IVF Hartmann AG (SWX:VBSN)

Intro
IVF Hartmann has been one of the leading Swiss companies in the field of medical consumer goods for 150 years with its headquarters in Switzerland. Since 1993, IVF has been part of the international Hartmann Group based in Germany, who also owns 66.3% of IVF Hartmann. The remaining 33.7% are free float and due to the tiny market cap, the shares are quite illiquid (yes, that’s a warning for all those who don’t like illiquid stocks).
 

Especially due to its disinfection segment, the company had a very successful 2020; that being said, in 2021 the demand for its products has decreased, be this for their disinfection products or goods related to hospitals.

Valuation
For the last five years, IVF has shown a very consistent EPS in the range of CHF 5.07 and 7.43 (2020). Thus, a normalized EPS of around CHF 6 translates into a P/E of around 20x. Not dirt cheap, however, one is getting a very solid business which is completely debt free (yes, that still exists).

What’s next?
IVF Hartmann has had some difficult months but mostly as a result of short-term problems, which should be solved in due course. It’s without doubt that IVF’s wide range of products and market share will continue to grow. After dropping from approx. CHF 190 per share to CHF 123, it seems now that the worst is over and better times ahead. If not right away – no issue at all – there are no banks or creditors pushing around.

Current Price
CHF 123.00 per share

Disclosure
As with most shares discussed on here, the author is long VBSN.

Altice USA (NYSE:ATUS)

Intro
Altice USA is one of the largest broadband communications and video services providers in the US, delivering broadband, video, mobile, proprietary content and advertising services to more than 5 million residential and business customers across 21 states. While the video segment has lost some ground in the last years, broadband was able to more than compensate for it.
Altice USA went public at $30 per share in 2017. After trading as high as ~$37 per share, the price has recently gone back to its low in 2018 at approx. $15 and shows attractive valuation metrics.

Valuation
From 2018 to 2020, the company has increased revenues from $9.6bn to $9.9bn, while adj. EBITDA has grown from $4.2bn to $4.4bn. This translated into free cash below between $1.2bn and $1.9bn. The first nine months of 2021 depict an adj. EBITDA of $3.3bn and a free cash flow of $1.3bn, making one assume that 2021 will likely show similar numbers as last year.
With a market cap of $6.9bn and net debt of $24.6bn, EV amounts to $31.5bn; hence an EV/EBITDA of ~7.1x results. If we compare free cash flow to equity with the market cap, a free cash flow yield of around 20% is derived.
While Altice USA shows leverage ratios that are higher than typically preferred, the current debt load seems manageable with only small-sized maturities until 2025.

What’s next?
Altice USA has been a share repurchaser par excellence! In 2018, it bought back shares for $500m, $1.7bn in 2019 and more than $4.8bn in 2020. This year’s buybacks will amount to almost $1bn as well. Since the IPO, the share count has therefore come down from approx. 730m to 455m, a reduction of ~37%.
If Altice USA keeps up its share repurchases while slightly growing its business, shareholders should be well rewarded and prices in the area of >$30 should be possible again.

Current Price
$15.07 per share

Two forgotten Spin-offs? Viatris Inc (NASDAQ:VTRS) and Organon & Co (NYSE:OGN)

Intro
Today we’ll look at two companies at the same time. Why two you might ask? Because they have very similar characteristics in many ways. Both companies have been spun off recently by a large pharmaceutical company – Viatris from Pfizer and Organon from Merck. Furthermore, they show the following similarities:
-High debt load due to one-time payment to parent company
-Stagnating revenues and hence a lack of growth
-Significant cash flow generation from existing products
-Small market capitalisation compared to the parent company
-Tiny or no dividend pay-out yet in order to reduce debt burden
-Limited analyst coverage

The above points might have led investors – that got the shares from the parent company – to sell them in the open market. As can be seen below, the valuation looks rather undemanding and might show good upside potential in the next two to five years.

Valuation
The two firms show a very undemanding valuation based on historical and short-term future numbers:
Viatris guides for an EBITDA of at least $6bn and free cash flow of $2bn in 2021. This translates into a free cash flow yield of approx. 12% and EV/EBITDA of less than 7x. As debt levels will decrease and costs will come down, these metrics will look even better.
In its prospectus dated February 13th, 2020, Viatris is forecasting unlevered free cash flows of $5bn to $6bn per year until 2024.

Organon guides for an EBITDA of at least $2.2bn and free cash flow of $1.3bn in 2021. This translates into a free cash flow yield of approx. 17% and EV/EBITDA of around 7.5x. Both rather compelling numbers.

What’s next?
Looking forward two to five years, it can be assumed that a big portion of the debt will have been repaid from the high internally generated cash flows and more analysts will follow the companies in more detail. Additionally, since the management is now solely focused on the spun off companies, there should be a much better focus – also on growth initiatives either internally of through acquisitions. If management is able to show positive growth numbers in the coming years, the market may reassess the companies and a double from the current depressed levels seems reasonable. Disclaimer: as with most stocks written on here, the author is long.

Current Prices
$14.07 per Viatris share
$29.01 per Organon share

GameStop (NYSE: GME) – Sell Put Options

Intro
There is probably no intro needed for Gamestop, the ultimate meme stock that ran from less than $20 to around $235 per share in no time this year. Disclaimer: At current trading levels, it is very unlikely that Gamestop will be able to show future results that will justify the very lofty valuation and buying the stock now is pure speculation. With the significant increase in its share price, volatility rose substantially as well – and this is where it may get interesting.
One, or probably the most, important parameter to calculate an option price is volatility. Volatility is measured in percentage and “boring”, mature stock usually show a volatility in the range of 15-20% and levels of above 50% are considered elevated volatility. Gamestop’s volatility is above 170% and therefore all Gamestop options outstanding are expensively priced by looking at the volatility.
As will be further described below, a possible strategy might be to sell deep out of the money put options and profit from a decrease in volatility or time decay.

Valuation
At the beginning of May, Gamestop’s equity amounted to around $880m which is approx. $12 per share (and of which $9 per share is cash and no financial debt). A few days ago, the company said that they may issue up to 5 million new shares which could increase its cash position by more than $1bn at current prices, which would further boost the equity and cash per share figures.
Regarding selling put options, it’s important to determine a stock price level where it is assumed the stock won’t drop. In this case, it is probably reasonable to say that a share should be worth at least approx. $10 (~cash value) – and more if they are able to sell additional shares to increase its liquidity position.

What’s next?
As outlined above, one possible way to profit from the high level of volatility is the sale of deep out of the money put options. Let’s look at one example:
Maturity: Jan 2023
Strike: $2
Price: $0.18
Implied volatility: 178%

By selling these options at $0.18 each, the seller immediately collects $0.18 with a maximum loss of $1.82 (strike of $2 minus $0.18 premium collected). In other words, as long as Gamestop trades above $2 in January 2023, the seller keeps the $0.18 and achieves a maximum return of ~9% (0.18/2). If volatility drops to, for example, 120% while the share price stays flat, the option will be worth only $0.01 and can be closed already ahead of expiration. If, for instance, the stock drops to $20 per share and the volatility to 70%, the options will also be worth around $0.01 and can be repurchased as well. It is evident that in all scenarios where either the stock doesn’t drop below $2 per share or volatility decreases (which will happen sooner or later), this will be a profitable trade. As a matter of fact, the situation is similar with strikes of $3, $4, $5 or $7 which show an excellent risk/reward situation.

Current Price
Jan23 2P @$0.18 per option (or 18$ per option contract)

Spice Private Equity (SWX: SPCE-USD)

Less than a month ago, I posted about Spice Private Equity. In the meantime, the sale of its stake in Leon Restaurant has been completed and the majority of the cash received. This is, of course, good news and the share price bumped from less than $10 to almost $16 per share.

Last month, it was outlined that the target price is around $15. Even under the most optimistic scenario, it is a ‘present’ that the price increase has happened so fast and why not lock in the profits reached in such a short time frame?

Time to say Goodbye?

Today, we are going to look back and talk about some potential changes in the stocks discussed since the beginning of 2020.

Due to the very benign stock market after the initial COVID-19 shock, most of the shares discussed on here have done rather well, some even extremely well. After such a huge recovery, it might be wise to quickly check the initial investment thesis and potentially make some changes where the stocks have reached the estimated intrinsic value.

Let’s go over the potential changes one-by-one:

-La Doria: Having hugely benefited from the crisis, it seems that the valuation is now closer to intrinsic value. Reminder: The price per share was below €9 when initially discussed on here and trades now at around €17. Although there is no doubt that the company will operate well in the months and years to come, it might be prudent to lock in some or all of the profits. All in all, the stock has advanced roughly 88% in local currency, not including dividends.

-K-Bro Linen: This story is similar to La Doria. Even though the company has survived the crisis alright, the hospitality segment is still facing bigger challenges where there seems to be some optimism already priced in. It’s possible that this recovers quickly, however, at initial discussion of the company the price per stock was slightly above $26 and now trades at more than $41. This amounts to a gain of almost 60%, not including dividends, and the price seems fair for the current situation and no meaningful margin of safety exists anymore.

-The Swatch Group: The investment thesis is still intact, but as above, the margin of safety has decreased and a position trimming might be a good move. Since the initial discussion on here, the stock price has increased almost 40%.

-Hunting: After big jumps in the oil price since the initial discussion on this blog, the stock price has advanced from £1.4 to more than £2.5. Business recovery has happened to a certain degree, however, not as much as it could or should have. This either takes some more time and might work out for the patient investor, however, locking in the decent profits of approx. 80% (not including dividends) seems to be a good alternative.

As always, do your own research and nothing on here is investment advice – happy investing!

Spice Private Equity (SWX: SPCE-USD)

Intro

Spice Private Equity is a Swiss stock market listed investment company focused on global private equity investments. The portfolio is split into the following categories/companies (‘fair market’ value as of end of 2020 in brackets):

1. Leon Restaurants ($33m) 
2. Bravo Brio ($26m) 
3. G2D Investments ($18m) 
4. Rimini Street ($13m) 
5. Legacy Portfolio ($12m) 
6. Cash and other current assets ($24m)

In sum, the portfolio is valued at ~$126m in the company’s books and with 5.4m shares outstanding this translates into a book value (NAV) of ~$23 per share since there is literally no debt in the company.

A word of caution for Spice Private Equity: trading liquidity is rather limited and might be too low for certain investors (largest shareholder holds around 60% of the shares). Further, although listed in Switzerland, the shares are trading in US dollars.

Valuation

The stock is currently trading at $9.25 – compared with an NAV of $23 at the end of 2020, a huge discount of more than 60% exists. It gets even better though, much better, after the company said in mid April that they signed an agreement to sell its biggest portfolio holding Leon Restaurants for approx. $46m, which is $13m above the book value at year end 2020. Although the sale is not completed yet (expected to close within the coming months), the buyer seems to be motivated and financially capable to fulfil its obligations. Due to the sale of Leon and further price advances of Rimini Street, the NAV per share should have further improved in the recent weeks.

This is a clear asset play, where the market cap of $50m will entirely be backed by the cash balance as soon as the Leon’s sale is completed: Consolidated cash balance last year was $24m as can be seen above, however, the parent company showed only $5m in cash (remainder must sit in their fully consolidated subsidiaries abroad). In a worst case though, we’ll have the $5m of the parent company and receive the $46m in proceeds which amounts to approx. $51m in net cash and hence is slightly above the market cap. In other words, new shareholders get the remaining portfolio for free.

What’s next?

After ‘cleaning up’ a big part of the portfolio, it seems like there are several ways now going forward with different catalysts: One might be to invest the cash proceeds into new investments or distribute the cash to the shareholders. Another one could be a bigger restructuring of the company with either a new focus or, alternatively, a potential buy-out from its largest shareholder – who wouldn’t buy the remaining ~40% of the company that is trading on cash levels? In any case, as long as the management doesn’t completely screw it, shareholders should benefit nicely in the time to come and a fair price may be closer to $15 per share.

Current Price

$9.25 per share

Basler Kantonalbank (SWX: BSKP)

Intro

Basler Kantonalbank is a mid-sized Swiss bank with deep roots in the Canton of Basel, where it was founded in 1899. The bank is fully owned by the Canton Basel City, however, has listed participation certificates listed on the Swiss stock market. The bank enjoys a very strong balance sheet with a total capital ratio of around 19% (vs. a minimum of 12%) and leverage ratio of above 10% (vs. a minimum of 3%).

Historically, Basler Kantonalbank was strongly focused on its own Canton, as is the case with almost all cantonal banks in Switzerland. For a few years however, the bank has been pushing the roll out of its ‘online-bank’ under a separate entity called Bank Cler, which is not tied to specific locations anymore and potentially shows good growth potential as more and more bank clients use easy to use apps on their smartphones.

 

Valuation

The capital of the owners is basically split into two categories: The first is the endowment capital, which is fully held by the Canton. The Canton provides the bank with a state guarantee, for which the bank has to reimburse the Canton. Additionally, the Canton receives a yearly a profit distribution for the endowment capital.

The second class are the participation certificates. Holders of the participation certificates don’t have voting power but the right for a dividend, if performance permits a distribution. The current distribution amounts to CHF 3.10 per certificate, reflecting a yield of almost 5%. The book value of a certificate as of end 2020 was almost CHF 80, which includes the effect of the endowment capital held by the Canton.

 

What’s next?

The price of the participation certificates touched CHF 140 in 2011 and has been in a steady decline since then. The bank also faced some issues with the US Department of Justice, which it settled in 2018 and reduced risk substantially. With further expected growing assets and profits, coupled with the solid dividend yield of almost 5%, the fair value might be closer to around CHF 100, which would reflect a premium of ~20-25% of the book value.

 

Current Price

CHF 65.80 per participation certificate