Elliot Associates Romanian play

Wood and Co research on Fondul Proprietatea published 2/22

We continue to regard Fondul Proprietatea (FP) as one of the most attractive investment opportunities in Romania. We see it as a play on: 1) the restructuring of state companies and corporate governance improvement; and 2) the eventual longer-term recovery of energy prices; as well as 3) the ability of the Fund’s manager, Franklin Templeton, to apply the right methods for reducing the discount to NAV. Our NAV estimate, derived by marking to market the listed holdings and valuing some of the unlisted stakes, is RON 1.196/share, which is in line with the official NAV of RON 1.208/share (as of January 2017). However, for some of the listed companies, we see further upside as possible (e.g., Petrom). We believe the current 25% discount to NAV is too high, and we see ways of narrowing this. We increase our price target (PT) to RON 1.11/share, using a 15% fair discount to NAV and a 9.5% cost of equity, implying 23.4% upside. We maintain our BUY rating on the stock.

Potential catalysts for the NAV discount to narrow. We see more asset disposals or listings from the unlisted part of the portfolio, followed by cash distributions to shareholders, as potential catalysts for the discount to narrow. The Fund has already disposed of its stakes in Transgaz, Transelectrica, Romgaz and unlisted E.ON, and has partially reduced its participation in Petrom and Conpet. We believe more disposals are possible from both the listed and the unlisted parts of the portfolio (e.g., a 10% stake in Hidroelectrica, once listed; an eventual sale of the stakes held in Electrica’s subsidiaries to the parent company). The proceeds of any disposals, as well as any dividends that the Fund receives from its listed holdings, are to be distributed to FP’s shareholders, either via buybacks or via reductions of the share par value.

NAV discount too high. The discount to NAV is at 25% currently, from 30% a year ago. The Fund pays a low amount of tax; generates an average yearly earnings yield close to its cost of equity; has been able to sell stakes at a discount of less than 5% to their NAV; and has taken important steps towards either listing other stakes in the portfolio or disposing of them. Therefore, we see no reason for the NAV discount to remain this high.

NAV could see further upside. Not only should the discount to NAV narrow, in our view, but we also see growing support for FP’s NAV to increase, as it is highly exposed to the prices of oil & gas and electricity (46% of NAV). We see oil & gas and electricity prices moving slowly higher, to the benefit of oil & gas producers like Petrom (17.7% of NAV) and electricity producer Hidroelectrica (26.4% of NAV). Moreover, we see more upside for the currently unlisted stakes once the IPOs have been undertaken, as we are currently applying a discount to them in our valuation (Hidroelectrica and Bucharest Airport being the largest).

For more details go to:http://seekingalpha.com/article/3757246-invest-paul-singer

Perfect summary of the current market stage

The two critical variables are the US fiscal program that will finally pass, and the extent to which the Fed tightens in response. Investing in the US — and everywhere else, given the weight of the US in the world — will for the foreseeable future revolve around those variables.
If we get a big stimulus and the Fed stays dovish, the market is priced correctly. This is possible but unlikely. In the event of a big stimulus and a strong Fed response — possibly the single most likely outcome — we can expect bond yields to move a lot higher. Stocks would be at some risk. And if Mr Trump fails to deliver as much as hoped in tax cuts (unlikely but possible), while the Fed presses on with three or four rate rises this year, investors in both stocks and bonds should brace to lose money.
From FT´s Long View by John Authers, published this Saturday

I am closing my EDL idea at 80% IRR

I am closing my EDL idea published at SA (see the link below). The idea made 60% return and 80% IRR. As expected Disney made an offer for EDL at 2.00 EURO per share. The price at the time of writing the article was 1.24. Hope you enjoyed the ride.

Idea for this week – see my Petrom article (link below). The company is reporting on 2/15/17. Romanians had a very strong winter, expect good numbers and further re-rating.

Link to Petrom idea

http://seekingalpha.com/article/4034808-omv-petrom-special-situation-oil-play-due-mishandled-spo-major-shareholder

 

Link to EDL idea

http://seekingalpha.com/article/3964804-disney-park-activist-play-200-percent-return-potential

 

 

 

OPAP – Greek play

Wood and co research on OPAP published today:

*** OPAP: VLTs not yet priced in (stays Buy) ***

To download the report, please click on the following link: Greece_Consumer Discretionary_OPAP_Update_25Jan2017.pdf, (650 KB)

We maintain our BUY rating on OPAP, with an increased 12M price target (PT) of EUR 10.00/share (from EUR 8.50 previously), due to full inclusion of the VLT project. Accounting for the VLT contribution on the one hand, and related cannibalisation of legacy games on the other, we are increasing our EBITDA estimates by 7-54% in 2017-19E. We expect a 2016-19E EBITDA CAGR of 13% and DPS of 0.51-0.68, yielding a decent 6-8% in the respective period. In light of our new figures, we still find the company’s 2018E EBITDA of 6.6x, 30% below peers’ median, attractive. Finally, since the announcement of positive changes in VLT regulations, OPAP’s share price has discounted only c.25% of the project value.

VLTs back in the game. In November, just before the potential expiry of OPAP’s licence (historical cost of EUR 560m), the Hellenic Gambling Committee released amendments to the market regulations. As a result, OPAP has now announced that the VLT project will finally be launched in 2017E. Accordingly, OPAP has significantly reduced its claim against the government under the litigation process within the UK arbitrage court. On a negative note, however, we underline that, as a result of the new regulations, OPAP’s catchment area is unlikely to grow by as much as we had initially expected, due to some machines being placed in the existing agents’ shops.

We expect a full launch of VLTs by 2H18E… According to the updated licence agreement, OPAP should now be able to fully deploy 16.5k own-use machines by 1 May 2018. For the 18.5k sub-contracted machines, we expect the process to be delayed by around half a year, as the company has not yet prepared the tender for sub-concessionaires. In our model, we have assumed full deployment of VLTs by the end of 2018E, with effective 2017/18E utilisation of 25%/77% for owned machines, and 3%/63% for sub-contracted ones.

…triggering our EBITDA forecast upgrades of 7-54% in 2017-19E. Taking into account the VLTs’ contribution, and their cannibalisation effect, we have increased our GGR forecasts by 7% to EUR 1,436m in 2017E, followed by a massive 77% hike to EUR 1,882m in 2018E, and another 117% increase to EUR 2,183m in 2019E. Given the structurally lower profitability of the VLT business, the increase in our EBITDA forecasts is more limited, amounting to 7% to EUR 308m in 2017E, 35% to EUR 388m in 2018E and 54% to EUR 438m in 2019E.

Valuation gap still not closed. We have increased our 12M PT to EUR 10.0 from EUR 8.50. Since the announcement of the VLT relaunch, OPAP’s market cap has only increased by EUR 250m, equivalent to less than 50% of the exclusive licence value and 25% of the claim against the Greek state. On our 2018E forecasts (which still do not include the full VLT contribution), OPAP is trading at an EV/EBITDA of 6.6x and P/E of 13.9x, 30% and 7% below its peers’ median.

Risks. The major downside risks to our positive stance are: a deeper slowdown in the Greek economy; regulatory risks, especially in VLT case; losing exclusivity to online gambling; and further GGR tax hikes.

 

No brainer trade for 2017

Rember Grexit. At that time Euro came under severe selling pressure because people were worried that Greece exit from the EU could result in other departures. That is now all forgotten.

Surprisingly, BREXIT so far resulted only in week GBP, because the markets have been focusing on what will happen to Britain after its departure from the EU. The markets devote little attention to what will happen to the EU. The is wrong. If Grexit resulted in worries about the EU future, Brexit would likely result in significant larger panic. When this happens, the markets will sell EUR.

So if you believe, that Britain is on the way out, then you should get ready to sell EURUSD.

Making money is about great ideas.