European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

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<h3>Trends</h3>
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<p>Mixed picture, although discounts have generally widened across the European space.</p>
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<h3>Interesting situations and trades</h3>
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<p><a href="https://www.smartkarma.com/entities/carlsberg-a-s" target="_blank" data-smartkarma-citation="entities:22320:1" rel="noopener">Carlsberg A/S (CARLB DC)</a> B shares (with 1/10th of the voting rights of the A shares) are trading at a whopping 22.2% discount (25% by mid-April) vs. the A shares, demand for illiquid A shares seems to be the explanation. Maintain LONG B shares/short A shares on, if you can get hold of any A shares.</p>
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<p><a href="https://www.smartkarma.com/entities/bayerische-motoren-werke-ag" target="_blank" data-smartkarma-citation="entities:21591:1" rel="noopener">Bayerische Motoren Werke AG (BMW GR)</a> exhibited a trend towards a reduction of the discount of preferred shares, until March 2020. The discount has suddenly tightened to 15.8% (vs. 22.1% by mid-April). The discount is approaching pre-Covid levels. Maintain long BMW prefs, short common shares on, with a target of a 12% discount.</p>
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<p><a href="https://www.smartkarma.com/entities/fuchs-petrolub-se" target="_blank" data-smartkarma-citation="entities:21624:1" rel="noopener">Fuchs Petrolub SE (FPE GR)</a>'s preference shares premium seems to vary within a range, which is probably liquidity related. It is 21.4% (vs. 19.6% by mid-March and down from 29.4% by mid-February and 34.4% in my October report). With over 50% of the ordinary shares, the Fuchs family maintains the majority vote. They have never stated they would consolidate and pride to be the number 1 among the independent suppliers of lubricants.</p>
<p>Although there is no reason why the voting rights should be specially dear in Fuchs's case, voting rights are still valuable and neither the dividend advantage of the preferred shares nor their being members of several midcap indexes (Prime Standard/MDAX; STOXX Europe 600; DAXplus Familiy 30) justify the large premium, in my view. Maintain the trade long common/short prefs on, with a 10% target.</p>
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<p><a href="https://www.smartkarma.com/entities/henkel-ag-co-kgaa" target="_blank" data-smartkarma-citation="entities:21646:1" rel="noopener">Henkel AG &amp; Co KGaA (HEN3 GR)</a> shows a long-term trend towards a reduction of the premium of the preferred shares. The premium has recently widened and is now 16.1% (vs. 14.9% by mid-April). Maintain the trade short prefs/long common shares with a 10% premium target.</p>
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<p>Voting rights are valuable in a company like <a href="https://www.smartkarma.com/entities/volkswagen-ag" target="_blank" data-smartkarma-citation="entities:21738:1" rel="noopener">Volkswagen (VOW GR)</a>. Prefs discount had recently widened to erstwhile levels: 20.5% (vs. 16.6% by mid-April and 31.8% on 18 March, highest since November 2009). Preference shares have in the past traded at a premium due to its higher liquidity and inclusion in stock indexes. That said, the ordinary shares are also liquid. The shareholder structure of Volkswagen is stable, and there seems to be no reason why the discount of the prefs should widen. Preference shares have in the past traded at a premium due to its higher liquidity and inclusion in stock indexes. Volkswagen was considering a separate listing of its Porsche sports car brand in a deal that could boost its valuation, according to Bloomberg, but the company seems to have put those plans on ice. <a href="https://www.smartkarma.com/entities/traton-se" target="_blank" data-smartkarma-citation="entities:28140:1" rel="noopener">Traton SE (8TRA GR)</a>, a subsidiary majority owned by Volkswagen, is squeezing out the minorities (both ordinary and preferred shares) in <a href="https://www.smartkarma.com/entities/man-se" target="_blank" data-smartkarma-citation="entities:21670:1" rel="noopener">MAN SE (MAN GR).</a> Recommendation is<strong> long prefs/short ords</strong>, with the necessary health warning attached to any trading with Volkswagen share classes, as one can never be completely sure of the Porsche/Piech families' plans. Plus it can be executed in size.</p>
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<a href="https://www.smartkarma.com/entities/danieli-c-officine-meccaniche" target="_blank" data-smartkarma-citation="entities:21177:1" rel="noopener">Danieli &amp; C. Officine Meccaniche (DAN IM)</a>:  the mandatory conversion and extraordinary dividend were approved on the shareholders meetings on 28 October. The conversion date is yet to be announced but expected soon. Since announcement, the adjusted spread has ranged between -5.48% and 7.69%. It is currently -2.22%. Long Danieli ords/short Danieli savings shares.</li>
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<a href="https://www.smartkarma.com/entities/telecom-italia-sp-a" target="_blank" data-smartkarma-citation="entities:21075:1" rel="noopener">Telecom Italia Sp A (TIT IM)</a> savings shares are trading at a 7.9% premium to ordinary shares (vs. a  6% premium by mid-April). Challenging macro means that the financial privileges of the savings shares count. More importantly, the market may think of a conversion of savings into ords à la Buzzi Unicem or Danieli. Short savings/long ords.</li>
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<p><a href="https://www.smartkarma.com/entities/grifols-sa" target="_blank" data-smartkarma-citation="entities:21274:1" rel="noopener">Grifols SA (GRF SM)</a> B shares are trading at a 35.3% discount (vs. 36.1% by mid-April and 39.7% by mid-February), there is a trend towards the tightening of this discount since March 2020 lows. The Covid-related antitakeover provisions issued by the Spanish Government mean that the voting rights are less valuable now. Also, the Spanish government plans to introduce double voting rights for "loyal" shareholders (those who have kept the shares for at least two years). Moreover, the by-laws contain a poison pill that should significantly reduce the discount in case of a takeover attempt. The discount in Grifols B shares has averaged 28% since listing of the B shares in February 2016. I recommend setting up the trade long B shares (traded on Nasdaq), short A shares (traded in Madrid). The target is a 27% discount. Please note there is FX risk, which can be hedged.</p>
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<p>The current discount in <a href="https://www.smartkarma.com/entities/atlas-copco-ab" target="_blank" data-smartkarma-citation="entities:22282:1" rel="noopener">Atlas Copco AB (ATCOA SS)</a> B shares vs. A shares is 14.5% (vs. 13.8% by mid-April) and seems to be on a widening trend.</p>
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<p>On 10 May, Industrivärden divested its entire holding of 44,334,933 class A shares in <a href="https://www.smartkarma.com/entities/ssab-ab" target="_blank" data-smartkarma-citation="entities:22492:1" rel="noopener">SSAB AB (SSABA SS)</a>. The divested shares represent 4.3% of the capital and 11.8% of the votes in SSAB. Industrivärden has been a long-term owner with a significant shareholding in SSAB since 1994. The reversal on the discount from June 2018 has no obvious explanation. The discount has widened to 7.2% (vs. 6.6% by mid-April). I would short B shares and go long A shares, with a 10% target.</p>
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<p>The discount in <a href="https://www.smartkarma.com/entities/volvo-ab" target="_blank" data-smartkarma-citation="entities:22521:1" rel="noopener">Volvo AB (VOLVB SS)</a> B shares has widened and is now trading at a 2.6% discount to A shares (vs. 0.8% discount by mid-February). It is the highest level since January 2016.</p>
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<p>The discount of non-voting <a href="https://www.smartkarma.com/entities/roche-holding-ag-77bd09c9-b0c2-45ea-98f1-6a7ca01dc9c5" target="_blank" data-smartkarma-citation="entities:27906:1" rel="noopener">Roche Holding AG (ROG SW)</a> shares has widened to 6.9% (vs. 5.1% by mid-April and 3.9% by mid-March), a level unreached since November 2011. The Hoffman family and related holds 45% of the voting rights (shareholder pooling agreement) whilst Novartis holds 33.3% of the voting rights.</p>
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<p>The discount in <a href="https://www.smartkarma.com/entities/schroders-plc" target="_blank" data-smartkarma-citation="entities:22134:1" rel="noopener">Schroders PLC (SDR LN)</a> has tightened to 25.4% (vs. 27.4% by mid-April 30.6% by mid-March and 34.1% by mid-February). I would maintain long non-voting/short voting shares on.</p>
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<p>Please read on for table and charts.</p>
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Trends



Mixed picture, although discounts have generally widened across the European space.



Interesting situations and trades





Carlsberg A/S (CARLB DC) B shares (with 1/10th of the voting rights of the A shares) are trading at a whopping 22.2% discount (25% by mid-April) vs. the A shares, demand for illiquid A shares seems to be the explanation. Maintain LONG B shares/short A shares on, if you can get hold of any A shares.


Bayerische Motoren Werke AG (BMW GR) exhibited a trend towards a reduction of the discount of preferred shares, until March 2020. The discount has suddenly tightened to 15.8% (vs. 22.1% by mid-April). The discount is approaching pre-Covid levels. Maintain long BMW prefs, short common shares on, with a target of a 12% discount.


Fuchs Petrolub SE (FPE GR)'s preference shares premium seems to vary within a range, which is probably liquidity related. It is 21.4% (vs. 19.6% by mid-March and down from 29.4% by mid-February and 34.4% in my October report). With over 50% of the ordinary shares, the Fuchs family maintains the majority vote. They have never stated they would consolidate and pride to be the number 1 among the independent suppliers of lubricants.
Although there is no reason why the voting rights should be specially dear in Fuchs's case, voting rights are still valuable and neither the dividend advantage of the preferred shares nor their being members of several midcap indexes (Prime Standard/MDAX; STOXX Europe 600; DAXplus Familiy 30) justify the large premium, in my view. Maintain the trade long common/short prefs on, with a 10% target.


Henkel AG &amp; Co KGaA (HEN3 GR) shows a long-term trend towards a reduction of the premium of the preferred shares. The premium has recently widened and is now 16.1% (vs. 14.9% by mid-April). Maintain the trade short prefs/long common shares with a 10% premium target.


Voting rights are valuable in a company like Volkswagen (VOW GR). Prefs discount had recently widened to erstwhile levels: 20.5% (vs. 16.6% by mid-April and 31.8% on 18 March, highest since November 2009). Preference shares have in the past traded at a premium due to its higher liquidity and inclusion in stock indexes. That said, the ordinary shares are also liquid. The shareholder structure of Volkswagen is stable, and there seems to be no reason why the discount of the prefs should widen. Preference shares have in the past traded at a premium due to its higher liquidity and inclusion in stock indexes. Volkswagen was considering a separate listing of its Porsche sports car brand in a deal that could boost its valuation, according to Bloomberg, but the company seems to have put those plans on ice. Traton SE (8TRA GR), a subsidiary majority owned by Volkswagen, is squeezing out the minorities (both ordinary and preferred shares) in MAN SE (MAN GR). Recommendation is long prefs/short ords, with the necessary health warning attached to any trading with Volkswagen share classes, as one can never be completely sure of the Porsche/Piech families' plans. Plus it can be executed in size.






Danieli &amp; C. Officine Meccaniche (DAN IM):  the mandatory conversion and extraordinary dividend were approved on the shareholders meetings on 28 October. The conversion date is yet to be announced but expected soon. Since announcement, the adjusted spread has ranged between -5.48% and 7.69%. It is currently -2.22%. Long Danieli ords/short Danieli savings shares.

Telecom Italia Sp A (TIT IM) savings shares are trading at a 7.9% premium to ordinary shares (vs. a  6% premium by mid-April). Challenging macro means that the financial privileges of the savings shares count. More importantly, the market may think of a conversion of savings into ords à la Buzzi Unicem or Danieli. Short savings/long ords.





Grifols SA (GRF SM) B shares are trading at a 35.3% discount (vs. 36.1% by mid-April and 39.7% by mid-February), there is a trend towards the tightening of this discount since March 2020 lows. The Covid-related antitakeover provisions issued by the Spanish Government mean that the voting rights are less valuable now. Also, the Spanish government plans to introduce double voting rights for "loyal" shareholders (those who have kept the shares for at least two years). Moreover, the by-laws contain a poison pill that should significantly reduce the discount in case of a takeover attempt. The discount in Grifols B shares has averaged 28% since listing of the B shares in February 2016. I recommend setting up the trade long B shares (traded on Nasdaq), short A shares (traded in Madrid). The target is a 27% discount. Please note there is FX risk, which can be hedged.


The current discount in Atlas Copco AB (ATCOA SS) B shares vs. A shares is 14.5% (vs. 13.8% by mid-April) and seems to be on a widening trend.


On 10 May, Industrivärden divested its entire holding of 44,334,933 class A shares in SSAB AB (SSABA SS). The divested shares represent 4.3% of the capital and 11.8% of the votes in SSAB. Industrivärden has been a long-term owner with a significant shareholding in SSAB since 1994. The reversal on the discount from June 2018 has no obvious explanation. The discount has widened to 7.2% (vs. 6.6% by mid-April). I would short B shares and go long A shares, with a 10% target.


The discount in Volvo AB (VOLVB SS) B shares has widened and is now trading at a 2.6% discount to A shares (vs. 0.8% discount by mid-February). It is the highest level since January 2016.


The discount of non-voting Roche Holding AG (ROG SW) shares has widened to 6.9% (vs. 5.1% by mid-April and 3.9% by mid-March), a level unreached since November 2011. The Hoffman family and related holds 45% of the voting rights (shareholder pooling agreement) whilst Novartis holds 33.3% of the voting rights.


The discount in Schroders PLC (SDR LN) has tightened to 25.4% (vs. 27.4% by mid-April 30.6% by mid-March and 34.1% by mid-February). I would maintain long non-voting/short voting shares on.




Please read on for table and charts.


Liquid Universe of European Ordinary and Preferred Shares: May Report

<p>On 8 May 2021, <a href="https://www.smartkarma.com/entities/traton-se" target="_blank" data-smartkarma-citation="entities:28140:1" rel="noopener">Traton SE (8TRA GR)</a> submitted a specified request to the Executive Board of <a href="https://www.smartkarma.com/entities/man-se" target="_blank" data-smartkarma-citation="entities:21670:1" rel="noopener">MAN SE (MAN GR)</a> to convene the AGM of MAN SE to resolve on the transfer of the shares held by its minority shareholders to Traton SE.</p>
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<p><strong>Traton SE currently holds 94.36 % of the share capital of MAN SE</strong>. <a href="https://www.smartkarma.com/entities/volkswagen-ag" target="_blank" data-smartkarma-citation="entities:21738:1" rel="noopener">Volkswagen (VOW GR)</a> has a c. 90% stake in Traton.</p>
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<p>The proposed cash compensation is €70.68 (27% premium to the closing price on the last trading session prior to the news release) per both common and preference share and is addressed to c. 8.29 mn shares, for a total consideration of c. €586 mn.</p>
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<li>The announcement follows record Q1 2021 results at Traton and strong performance at MAN SE (33% increase in incoming orders and 29% increase in unit sales, 17% increase in sales revenue and €71 mn in adjusted operating result, vs negative €78 in Q1 2020 at MAN SE). MAN SE plans to cut as much as a quarter of its workforce and potentially close three factories in a restructuring plan.</li>
</ul>
<p>The Executive Board and the Supervisory Board of MAN SE will propose to the Annual General Meeting (date TBA shortly) that a <strong>dividend of € 0.11</strong> per ordinary or preference share be distributed for the FY 2020 (source: MAN 2020 accounts and website).</p>
<p>The news clearly took the market by surprise. On 10 May, MAN SE common and preference shares closed at €71.6, a 29% increase vs. the prior closing price (VWAP was €71.72, with c. €27.4 mn traded, well above the three-month average).</p>
<p><strong>Gross spread is (1.15)%</strong>, including the €0.11 dividend. The market expects a sweetened squeeze-out compensation, which seems dangerous, or the resolution of a procedure. To be on the safe side, I would wait for the share price to go under €70.79 to set up any position.</p>
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<p>The amount of the proposed consideration should be reviewed by a court-appointed auditor.</p>
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<li>By putting revenues on the median of comparables EV/2020a sales, the implied valuation of MAN SE could be €77.3/share. There are not any Capital IQ consensus estimates for FY2021 and beyond.</li>
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<p>Dissenting shareholders may start legal action against the squeeze-out resolution, and delay the date in which it becomes effective by 5-6 months. <em>The basis to challenge the compensation could be stronger than expected results from MAN, and the procedure can take years although it will not delay the squeeze-out</em>. </p>
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On 8 May 2021, Traton SE (8TRA GR) submitted a specified request to the Executive Board of MAN SE (MAN GR) to convene the AGM of MAN SE to resolve on the transfer of the shares held by its minority shareholders to Traton SE.


Traton SE currently holds 94.36 % of the share capital of MAN SE. Volkswagen (VOW GR) has a c. 90% stake in Traton.


The proposed cash compensation is €70.68 (27% premium to the closing price on the last trading session prior to the news release) per both common and preference share and is addressed to c. 8.29 mn shares, for a total consideration of c. €586 mn.

The announcement follows record Q1 2021 results at Traton and strong performance at MAN SE (33% increase in incoming orders and 29% increase in unit sales, 17% increase in sales revenue and €71 mn in adjusted operating result, vs negative €78 in Q1 2020 at MAN SE). MAN SE plans to cut as much as a quarter of its workforce and potentially close three factories in a restructuring plan.

The Executive Board and the Supervisory Board of MAN SE will propose to the Annual General Meeting (date TBA shortly) that a dividend of € 0.11 per ordinary or preference share be distributed for the FY 2020 (source: MAN 2020 accounts and website).
The news clearly took the market by surprise. On 10 May, MAN SE common and preference shares closed at €71.6, a 29% increase vs. the prior closing price (VWAP was €71.72, with c. €27.4 mn traded, well above the three-month average).
Gross spread is (1.15)%, including the €0.11 dividend. The market expects a sweetened squeeze-out compensation, which seems dangerous, or the resolution of a procedure. To be on the safe side, I would wait for the share price to go under €70.79 to set up any position.


The amount of the proposed consideration should be reviewed by a court-appointed auditor.

By putting revenues on the median of comparables EV/2020a sales, the implied valuation of MAN SE could be €77.3/share. There are not any Capital IQ consensus estimates for FY2021 and beyond.

Dissenting shareholders may start legal action against the squeeze-out resolution, and delay the date in which it becomes effective by 5-6 months. The basis to challenge the compensation could be stronger than expected results from MAN, and the procedure can take years although it will not delay the squeeze-out. 



<p>This Insight explains the main features of German non-voting savings shares and provides a list of the main ones traded. It mentions the reasons why preferred shareholders could be at a disadvantage in case of a takeover, and why some companies choose to offer conversion of preferred shares into ordinary shares.</p>

This Insight explains the main features of German non-voting savings shares and provides a list of the main ones traded. It mentions the reasons why preferred shareholders could be at a disadvantage in case of a takeover, and why some companies choose to offer conversion of preferred shares into ordinary shares.

German Preferred Shares: Takeover and Conversion

CEO, A. Stotz Investment Research

Dr. Andrew Stotz, CFA

Quantamental Investing to beat Benchmarks

A. Stotz Investment Research

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Equity Bottom-Up

<ul><li>Improving asset turnover, earnings on an upcycle trend, and strong stock price momentum relative to its sector</li><li>Sinotruk’s heavy-duty trucks segment should drive the sales momentum with the increasing tractor demand. 1H17 saw a remarkable revenue growth of 74% YoY</li><li>Change in regulations by Chinese government to curb overloading and emissions should boost compliant Sintotruk truck sales further</li><li>Trades at 17CE* 14.4x PE versus Asian Capital Goods at 11.8x PE, but Sinotruk offers much better earnings growth and is net cash</li><li>Risks: Heavy-duty truck demand slowdown</li></ul><p><em>* Consensus Estimates</em></p>

Improving asset turnover, earnings on an upcycle trend, and strong stock price momentum relative to its sectorSinotruk’s heavy-duty trucks segment should drive the sales momentum with the increasing tractor demand. 1H17 saw a remarkable revenue growth of 74% YoYChange in regulations by Chinese government to curb overloading and emissions should boost compliant Sintotruk truck sales furtherTrades at 17CE* 14.4x PE versus Asian Capital Goods at 11.8x PE, but Sinotruk offers much better earnings growth and is net cashRisks: Heavy-duty truck demand slowdown* Consensus Estimates

Sinotruk (3808 HK): Heavy Duty Has Yielded Heavy Sales

Germany

MAN SE operates in the engine, commercial vehicle, and mechanical engineering industries. The Company supplies trucks, buses, diesel engines, turbomachinery, and special gear unit.

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MAN (MAN GR)

Liquid Universe of European Ordinary and Preferred Shares: May Report

Discounts have generally widened. Interesting situations are: Carlsberg, BMW, Fuchs Petrolub, Henkel, VW, Danieli, Telecom Italia, Grifols, Atlas...

Jesus Rodriguez Aguilar

Traton SE/MAN SE: Minority Squeeze-Out

Gross spread is (1.15)%, including the €0.11 divi. The market could be expecting a sweetened squeeze-out compensation, or a challenge in courts to...

Jesus Rodriguez Aguilar

German Preferred Shares: Takeover and Conversion

This Insight explains the main features of German non-voting savings shares, why preferred shareholders could be at a disadvantage during...

Jesus Rodriguez Aguilar

Sinotruk (3808 HK): Heavy Duty Has Yielded Heavy Sales

Improving asset turnover, earnings on an upcycle trend, and strong stock price momentum relative to its sector Sinotruk’s heavy-duty trucks...

A. Stotz Investment Research

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