November 2012

November, 2012

To whom it may concern,

In this letter we will present a small market overview and the two new stocks for our Stockscreener Portfolio namely A.S.Creation Tapeten AG and SMT Scharf AG furthermore we will explain our Lenzing AG Valuations. Our two portfolios are trading at 1,5% for the Stockscreener portfolio and 2,5% for the HiddenChampions portfolio as of the 1^st of November 2012.

The previous month showed a stabilization of the stock markets, many undervalued stocks gained in their valuations and some closed their gaps (i.e. Mobotix AG currently up 49% since September 2012). Nevertheless the markets remain at values that are slightly under their peak values of a couple of weeks ago. In our opinion the markets are waiting for new stimulus such as the US Presidential Elections, the solution/debate of the Fiscal Cliff in the U.S., new economic data from main economies as well as qualitative data about the track to solve the European crisis. Especially in our focus market, Germany we cannot see many undervalued quality stocks anymore compared to couple of months ago. Therefore it was a bit of a challenge to come up with good undervalued stocks for our Stockscreener portfolio. In reaction to the situation we shifted our analysis towards a more qualitative approach.

The first stock that was added to our Portfolio is A.S Creation Tapeten AG. This company is the European leader in wallpaper production and development. We liked the company as it has a very stable operating business and is easy to understand. The company did not lose any amounts of sales during the financial crisis and furthermore increased its profitability and increased its EBIT by an average of 20% for the past five years. In the past two years the Creation AG substantially increased its investments into the company by expanding into new countries and reinvesting into new assets. We engaged a conservative 5-year DCF-model to value the company sufficiently and came up with a market premium of 52%(DCF-valuation 6% growth rate including inflation). After further investigation we came upon the fact that the company is currently struggling with a lawsuit and probably facing an antitrust penalty of 18 € million. After pricing in this loss the market premium still remained at 33%. We came to the conclusion that the company is undervalued with a high margin of safety given the B/MV. After all a further positive affect is the strong 52-week price momentum of 1,3.

Short facts:

B/MV: 80%

P/E: 12,77

ROIC 5y: 10,7%

DCF-Valuation premium to Market Price: 33,9%

Growth rate: 6%

WACC: 9,49%

The second company that was added to the Stockscreener Portfolio is SMT Scharf. We have to admit that this is not a new stock that popped up on our screeners. SMT Scharf is already in our second portfolio therefore we have already analysed it a couple of months ago. Still the company has not yet outpaced its undervaluation, it rather faced high volatility and therefore we grabbed the chance and added it to our Stockscreener portfolio as well. To explain this company in short: It is in engaged in mining equipment in specific in railway constructions for mines. The company states that it has the main market leader position in this field, this has to be handled carefully. Their product is leading in its field but there are plenty of substitutes for their provided service that can be chosen as well. Nevertheless the company has strong brand recognition and is moderately expanding its sales by 11% annually. It managed to achieve stable sales during the crisis as well and gained efficiency by increasing its EBIT stronger than its sales (21% past 5 years). To stress the quality of this company furthermore, it has a strong equity position of 50% and has a ROIC 5 past years of 32%. We value this company with an intrinsic value at a market premium of 34,83% (DCF valuations at a moderate growth rate of 5% including inflation).  Concerning the margin of safety we have to admit that the B/MV is rather low 46% but given the fact that the company has very stable sales and a significant amount is due to maintaining works of their railways, which means reoccuring orders. This outways the low B/MV a bit.

Short facts:

B/MV: 46%

P/E: 8,71

ROIC 5y: 32%

DCF-Valuation premium to Market Price: 34,83%

Growth rate: 5%

WACC: 7,88%

To finalise our report we provide you with our analysis of Lenzing AG, it was added to ValueHiddenChampions recently. Lenzing AG produces high-quality man-made cellulose fibres for clothing as well as for medical purposes. We have to admit that we have been tracking this company for a long time. It is based in Voecklabruck, Austria and has since its inception stressed its commitment to innovation. The current CEO Dr. Peter Untersperger has been responsible for the current remarkable status of the company and wants to pursue to be CEO for the following years. He himself is fully aware of the quality of the products of the company. Despite the CEO’s trying to overcome information asymmetries the company still is staying undervalued for a significant amount of time. Recently the company committed further resources to strengthen its market position both in Austria and abroad. As a truly innovative company the company has a higher reinvestment rate compared to our previous two candidates, still producing strong Free-Cash-Flows. We like this company as it has established a strong moat with its range of patents and its strong commitment to innovation. Furthermore the relationship of the executives and the personnel is outstanding and the executive’s identification with the companies’ products. From a quantitative point of view we can say that it has a strong margin of safety paired with a strong operating business. Our DCF-valuation comes with a 37% market premium with a growth rate of only 4% and a WACC of 8,39%, one have to say that the FCF was further decreased by 20% in this valuation). To conclude, the company is undervalued considering its strong operating business and the low B/MV 58% valuation.

Short facts:

B/MV: 46%

P/E: 6,8

ROIC 5y: 14,82%

DCF-Valuation premium to Market Price: 38,22%

Growth rate: 4%

WACC: 8,39%

I hope you like our analysis and if so please support our wikifolios. If you have any further questions please do not hesitate to contact us or comment here!

Concerning our analysis:

We try to investigate with serious effort, besides the information given in this letter we have to admit that we have more information than published that support our analysis but we do not want to overload our report. The DCF-models are based on Aswath Damodaran models concerning stand-alone valuation of companies(FFCF). Furthermore we tried to have as conservative models as possible, all growth rates are reasoned by market-circumstances and growth factors given by the companies’ past years fundamentals and are including inflation rates (2%). The WACCs were calculated with up-to-date numbers, additionally the Re was increased given risk factors concerning the companies, such as dependency on clients, suppliers, management, reputation, illiquidity, etc. with an utmost risk premium to Re of 10%. Thus we can say calculating the WACC is influenced by Private Equity WACC calculations given our field of illiquid small and mid caps.

Sincerely,

Aeneas Investment Team