $3.87 at the moment (assuming 30% volatility). Since we got 0.54 warrant per GWSV share that means that even with a slightly lower Primo Water price the expected payoff is still looking pretty good. What will happen next will mostly be noise from an investment process perspective, but nevertheless, if this blog is still alive in four years time I will let you know how this ended :).


Author has no direct position in Primo Water, but owns the warrants

Stalexport Autostrady SA: Polish toll road at a 20%+ FCF-yield

A reader whispered the name Stalexport Autostrady SA (WSE:STX) in my ear. This Polish company used to be an importer and exporter of steel products (hence the first part of the name), but in 1997 it obtained a 30-year concession to operate a 61KM stretch of the A4 as a toll road between Katowice and Kraków (respectively the 10th biggest and 2nd biggest cities of Poland). The steel business was sold more than a decade ago when Atlantia SpA (BIT:ATL) took a majority position in the company. Atlantia is an Italy-based operator of toll roads and airports in various countries with a €22.5 billion market cap while Stalexport Autostrady is worth just €225 million at the moment. Atlantia holds 61.2% of the outstanding shares, but it’s just a tiny tiny sliver of their overall business.

Toll road between Katowice and Kraków on Google Maps

Conceptually, understanding a toll road business is easy. The costs you have are mostly fixed: road maintenance and operating the toll booths. How much money you make is a direct function of how many cars use the road, and how much toll you ask. It’s usually a pretty good business to be in because most people have no real choice to use your road if they want to get quickly from point A to point B, and no-one is realistically going to build a competing  road in the same direction. In this case we know that the concession will end in March 2027, so this is the kind of situation that screams for a discounted cash-flow model to estimate intrinsic value.

Financials: the balance sheet

Before we start building a DCF-model it’s a good idea to first take a look at the historical financials, and especially the balance sheet. There are a couple of big items on there that are important to understand. I have color-coded them in one column:

Source: company data and author’s calculations

The assets colored red are basically the operating assets of the company, and the concession itself (the intangible assets). As you can see the value of the concession drops every year, and is expected to be zero in 10 years time. Maybe the physical operating assets will have some residual value, but this part of the balance sheet isn’t very important.

More important are the yellow colored cells. On the asset side these are mostly labeled “other non-current investments” while we have various provisions at the liability side. These two items cancel each-other almost out, and that is no coincidence. The investments are “cash reserved for capital expenditures” while the provisions are the estimated costs of mandatory capital expenditures (with the concession also came the obligation to maintain/upgrade the road). This is very handy for our DCF-model. We don’t have to worry about modelling capex: we can just assume that these balance sheet items will cancel each other out in 10 years time. To check that this is sort of reasonable we can compare the implied annual capex/year with historical capex levels. Total provisions are PLN412 million which would imply roughly PLN41 million of capex/year versus a seven year average of PLN46.5 million. This is a small gap to begin with, and it will be a bit smaller because the provisions are discounted while the investments will also generate a certain return (and we have some excess investments to begin with). I also think it makes sense to assume limited capex close to the end of the concession.

The green and blue cells are closely related, and basically represent how much excess cash/assets the company has at this point in time. They do have some debt, but they have been paying that down rapidly in the past years. Note that the “other non-current liabilities” also represent a very debt-like liability since they are concession payments that have to be made to the Polish state. This amount went down by a large amount compared to 2016, but that at the same time “trade and other payables” saw a huge increase. As a result net working capital turned negative, but this should be a temporary situation. They are basically paying down debt, and they now have roughly PLN60 million in excess cash while holding PLN60 million in positive working capital as well if we normalize the situation.

Financials: earnings and cash flow statement

Source: company data and author’s calculations

Looking at the income statement is useful, but we have to know what we are looking for. Earnings are sort of meaningless (except for the fact that they determine taxes) since we don’t care about the depreciation of the concession, or the variability in earnings because of lumpiness in roadworks. Stalexport Autostrady doesn’t really have a meaningful “cost of sales”. A large part of the cost of sales are the amortization of the concession and changes in the valuation of the provisions, and costs related to roadworks. Therefore, it doesn’t move based on revenue, and as a result higher revenues are resulting in higher operating margins. Because of that, the business is at the moment throwing off cash.

We mainly care about the amount of operating cash flow. The most important driver of the amount of operating cash flow has been the revenue, that has been growing at an average rate of 10% per year. If you dive in the companies annual reports you see that this growth is driven by a combination of higher traffic and higher tolls. The maximum amount of toll that the company can charge is capped in the concession agreement, but the rate for passenger cars can be increased by 40% before hitting it while the rate for trucks has 18.3% of upside left. Tolls from passenger cars represent roughly two-thirds of all toll revenue.


Now that we sort of know the current state of the business, and understand what is important, we can use that to make some predictions about the future. I have made a very simple cash flow model based on the trailing twelve month operating cashflow. I have adjusted this number for changes in working capital, and also deducted the dividends paid tot non-controlling interests (and assumed that this amount will remain the same in the future). The value that the models spits out depends on four major assumptions:

  1. Incremental revenue drops directly down to the bottom line (after 20% taxes are paid).
  2. Revenue continues to grow with an average rate  of 10% per annum (not so conservative).
  3. No additional cash is required for maintenance capex above the amount currently provisioned (with the PLN164 million in net tangible assets on the balance sheet providing an additional buffer).
  4. We use a 10% discount rate (I think this is pretty conservative).

The interaction of the first two are really the crucial ones. Because we don’t model increases in costs and overhead while revenues grow the amount of operating cash flow that the business generates the next ten year will just explode. If you look back at the historical results that doesn’t seem to too crazy: this is exactly what we see happen in the past results.

Without further ado, the model:

Source: company data and author’s calculations

If these assumptions are reasonable, we find that Stalexport Autostrady should be capable of generating roughly PLN3.2 billion of operating cashflow with a net present value of PLN1.9 billion using a 10% discount rate in the next 9.5 years. Since the current market cap is just PLN945 million this gives us a large margin of safety, and if we increase the discount rate to find the same present value as the current market cap we need to use a whopping 27.4%.

If we input zero revenue growth in this model we get undiscounted cash flows of PLN1.7 billion for a discounted value of PLN1.1 billion. So basically the market is pricing the toll road as if revenues will suddenly stop growing, something that I think is unlikely to happen with an asset like this that has so much pricing power. And even if that turns out to be the case, getting paid 10% per year is nothing to sniff at in today’s low interest rate world.


To cut directly to the chase: Stalexport Autostrady seems to be valued very attractively compared to its expected cash flows in the next 10 years. According to my, admittedly very crude model, the stock should be trading at roughly twice the current level. It’s quite possible that a 10% revenue growth rate will turn out to be a too aggressive assumption, but since expected returns are adequate even with a zero growth rate I think there isn’t a whole lot that can go really wrong here. A toll road (concession) must be one of the more stable assets one can own, so I’m pretty excited to be able to buy this at such a high yield.


Author is long Stalexport Autostrady