Win win

Today I faced in the romanian market a standard situtation described in behavioural finance books. So, I have for the next 2 months the following 2 investment options:

1. SIFs having a potential between -20% and +20% in the next 2 months (personal estimation)

2. SCD having a minimum potential of +1,5% due to the takeover offer. Considering that we speak about pharmaceuticals and that the offered price is exactly the book value, it is possible that the offer will be improved.

Option 1 is a pure bet! Option 2 is as safe and brings as much as a bank deposit (1,5% in less than 2 months), but it offers the possibility to participate free of charge to a bet.

I am sure all the traders will be disgusted by my exercise and will choose immediatly option 1 saying "no risk, no fun". Option 2 is the dream of any portofolio manager - it brings a sure profit + a greater profit in case a certain event (takeover price increase) occurs.

I wonder why nobody from the romanian banking system noticed the anomaly? What are the romanian fund managers doing??

In any western market, if the offered price is 0.7 ron, the banks would immediatly put a huge bid above that price. How much above, it depends on the estimated probability that the offer will be increased. But in any case, the bid will not stay below the offered price. Currently the bid is so low that it even offers a chance to do an arbitrage with the money market (buying at .68 could bring a 2,3% netto in about 42 days - that would be a 19,9% per year). This means that buying below 0,69 you do a clasic arbitrage and win a bet for free.

If Sanofi-Aventis will raise its offer for SCD to a similar level to what Zentiva offered in 2005 for SCD, the potential gain is +100%!! Of course, the probability for this to happen is low, but I can bet on that for free. Why not?

About banks

Our controversed SIFs sold last week their Bancpost shares. This gives us the possibility to evaluate the other banks :) ... So, Bancpost (almost 5% market share from the assets point of view) was sold for about 350 mio euro.

1. TLV has a current market capitalization of less than 300 mio euro. I would say the value of TLV (and its market share) is bigger than that of Bancpost. I see here at least 20% upside potential for the TLV share.

2. BRD has roughly 15% market share and a market capitalization of 1200 mio euro. I've always been a big fan of BRD, but now its share seems to be overpriced compared with its peers (peer-based price would be about 1100 mio). The reason for this: SocGen supported actively the BRD share and BRD is regarded as a safer investment.

3. BCR has 24% market share and no market capitalization yet :) Its new valuation seems to be arround 1700 mio euro. Just compare this with the 6000 mio payed by Erste.

4. Let's evaluate SIFs also :) Based on the Bancpost exit price, BCR + BRD together can be evaluated at 3000 mio euro. 5% of 3000 is 150 mio euro for their bank holdings. It is up to you to discount this because of the Dinel-Fercala risk :)

The Truth about Dacia's sales in Germany

I love numbers, they tell the truth!

Dacia's sales in Germany (helped by the 2500 Euro incentive given for giving up old cars) topped at about 1000 cars/week. That makes 4000 per month and 50.000 per year. That's nothing compared to the total of new cars sold yearly in Germany (about 2-3 millions). It is roughly 2% of the market, which is very good for Dacia, but it is far away from being a top position. Even more, this 2% are assuming that the sales will keep the current high levels, which I doubt. I bet that the Dacias sold in Germany will end up like those sold in 80s in Hungary: sooner or later they will be bought for 1k-3k euro by romanian citizens and brought back to Romania.

I wrote this post because I saw 2 types of articles in newspapers: romanians celebrating the take over of the german auto market :) ... and germans complaining that the government incentive goes to Romania and Germany gets no advantage of it ... both statements are false, the numbers show it!

However, 50.000 Dacias sold only in Germany means that Dacia needs to increase capacity in Pitesti.

Good signs

Finally, somebody did something good for the poor romanian capital market! We will have a triple A bond listed in Bucharest and London! I am 100% sure this is the way to develop our markets! Thanks to EBRD and SocGen!

EBRD issues inaugural bond in Romanian Leu
04/02/2009 10:42 (00:44 minutes ago)
The FINANCIAL -- The European Bank for Reconstruction and Development has launched its first issue in Romanian Leu (RON) by issuing a RON 115 million fixed rate bond. The issue is the first ever bond to be launched simultaneously in the Romanian and the international markets.

According to EBRD, the bond issue is part of the Bank’s strategy to assist in the development of the capital markets in Romania. As the first bond issue in Romania to benefit from recent changes to cross-border securities issuance in the EU, it should pave the way for other transactions. This issuance enables the Bank to access the domestic Romanian investor base, in addition to capturing demand for RON from the international investment community. “The further development of a domestic capital market will have long-term benefits for the Romanian economy”, said Claudia Pendred, EBRD Director for Romania.



The Bank’s RON 115 million bond has a 10-year maturity and pays a coupon of 11.25 per cent, with an issue price of 100 per cent. The issue is lead-managed by Société Générale. The bonds will be cleared through Clearstream, Euroclear and the Romanian Central Depositary. Applications will be made to list the bond on both the Bucharest Stock Exchange and the London Stock Exchange.



This RON bond builds on the Bank’s ongoing issuance programme in the currencies of its countries of operations. The EBRD has been active in local currency issuance across the region and particularly in Russia where it has now raised RUB 27.5 billion through bond issues.



Manfred Schepers, EBRD Vice President Finance, said “this issue reflects the importance of developing a domestic capital market in local currency. The need for deep domestic markets has been highlighted by the current crisis where an over-reliance on foreign currency debt has exacerbated instability.”


To date, the Bank has invested about €3.8 billion in 249 projects in Romania and helped mobilise a further €7.2 billion from external sources, resulting in total investments of over €11 billion.



Following are the terms and conditions of the issue:



Issuer: European Bank for Reconstruction and Development (EBRD)
Issue Amount: Romanian Leu 115 million
Maturity Date: 5 February 2019
Coupon: 11.25% annually every 5 February
Issue price: 100%
Lead Manager: Société Générale
Ratings: Aaa (Moody's), AAA (S&P), AAA (Fitch)
Listing: Bucharest Stock Exchange and London Stock Exchange

The proof

EU is in recession! Do you want to see the proof? I'll show you the proof!

N-TV showed Saturday morning the german finance minister playing at lottery! I mean, just figure out: lottery = random, finance minister = the one who knows what is going on financially in a country! It sounds like deep recession to me :)

I know what your question would be and I will answer it: YES, one of the played numbers was his birthday :)) He confirmed!

TLV

TLV, the pride of BVB, one of the few private companies built up based on the romanian capital market, reported yesterday the 2008 financial results. Usually, the last quarter used to be a hit!

TLV did not lose money in the last quarter of 2008, but they did not make money either. The net profit after q4 is just a (tiny) tick higher than the result after q3. We hoped till now that the predictions are awfull, but the reality will be nicer. Well, the hard facts are clear: DOWNTURN is here!! Fasten your seat belts!

Highway to hell

So, what do we have new?

1. TLV really buys back its shares! Tough to say if they are not doing a terrible mistake! BRD and SIF5 stopped apparently their unofficial buybacks (because they did not get the expected result?)

2. Suddenly, all the local analysts agreed that eurron will move towards 4,5 ron. As always in a market, when all the participants agree on something, the markets moves immediatly and brutal in that direction. Ron's direction is clear and the trends in currency markets run years, not days.

3. Worldwide bad news popup: Royal Bank of Scotland loose 28 billion euro (that's a bit less than what whole Romania produces in one quarter), automakers worldwide cut production by 50% or so, xmas retail sales fall.

In such a confuse situation, I would say nobody is able to predict how long the recession will last and how deep it will go. The world economy is too big and strong interconnected (comparing with 1929 or even 2001). You cannot compare 1929 world trade with the current situation. World market economy is not anymore limited to US and Western Europe. The world leaders and economists never faced such a huge elephant. It is tougher than ever to turn it arround. And I'm afraid that Obama is better in marketing than in macroeconomis.

When even the bravest give up

During 2008, the SIFs ignored the general trend and lost lots of cash buying shares quite early, despite signs/voices announcing a downturn. In January 2009, they suddenly make an interesting announcement: they are not so sure, whether to participate in the cash subscription at Bancpost! The SIFs, those brave investors, the sole active buyers during the 2008 bear market. They have no more money or they become more pessimist now!

So, what do we have? The bravest longers give up, the macro indicators are terrible, even the big recession-proof companies are shaken, the auto industry is almost in collapse worldwide (Toyota sales dropping 35% !!). At the end of 2008, everybody was expecting a massacre in Jan and Fed 2009. Not even a single guy said that we might see something positive at the beginning of 2009 - "Maybe in the second half of 2009, but for sure not in the first half"

And? Despite all these, the stock indexes start the year incredibly strong! I think this will be the beloved example of those supporting the contrarian investing model.

Now I wonder: Can it be that the stock index, the best leading indicator, after signaling in 2008 a sudden macroeconomic downturn, is already early-indicating an upcoming economical revival thanks to the low interest rates and the economy support packages introduced by governments around the globe?

The lessons of 2008

It is time to look back and learn something from the 2008 lessons:

- it was definitely a terrible year for analysts. The volatility made the forecasts look ridiculous. A lot of gurus lost their fans.

- the business cycle turned dramatically, as we never thought that it could turn down - from record profits till collapse there were no more than several months. What is the value of DCF analysis for example, when the whole cycle is turning 180 degrees.

- it was the year when all the stand alone investment banks dissapeared. An entire old business model just vanished

- many pretend they saw the financial tsunamii coming. But let's face the facts: nothing was done against! Otherwise, some of the investment banks would have survived. They were in the middle of financial markets, filtering all the information and oppinions available, but they could do nothing to prevent it.

- there is no such thing like portofolio diversification. As GS said yesterday in their quaterly report (announcing their first ever loss), the prices for all asset classes dropped. With no exception! Commodities, houses, equity, bonds (except few sovereign bonds), even gold.

.... to be continued

Banks, dividends, sifs

Last week I was reading that it is almost a consensus among the analysts that no german bank is going to pay dividends in spring 2009. Even more, some of them might try to raise additional capital from shareholders (e.g. postbank and commerzbank). Also the insurers might cut partially the dividends (for sure allianz, not so sure munchener re).

What if scenario ... what if austrian and french banks are going to do the same? It looks like it is more and more probable that sifs will not cash anymore next year the generous dividends from BCR and BRD, which were the biggest part of their regular income. Without bank dividends and without selling any participations, the sifs will run out of cash next year. And for sure 2009 will not be a good year for fire selling minority participations. Maybe Dinel Staicu, Chelu and Fercala are focused now on their power fights, and they do not see the tsunami coming. That reminds me of something Giovani Becali was saying 2 days ago about Gigi Becali: "he is rich as he was till now, but he just has currently no cash :)". I hope we will not say next year about sifs - they owe 5% of the romanian banking system, but they cannot cover their operating costs.

PS. One more thing about banks: Allianz and Commerzbank renegociated last week their initial sale agreement regarding DresdnerBank. The total transaction amounts now only 5 billion euro (down from 10) and still the biggest chunk of it are Commerzbank shares and not cash. The only improvement is that the transaction will be done in one step and not in 2 steps as planned, avoiding a capital raise, which would have been hard to digest for the Commerzbank shareholders. The numbers used by sifs or analysts when evaluating TLV or BCR must be strongly adjusted. 6 billion euro for BCR or 1 billion euro for TLV are fairy-tales from past times.

Petrom

As topic introduction for a discussion on agf.ro, I collected some facts about Petrom. Just not to search for the numbers during the discussions, to support the different oppinions :)

- the price paid by OMV for takeover was 0,2158. Also the 8% shares distributed to employees will be also sold at this price.
- the last dividend was 0,0191 (roughly, 10% of the current price)
- EPS after 9m: 0,04 ron (roughly, 20% of the current price)
- Erste's target price for SNP (published in nov 2008) is 0,6 ron
- the well known profit structure of Petrom: exploration brings profit, refining and marketing are loosing money. Discussion topic: when or what can move refining and marketing to profit?

About Exploration

- q3 domestic production cost 45 ron/boe. I would say this would stabilize for the moment.
- q3 realized crude price 247 ron/boe. The crude price is falling, but usd is jumping. I would rate that by the end of the year, the realized crude price will fall to 150 ron/boe.
- according to 2007 annual report, the domestic replacement rate is 38%.
- according to 2007 annual report, domestic and international production is approximately 197,000 boe/d and proved reserves are around 894 mn boe. Discussion topic: reserves trend.
- the new Komsomolskoe Kazakhstan oil field is expected to produce about 2800 boe/day. Now, the whole Petrom production is arround 197.000 boe/day

Of course, Petrom's profit is highly dependent from the international oil price and the exchange rate usd/ron. Until marketing division will deliver results.

About marketing & refining

- dominant market share in Romania
- refining margin in q3 was almost 0

The one time events impacting the 2008 financials:

- provisions were created for the employee claims (diminishing profit in q2)

- Petrom hedges the crude price (selling in advance at higher prices) and this is visible in q3 in the financial result (raising profit in q3)
(quote from report: Should oil prices drop below USD 65/bbl in 2009, the hedge would still pay out an additional USD 15/bbl to actual oil prices. The put spreads were financed via calls in order to avoid initial investment (zero cost structure), whereby Petrom will not be able to profit from oil prices above approximately USD 110/bbl in 2009 for the above stated volume)


- Arpechim was written off in q3. What's next? Sell? Close? Company executives stated clear that they do not expect the unit to be profitable.

- future investment: 860 MW Brazi power plant. Is Petrom moving to power generation market?

Personal oppinion: as long as it trades under the takeover price (0.21 ron), SNP is a buy. However, it is a defensive share and not very interesting for the kind of traders staying daily on agf.ro

I would wish Petrom to be some kind of indicator for the whole romanian economy. Similar to General Electric. If GE goes well, the whole US economy goes well. If not, than not :)

BRD

I just want to make a note for myself(sometime in the future, I will read what I wrote here to analyse where I was right or wrong):

Societe Generale buys almost daily BRD shares. Since more than 1 month. Of course, they are major shareholder and have another perspective. Should I join the party?

This note is also part of my attempt to keep an overview on the situation and base only on facts. They are buying, that's a fact. I cannot say now if they are incredible smart or plain stupid.

Wind of change

This crisis is not the end of capitalism and the raise of communism, as some journalists write. Marx will not come back. There are just big changes that must be done. I will give few examples:

1. Global markets, local regulating bodies. Some decades ago, each German land was having its own police restricted to that land. If somebody steals a car in Bavaria and runs away in Hessen, bad luck for bavarian police. They were supposed to stop at the border and give the case to their hessischen coleagues. Goldman Sachs takes 10.000 millions usd from FED and go to speculate on romanian currency. If they would speculate against usd, of course, they would get no money from FED for that. We need global regulating bodies.

2. Rating agencies. They are payed by issuers, not by investors. If Lehman Brother issued some certificates, they also payed Moody's to assign a rating to those certificates. Of course, they cannot assign a bad one, because they are payed by Lehman. Even more, the rating considers more the solvability of the issuer and not what is in that sold package. The whole concept of rating agencies must be changed.

3. Equity market laws. They are so old and that even old respectable companies ignore them. Theoretically and legally, Porsche owns 30% of VW. Practically, they own 30% shares and 41% call options. But the current laws are too old and they do not oblige Porsche to make public the fact that they actually/potentially have 71%. According to current law, a shareholder is defined only by the number of shares he has. The laws are from the times when only shares were traded.

4. Derivates markets. Actual free float of VW was 5%, but the naked short sellers were short 10%. They could not even close their positions. They had no idea that Porsche, major shareholder, owns 41% of VW by owning calls! The regulating body had no idea that the short sell positions are bigger than the free float. Until Porsche made a volunteer public statement. The short sellers had no other option than go bankrupt or beg for mercy from Porsche. Why? Because the laws are too old and no more effective.

5. Market principles: I like the free market, the place where the price is decided by sellers and buyers. But there is no book about it, where it is written that third parties can join and influence the price. What about oil market? The producer want to sell it with 70-90 dollars per barrel. But the speculators push the price to 150. Why? Is it because producers want to sell fast and go back to drilling? No, it is just a free market big enough to attract big speculators. I think these markets should be regulated to allow only producers and rafineries as consumers to trade. It is not a restriction of the free market concept. Just the speculators should stay out when establishing the price for basic goods that everybody needs.

Soon 1 euro = 4 ron and even more

On the long run, I am optimist about the romanian economy and its long struggle to catch up with the EU level.

On short term, dark clouds are coming! Very dark and very soon! The initial attempt of Isarescu to keep the exchange rate stable was a good thing because it had a symbolic message for the investment bankers: guys, this is not your playground! You can play, but do not ignore the fundamentals. But it's the fundamentals that will force Isarescu to let the ron to go over the level of 4 ron for 1 euro.

The euro loans are prohibitive now in Romania! The banks cannot finance such loans. And the RON loans are also prohibitive because Isarescu keeps the rates too high to reduce inflation. Soon, he will drop the rates because economy cannot survive with the current loan conditions and inflation poses no risk. When that will happen or even forecasting that, the ron will drop. We need it also because we want to cut imports and support export, we need it because the capital inflows (from investors or from romanians living abroad) will drop dramatically. There is no other chance that to let the ron drop. I try to watch it objective :)

Overview

Despite of the turbulent period, I am trying to keep an overview on what is happening:

1. Finance: The situation of the western banks relaxed due to the gov support. But the financial system seems to break away in other parts: more and more east european countries face financing problems (mainly Ukraine and Hungary). On top of that, Austria cancelled the bond auction because of the too big yields requested by banks for a loan to a AAA rated western country. This is a very bad sign. Why? Banks can be saved as long countries have access to credit! If also the countries have problems to get money, there is nobody left.

2. Auto: the sales dropped in October in Germany by 8,2%. And they plunged in US 32%. These numbers are dramatically, they are impacting not only GM or Ford, but the whole industry, Toyota and german automakers.

3. Raw materials industries: everything goes down, inclusive oil and gold. This makes me anxious actually - gold is going down, despite its reputation of safe harbor during recessions.

4. Constructions: plunging all over the world, but US starts signaling a bottom.

In these conditions, we should be happy if the xmas rally will bring djia and dax 25% away from the highs. This would make djia about 10500 and dax around 6000. The fundamentals are pretty bad now and these are the tops that (I believe) we can still reach this year. Maybe this will be supported by dramatic rate cuts made by ECB in the next 2-3 months.
On the down side, there is plenty of room and I am afraid we are going to see new lows next year.

Regarding the romanian market, I just want to note that one anomaly is fixed or on the way to be fixed: Petrom share was trading far below the price paid by OMV and the price the employees will pay for the 8% stake. Yesterday it came back to normal levels. But bad news are coming also from this area: Petrom reduces their ambitious investment plans. It is a symbolic bad news, Petrom being for me kind of GE of Romania, pointing where the whole economy is heading.