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Wednesday, 20 February 2013

Is Dutch stock still a good investment, in spite of the recent incidents? And has Imtech been involved in fraud in Poland? ‘Ernst’s Economy for You’ live from BNR Newsroom, Pt I

Yesterday, Ernst’s Economy for You was again discussing at the live radioshow BNR Newsroom, hosted by Paul van Liempt.

Paul van Liempt - BNR Newsroom
Picture copyright of Ernst Labruyère
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 The two main subjects of this evening were: the Dutch stock-market and the possible currency wars between Europe and the rest of the world.

In this episode, I will print an integral report of the discussions on the Dutch stock market. Tomorrow, I will come back to the threatening currency wars in the second episode of this small series.

At this moment, the dust is finally settling down after a series of large incidents with Dutch stock involved:
Paul van Liempt invited one of the smartest and most eloquent Dutch investors, Corné van Zeijl of SNS Asset Management and the young, gifted BNR Economy reporter Eline Ronner, to discuss the Dutch stock markets. Ernst’s Economy has been an active part of this discussion (the whole discussion can be found at BNR Business Radio, only in Dutch of course):

Dutch Stock Market

Paul van Liempt:

Imtech is the victim of speculations on a follow-on stock offering [a so-called claim emission where only existing shareholders can purchase stock – EL] and Fugro has to deal with a resigning member from the Board of Supervisors. What should happen with Dutch stock. Should you still invest in ‘Holland’s finest’? I ask this to Professor Sylvester Eijffinger of the University of Tilburg, who will be the main guest in the next part of this program?

Professor Sylvester Eijffinger
Picture copyright of Ernst Labruyère
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Eijffinger: You could definitely do so. Companies got rid of their debt and they own a lot of cash at this moment, but they are short in investments yet. Royal Dutch Shell PLC (RDS), Akzo Nobel NV (AKZA) and Unilever NV (UNIA) have an attractive Price / Earnings level at this moment. This are rocksolid companies with loads of cash.

Eline Ronner: The market is very volatile currently with enormous ups and enormous downs. This isn’t always very rational.

Paul: Talking about enormous downs. Was Imtech an accident?!

Eline: I’m not so sure yet. You don’t know if the poisoned cup is empty yet, after the write-off of €100 mln in Poland. Investors fear that ABN Amro was right last Friday, 15 February, when it announced that a follow-on stock offering for Imtech is due within the coming months. When this claim emission will indeed be €750 mln on top of the total outstanding amount of €900 mln nowadays, this will be an enormous dilution. The stock rate might drop like a meteorite. However, this follow-on offering is not certain yet. One analyst of ABN Amro is expecting this, but it has not been announced yet.

Eline Ronner
Picture copyright of Ernst Labruyère
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Corné: Imtech cost many people a lot of money. Also SNS Asset Management owns "some" Imtech stock. As we are large investors, you can imagine that some stock is actually quite a lot of stock: about €2 mln or 0.2% of total outstanding capital of Imtech stock before the rates dropped.

There has been a lot of uncertainty. You know: the higher the level of uncertainty, the larger the uncertainty premium is and the lower the stock rates go. We profited from this drop. We expect Imtech to be quoted in the AEX [the main quotation at NYSE / Euronext Amsterdam) halfway March. This will attract a lot of new investors. We thought that it would be better to invest in advance, before the whole crowd buys the stock and causes Imtech’s stock rates to rise.

On top of that, there is a short on Imtech in the market to the tune of 10% of outstanding capital. That is a huge amount of stock that must be settled.

Ernst’s Economy: Could Imtech Poland be involved in fraud? The subsidiary of Koninklijke Philips Electronics NV (PHIA) in Poland has already been accused of fraud and bribery [currently on trial in Poland - EL], concerning its medical instruments division.

A few days ago, the FD printed a picture of what should become Adventure World Warsawa in Poland. This is the place where Imtech had invested and allegedly lost its €100 million investment, that is about to be written off. At this picture, it was a large piece of building terrain, where only some digging activities had taken place. You couldn't see at all where this huge amount of money did go?!

Corné: I heard that question more than once. When I looked at the same picture, I thought: “that must have been quite expensive shovels there”. The point is, however, Imtech has been main contractor in Poland and they have probably made all kinds of commitments to subcontractors. I expect that the money has been spent through these commitments. 

Corné van Zeijl - SNS Asset Management
Picture copyright of Ernst Labruyère
Click to enlarge
First, however, we have to wait how the negotiations with the banks will go, shortly [Imtech couldn't meet the conditions in its banking covenants, which are necessary to keep their credit lines - EL]. Then we know whether there will be a follow-on offering soon. And then we will probably also know what went wrong in Poland.
Imtech has laid down a claim and it surely isn't going to take this €100 mln loss for granted.

Other guest: Corné, you told us there is a short of 10% in the market on Imtech? By itself, that is no reason to buy stock, unless everything goes fine. 

Corné: With a short of ten percent of market capitalization on a certain stock, you know that these people have to return their shares one day. That means that 10% of share capital must be bought again. Besides that, when Imtech will join the AEX, all passive index trackers must buy this stock too. When all these investors have to buy this stock, I’ll better be first to buy it. That is an argument for purchasing that stock. No guarantees are supplied, however.

Eline: It is bad news when there is trouble within a company. When you have a stock quotation, you will be under the looking glass immediately. You don't have the possibility to silently "clean up the mess". That is what Imtech would like to do most at this moment.

Paul: Fugro, the Dutch engineering agency for foundation techniques and ground mechanics for the international Oil and Gas market, is called the 'most pitiful stock in the market' by many people. What is going on there? 

Eline: the latest story is that there is a large argument between two members of the board of supervisors about the desired roadmap for the company. One supervisor resigned after a conflict within the board.

Corné: There are two factions within the company: some people called it jokingly ‘Kramer vs Cremers’. Gert-Jan Kramer is the founder and largest shareholder of the company, who heads one faction, while Frans Cremers, who just resigned, headed the other faction in the Board of Supervisors. Trouble in the company is a bad omen. It looks like Kramer wanted to make long-term investments, which dilute the short-term profits. He wanted to make large acquisitions shortly. This would probably scare away the shareholders.

Eline: The Telegraaf, a large newspaper in The Netherlands, wrote: 'investors fear Imtech scenario for Fugro'. That seemed exaggerated. What do you think about that, Corné.

Corné: I don't expect such a thing to happen. On the other hand, Cremers was chairman of the audit committee within the board. The person who audits the books of the company. It is quite scary when exactly this guy resigns. Therefore the fear among investors can easily be understood. When there is trouble in a company, you better wait for a while until the rate bottomed out and the trouble is over. Then you can pick up the stock again.

Paul: Concerning TNT, the Dutch courier service. Although the company presented a loss of €81 mln over 2012, the investors were quite enthusiastic. Does this have something to do with the new CEO Bernard Bot?

Corné: I don't know him personally, so I can't tell you. The enthusiasm of the investors came probably from the financial position of TNT. This looks solid. The company doesn't have net debt and it has been planning to sell its businesses in China and Brazil. These countries were causing losses and now TNT can earn money back from the sale. Also TNT is going to cut expenses and introduce additional austerity measures.

On the other hand, the company is not exactly cheap at this moment. Currently, the P/E ratio is 19. If you would buy TNT at this moment, you probably expect an economic recovery in The Netherlands. Unfortunately, I don't see such a recovery in Europe and The Netherlands. There will probably be some kind of recovery. The purchase managers index looks somewhat better in a lot of countries, except for France. Even in the Southern European countries you see a moderate recovery in the purchase managers indexes. Things will be slightly better, but it is too early to throw a party.

Eline: The sad thing, however, is that we see this jump in the stock rate on the same day that TNT has been announcing austerity measures and reorganizations. We don't have a real outlook on autonomous growth currently.

Corné: In an economy with little debt, you have to achieve your goals with less expenses. This won't lead to much economic growth and thus we won't expect to see this growth. However, this growth is where future profits come from, mostly. That is what investing is all about.

Paul: How about KPN. The stock rates are very low currently. Is this company a serious candidate for a friendly / hostile takeover?

Eline: That could be. These rumours have been going round, because of the enormous drop in the stock rate lately.

Paul: CEO Eelco Blok is blamed by many for bad management. But this large investor, Carlos Slim of América Móvil SAB de CV (AMOV), has enough money, so he could make another investment in KPN, couldn't he?

Corné: I don't think that AM will take over KPN. Slim invested €3 bln of which €1.75 bln has been burnt already. I don't think that he wants to make another investment, as Slim is mainly interested in AM's own balance. AM has a great rating and I don't think that Slim wants to jeopardize it on KPN. Besides that, with 27% of KPN’s stock in hand, he is entitled to a position on the supervisory board, which would yield him much influence. He doesn't have to hurry up things. By waiting and sitting on his hands, he can force the other shareholders to take their share of the burden in the KPN follow-on offering, the €4 bln claim emission.

Paul: From the sidelines, you could say about Blok that he should have intervened more quickly and ferociously. Is that too easy?!

Eline: I guess so. He inherited a lot of challenges from his predessor Ad Scheepbouwer.

Ernst's Economy: Did KPN mess up again with the 4G auction? After the UMTS auction failure in the year 2000, KPN again paid top dollar (€ 1.35 bln) on the 4G auction. Only Vodafone did worse with €1.4 bln. Will KPN ever earn this money back?

Eline: I wonder too whether they will ever earn their money back. The license was indeed extremely expesnive.

Corné: You have to look at the alternative. Without 4G, KPN would be out of business probably. A good thing is that KPN is hurrying to deploy 4G in the Netherlands.  The reviews of KPN 4G are very enthusiastic. Before the summer, half of the country should be up and running on 4G. That particular target has been an enormous challenge, but KPN ran the gauntlet. So if you want to have 4G on your smartphone or iPad, you have to shop at KPN.

Eline: They have to collect the first movers advantage. Their competitors, when online, will probably aim at a price below KPN's.

Paul: Talking about the stock exchange and its future. A lot of companies disappear from the exchanges and few are entering it. What is these days the use of doing an IPO?!

Corné: I wonder too. You are in the spotlights. There is little added value for a CEO. You can almost only crash and burn, like what has happened during the last months. There is no good reason. You salary and bonuses are watched closely and everybody has an opinion on you. There are tons of regulation on stock quotations. If you have a good relation with a sensible private equity supplier, who has a keen eye for the long term, this has many advantages. I'm not talking about long-term relations, not about the locust-like raiders of private equity.