Scherzer & Co — FY17 results aided by good market sentiment

Scherzer & Co (DB: PZS)

Last close As at 27/03/2024

3.10

0.02 (0.65%)

Market capitalisation

93m

More on this equity

Research: Financials

Scherzer & Co — FY17 results aided by good market sentiment

Scherzer (PZS) posted a NAV total return of c 22% to €2.74 in FY17 as it was able to benefit from the favourable market environment in Germany (MDAX +18%, SDAX +25% and TecDAX +40% last year). The NAV discount disappeared completely and the shares now trade at a 1% premium to the last reported NAV of €2.84 (as at end-April 2018). PZS’s portfolio of extra compensatory claims (ECS) stood at €93.2m (or €3.11 per share) as at end-March 2018 and still represents important additional NAV upside potential. Management proposed a total dividend payment of €0.10/share from FY17 earnings, including a special dividend of €0.05/share.

Milosz Papst

Written by

Milosz Papst

Director, Financials

Financials

Scherzer & Co

FY17 results aided by good market sentiment

Asset management

Scale research report - Update

8 May 2018

Price

€2.85

Market cap

€85m

Share price graph

Share details

Code

PZS GY/PZSG

Listing

Deutsche Börse Scale

Shares in issue

29.9m

Last reported net debt as at 31 December 2017

€24.0m

Business description

Scherzer & Co (PZS) invests its funds mainly in domestic equities. PZS looks for companies that are unknown and unloved, and special situations. The focus is on special situations, where the downside is perceived to be limited. In addition, it acquires value stocks, mainly below book value. These stocks need to demonstrate strong business models.

Bull

Strong management, well known in the market.

‘Hidden’ NAV kicker through special compensatory rights, albeit with binary outcomes.

Well diversified portfolio with attractive risk/return pattern, built over a number of years.

Bear

Dependent on market environment.

Still relatively small.

For the strategy, market size is limited.

Analyst

Milosz Papst

+44 (0) 20 3077 5700

Scherzer (PZS) posted a NAV total return of c 22% to €2.74 in FY17 as it was able to benefit from the favourable market environment in Germany (MDAX +18%, SDAX +25% and TecDAX +40% last year). The NAV discount disappeared completely and the shares now trade at a 1% premium to the last reported NAV of €2.84 (as at end-April 2018). PZS’s portfolio of extra compensatory claims (ECS) stood at €93.2m (or €3.11 per share) as at end-March 2018 and still represents important additional NAV upside potential. Management proposed a total dividend payment of €0.10/share from FY17 earnings, including a special dividend of €0.05/share.

Stronger impact of realised gains on earnings

PZS reported an FY17 EPS of €0.26 compared to €0.15 in FY16, assisted by net disposal gains of €10.5m (FY16: €5.7m), higher net income from writing options of €0.8m (FY16: €0.3m) and a slight increase in dividend income, which stood at €1.8m (up 8% vs €1.7m in the prior year). Moreover, PZS has realised income from ECS of €1.2m in FY17 (vs a negligible amount in FY16), with two arbitration rulings resulting in additional income to PZS. The company’s net debt to equity ratio was higher at 40% vs 34% in FY16.

Overall positive developments across top 10 holdings

The majority of PZS’s top 10 holdings reported earnings growth in FY17, including GK Software (whose share price almost doubled last year), freenet (though mostly due to the consolidation of Sunrise), Horus, Audi, K+S, Innogy (soon to be acquired by E.ON) and Lotto24 (reporting positive earnings for the first time in its history). Mobotix is undergoing restructuring, while Oldenburgische Landesbank’s shares are currently subject to a ‘squeeze-out’ procedure. Allerthal-Werke’s management proposed a solid dividend rise to €1.35 per share (vs €0.50 paid from FY16 earnings), which implies an increase in dividend inflows to PZS of c €0.2m in 2018.

Valuation: Discount to NAV diminished

PZS has long traded at discounts to NAV to the tune of 15% but, following positive catalysts such as the successful sale of FIDOR bank in 2016, its shares are now trading broadly in line with NAV. An additional stock driver is the recently updated valuation report on AXA, which implies potential income from PZS’s AXA shareholding of €18.8m or €0.63 per PZS share. It must be noted that the NAV does not include any income from potential ECS profits.

Consensus estimates

Year
end

Revenue
(€m)

PBT
(€m)

EPS
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/16

7.6

4.5

0.15

0.05

19.0

1.8

12/17

18.8

5.4

0.26

0.10

11.0

3.5

12/18e

10.1

6.0

0.18

0.05

15.8

1.8

12/19e

10.4

8.3

0.18

0.05

15.8

1.8

Source: Scherzer & Co accounts, consensus based on two analysts as at 2 May 2018

Edison Investment Research provides qualitative research coverage on companies in the Deutsche Börse Scale segment in accordance with section 36 subsection 3 of the General Terms and Conditions of Deutsche Börse AG for the Regulated Unofficial Market (Freiverkehr) on Frankfurter Wertpapierbörse (as of 1 March 2017). Two to three research reports will be produced per year. Research reports do not contain Edison analyst financial forecasts.

Financials: Considerable increase in net realised gains

PZS reported an FY17 net profit at €7.9m, which is 77% ahead of the previous year (€4.5m). The company was able to realise net gains from the disposal of both non-current and current financial assets of €10.5m (vs €5.7m in FY16). In FY17, PZS executed complete disposals of several holdings, of which the most important contributors to group results were Data Modul, Wüstenrot & Württembergische (these two were among the top 10 holdings as at end 2016), as well as Strabag. PZS has also carried out some partial disposals, eg Lotto24, where the company realised a gain of €3.0m. Net income from writing options was €0.8m in FY17, up from €0.3m in the prior year, while dividend income reached €1.8m (up 8% y-o-y). Net write-ups and write-downs of held positions reached -€2.9m (vs -€0.9m). In this context, it is worth noting that the German accounting standards allow only write-ups of holdings that were previously written down, up to the level originally recognised on the balance sheet.

Personnel expenses increased to €2.7m in FY17 from €1.3m in FY16, mainly on the back of higher bonuses to management and employees (€2.1m vs €0.7m in FY16). In conjunction with other operating expenses of €1.0m (although these are somewhat distorted by FX gains/losses) and compared with PSZ’s reported NAV as at end 2017, this translates into an expense ratio of 4.3%. The company’s net debt to equity rose to 40% from 34% in FY16.

Exhibit 1: Results highlights

€000s

FY17

FY16

y-o-y

Revenues

4

0

N/M

Income from financial instruments

17,819

6,718

165%

Gains on sale of non-current financial assets

8,002

2,931

173%

Gains on sale of current financial assets

7,022

3,512

100%

Gains on derivatives

1,228

265

N/M

Extra compensatory claims (ECS)

1,567

11

N/M

Other operating income

943

910

4%

Expenses related to financial instruments

(4,937)

(730)

576%

Loss from sale of securities

(4,490)

(730)

N/M

Loss on derivatives

(447)

0

N/M

Personnel expenses

(2,686)

(1,278)

110%

Other operating expenses

(976)

(581)

68%

Income from dividends

1,801

1,664

8%

Write-offs on current and non-current financial assets

(3,796)

(1,809)

110%

D&A

(11)

(7)

42%

EBIT

8,161

4,885

67%

Other interest and similar income

80

144

(45%)

Interest and similar expenses

(297)

(287)

3%

EBT

7,944

4,741

68%

Income and other taxes

(43)

(276)

(84%)

Effective tax rate

1%

6%

N/M

Net profit for the period

7,901

4,465

77%

EPS (€)

0.26

0.15

77%

Source: Scherzer & Co accounts

Income from ECS stood at €1.2m in FY17 (vs close to zero in FY16), with four arbitration rulings announced last year. Scherzer’s ECS portfolio as at end 2017 represented a total volume of €93.2m, slightly down from €95.8m as at end 2016. ECS related to conwert Immobilien Invest, Strabag and IVG Immobilien representing a volume of €2.3m were added to the portfolio, while ECS leaving the portfolio stood at €7.2m. When we include the ECS of Allerthal-Werke and RM Rheiner Management, the total portfolio value equals €110m. This did not change until end-March 2018, as no legal proceedings/’squeeze-outs’ were completed in 2018 ytd.

PZS was able to benefit from favourable market conditions in 2017, with NAV up by c 22% y-o-y to €2.74 per share in 2017, compared to MDAX, SDAX and TecDAX performance of 18.1%, 24.9% and 39.6%, respectively. PZS’s NAV improved by a further 3.6% to April 2018 (see Exhibit 2), amid the mixed performance of major German indices.

Exhibit 2: PZS’s NAV and share price comparison

Source: Scherzer & Co accounts, Bloomberg

Exhibit 3: PZS’s top 10 holdings list

Company

April 18

December 17

December 16

Opportunistic/safe

GK Sofware AG

14.02%

13.72%

8.72%

Opportunistic

Oldenburgische Landesbank AG

7.92%

5.78%

n/a

Safe

freenet AG

7.59%

9.10%

7.51%

Opportunistic

Allerthal-Werke AG

5.02%

4.88%

5.05%

Safe

Horus AG

3.95%

4.02%

n/a

Opportunistic

Audi AG

3.90%

3.73%

n/a

Opportunistic

Innogy SE

3.80%

n/a

n/a

Safe

K+S AG

3.61%

4.00%

3.41%

Opportunistic

Mobotix AG

3.38%

2.92%

5.11%

Opportunistic

Lotto24 AG

2.72%

n/a

6.72%

Opportunistic

Total top-10 holdings

55.91%

54.17%

53.91%

 

Source: Scherzer & Co, Edison Investment Research. Note: *Also includes holdings that were not in top 10 as at March 2018.

Valuation

The most recently reported NAV stands at €2.84 per share as at end March 2018. In the past, PZS’s shares traded at prices below the stated NAV. This appears to be a function of the asset value minus the capitalised management costs, which were c 10% of revenues. As such, the average discount to NAV before 2016 was c 15%. Since the successful ECS transaction in 2015 and subsequent newsflow (eg the AXA valuation case and successful sale of the FIDOR Bank stake), the discount has declined and the stock now trades slightly above the last reported NAV at €2.85. This suggests improved acceptance of potential gains resulting from the ECS portfolio. However, there is no visibility of future gains, which may be why PZS has traded well below market averages in the past five years based on the P/E ratio. However, the discount disappeared recently and PZS currently trades broadly in line with the market on 2018e P/E.

Exhibit 4: Comparable market P/E ratios

 

P/E (x)

 

2012

2013

2014

2015

2016

2017

2018e

DAX

17.3

18.4

16.6

22.0

19.0

14.6

13.3

MDAX

17.9

27.8

20.0

19.2

28.8

17.6

18.2

SDAX

N/M

54.7

30.9

28.0

23.5

23.4

16.3

Arithmetic average

17.6

33.6

22.5

23.1

23.8

18.5

15.9

PZS

loss

7.2

11.9

9.2

13.6

10.8

15.9

PZS discount

loss

79%

47%

60%

43%

42%

0%

Source: Bloomberg as at 2 May 2018, Scherzer & Co reports. Note: P/E valuations based on year-end prices

PZS’s valuation is mainly based on asset value, also demonstrated by the price to book (P/B) value. We have looked at the development of market P/B ratios over time, and a decline in PZS’s discount to the market has been apparent since 2015. Importantly, PZS has achieved positive absolute returns each year since 2012, documented by the increase in NAV (even after dividend payment).

Exhibit 5: Comparable market P/B ratios

 

P/B (x)

 

2012

2013

2014

2015

2016

2017

2018e

DAX

1.5

1.8

1.7

1.7

1.7

1.9

1.8

MDAX

1.8

2.3

2.1

2.3

1.9

2.1

2.1

SDAX

1.3

1.7

1.9

2.0

1.7

1.8

1.5

Arithmetic average

1.5

1.9

1.9

2.0

1.8

1.9

1.8

PZS

0.8

0.8

0.8

0.8

0.9

1.3

1.4

PZS discount

48%

59%

58%

60%

49%

32%

21%

Source: Bloomberg as at 2 May 2018, Scherzer & Co reports. Note: P/E valuations based on year-end prices

In addition, the NAV progression does not fully reflect the ECS portfolio. On the one hand, earnings realised from successful closings are reflected in the NAV, as the returns are partially reinvested in the portfolio; on the other hand, the outcome and the timing of the claims are uncertain.

However, the AXA case highlights the potential; while it is unclear whether the new valuation report will be fully accepted and finally turn into payments to those shareholders who tendered in the AXA shares in 2006, a potential gain of €103 per AXA ordinary share represents a pre-tax gain for PZS of c €18.8m, or €0.63 per PZS share (before taxes and other costs). The €0.63/share gain is equal to a 23% increase in the current NAV.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Any Information, data, analysis and opinions contained in this report do not constitute investment advice by Deutsche Börse AG or the Frankfurter Wertpapierbörse. Any investment decision should be solely based on a securities offering document or another document containing all information required to make such an investment decision, including risk factors.

Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Deutsche Börse AG and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

More on Scherzer & Co

View All

Latest from the Financials sector

View All Financials content

GO internet — Adding fibre and 5G capacity

The strategic partnership with Linkem, together with plans to expand its fibre offering, should increase GO’s addressable market and provide a much improved service to its existing wireless subscriber base. Despite this, the shares appear to discount a continued slowdown in subscriber growth from the wireless network with nothing in the price for fibre. We believe there is upside potential towards 220c/share.

Continue Reading

Subscribe to Edison

Get access to the very latest content matched to your personal investment style.

Sign up for free