Valmet demerger from Metso

We have a new position (Valmet Corporation) since Metso Corporation was split in to two publicly listed limited companies. Both are listed in NASDAQ OMX Helsinki.


Valmet Corporation is a leading global developer and supplier of services and technologies for the pulp, paper and energy industries. Mission of the company is " Converting renewable resources into sustainable results". They have over 200 years of industrial history. 1999 Valmet and Rauma corporations were merged to form Metso and now Valmet a separate company again through the demerger.

Demerger was driven by Swedish investor Christer Gardell who has been on board of directors of Metso since 2006. His investment corporation Cevian Capital is biggest shareholder in both Metso and Valmet with close to 14% share of both. Cevian Capital is known for active ownership investment strategy. Finnish state owns approximately 11% of both corporations through holding company Solidium. There are no other significant shareholders since even the major Finnish pension funds don't own more than 1-3% of the companies.

Valmet’s net sales in 2012 were approximately EUR 3 billion. Profitability of Valmet is much poorer than that of Metso. EBITA before non-recurring items was EUR 192 million in 2012. The net sales split in 2012 was roughly as follows:

• Pulp and Energy 39%
• Services 34%
• Paper 27%

Valmet’s services cover everything from maintenance outsourcing to mill and plant improvements and spare parts.  

The net sales split by geographical area:

• Europe, middle-east and africa 40%
• Asia/Pacific (incl. China) 24%
• North America 19%
• South and Central Amercia 17%

Valmet is established market leader in all markets served.  The company faces limited growth opportunities in all of its markets served. It seeks long term growth potential in market for biomass conversion technologies.

Nordnet wrote about the demerger in their morning briefing on 3rd of January 2014. They have "reduce" recommendation for both Valmet and Metso. At 6,65 euros per share for Valmet they estimated

• P/S: 0,4
• P/B: 1,2
• 2014: P/E 20; EV/EBITDA 6,4
• 2015: P/E 15 EV/EBITDA 5,4

They think the valuation is challenging short term due to market weakness and fairly high forward P/E valuations. For Metso they estimated:

• P/E 2014: 14-15
• EV/EBITDA: below 10

Nordnet stated valuation to be fair, but challenging due to weakness and unclear trajectory of the mining industry, which matters great deal to the new Metso. 


I don't yet have strong opinion on Valmet. I started position in Metso originally mostly because of the businesses that are now part of the "new" Metso. Since these types of transactions usually unlock hidden value, I will give time - maybe 1 year - for Valmet and then see whether it's good idea or not to keep it in our portfolio.


The author holds shares of both Metso and Valmet.



Sources (beyond linked ones):

• Valmet Corporation web site
  
• Demerger prospectus
• Presentation by CEO of Valmet

Portfolio performance 2009-2013

Happy New Year 2014!

It's time to compare the performance of our portfolio in the year 2013 against index investing.

As regular readers know by now, I have chosen MSCI all country world (ACWI) index as our benchmark index. In 2012 we significantly underperformed, but last year we took back the difference and are leading our benchmark investment by a small difference.

Our performance during 2009-2013 has been as follows:

Our portfolio is currently defensive (less risky) and less volatile than the ACWI index. Therefore, it has underperformed in bull market and overperformed in bear market - until 2013. The explanation is our largest position & turnaround bet - Nokia, which gave quite a boost to the overall portfolio by doubling.

Also, Western Digital - which also happens to be one of our largest holdings - rose 100% in dollar terms. Apart from UPM, which is luckily yet another large position, I don't recall above average returns this year. However, these three were enough to boost performance from below average to above average in 2013. Apart from Nokia I haven't been trimming down the winners. Nokia just grew too big within the porfolio. I used the opportunity to offset losses and to grow other promising positions.

Our benchmark index 2009-2013 (based on MSCI All Country World Index; Net; Euros)

I have not calculated our performance during 2007-2008 because we were off the market. During that time and also before that our benchmark index would have been different because the investment objective was different and risk level was much lower.

About the "benchmark investment"

I have chosen to construct my own imaginary benchmark index fund out of MSCI ACWI index instead of choosing one particular index fund that tracks the index. The main reason for this is that I would never invest all our money in any particular fund. I would rather choose several funds managed by several companies that as a whole would track the index close enough. My estimate for average cost level for the benchmark investment is 0.5% per transaction and 0.5% per year.

The index data itself is available via MSCI Barra web site as excel-file at least at the time of writing this post. I use a version of ACWI index which has large and mid cap companies in it. I use it with the following parameters:
- EUR (as in euros)
- Daily (as in daily quotations of the index)
- “Net” (as in “With Net Dividends” that takes into account taxes that you would have to pay before you can reinvest back into the fund. “Gross” option reinvests dividends wholly.)

The benchmark investment is always fully invested into the passive index. Starting balance was invested at end of 2008 to the index. By dividing the money with the value of the index, you get “shares in index”.

About calculating the yearly returns

The yearly return of the index and the "benchmark investment" will be different due to addition of money into the brokerage accounts during the year. The yearly returns are simply calculated as
[balance at end of year N] - [(balance at end of year N-1) + (additions to brokerage accounts during the year N)] / [(balance at end of year N-1) + (additions to brokerage accounts during the year N)]

Thoughts on Nokia EGM

Yesterday I attended the extraordinary general meeting of Nokia corporation. It was my first general meeting of any kind. I attended because it was historical meeting and certainly very widely watched and reported one - at least in Finland where Nokia easily brakes the news barrier whatever it does.

As you may know by now, the Nokia EGM decided to confirm and approve the sale of substantially all of Nokia's Devices & Services business to Microsoft in line with the proposal and recommendation of the Nokia Board of Directors. 

More than 99 % of the votes cast at the EGM were in favor of this proposal. If I recall right, it was only some 8 million votes out of 1,7 billion that were supporting either dismissal or the alternative proposal that was made. Surprisingly many votes were disqualified or blank (some millions).

So no surprises there.

The level of Q&A was disappointing not because of answers provided (often by Chairman of the board of directors Risto Siilasmaa), but due to the questions and comments being made. Lots of commentary and opinions. Many of them unnecessary or outside of decision at hand. It took ages to go through the Q&A part, but apparently there was some kind of agreement to allow gross overruns of budgeted 2 minutes per question or comment. 

Good experience, but I think I'll continue skipping most of GMs.

Changes in portfolio

I decided to let go of the following stocks:

• Baidu
• China Mobile
• Sanofi

Dividends from China Mobile and Sanofi are being treated unfavourably by Finnish tax authorities in comparison to other foreign companies. Dividend from a company in Hong Kong (China Mobile) is treated as regular income and thus subject to much higher tax percentage than normal dividend or capital gain. Dividend from France (Sanofi) on the other hand is supposed to have zero withhelding by broker. Since my broker withhelds part of the dividend and this is not taken into account by Finnish tax authorities, I am being taxed partly twice.

As I was looking for passive ETFs where to put the money I came across an interesting ETF (PowerShares Golden Dragon China Portfolio; NYSE: PGJ) that had big exposure to Chinese technology companies like Baidu and also to China Mobile. Thus, I dediced to take the profits from Baidu which has risen nicely lately and spread also that money around more evenly. 

 

I don't like the big exposure to banking sector of ETFs like iShares China Large-Cap (NYSE: FXI). Nor I wanted to put all money from China Mobile and Baidu to PGJ so I selected another ETF to maintain our exposure to China. Guggenheim China Small Cap ETF (NYSE: HAO) invests into 241 companies like BYD which I had a direct investment in some time ago. Sector exposure is quite balanced (industrials 19%, consumer cyclical 17%, technology 14%, real estate 11%, basic materials 11%, consumer, non-cyclical 10%...).

To maintain some exposure to Telecommunications Service Providers beyond our position in TeliaSonera some our our money went to iShares Global Telecom ETF (NYSE: IXP). Three biggest holdings are AT&T, Vodafone and Verizon. Naturally China Mobile is within top 10 holdings as it is one of the biggest operators in the world by any measure.

From the pharmaceutical / healthcare sector I selected iShares Global Healthcare ETF (NYSE: IXJ). Sanofi is there within 10 largest holdings. Top 3 being Johnson & Johnson, Novartis and Pfizer.

Tasman Metals vs. peers

When writing my previous article on Tasman Metals, I noted that it would be useful to look at Competing HREE mines coming online elsewhere outside of China that might fill the same supply space. I started some work on this, but concentrated only on mines in or near Europe. A recently published article in Seeking Alpha seems to do this job rather nicely (as far as I can tell). I highly recommend it if you are interested about rare earth elements to begin with.
 
Best In Rare Earth Class And Undervalued: Tasman Metals" by "The Critical Investor". 

I recommend to read also all of the comments, since there is some good discussion and alternative views there on the subject.
 
Also, I recommend listening to the recent interview with Mark Saxon, CEO of Tasman Metals by Gold Stock Trades Editor Jeb Handwerger in Youtube. "Tasman Metals: Critical Supply Of Heavy Rare Earths In EU"

The projects I managed to find in or near Europe were:

• Storkwitz deposit (Germany)
• Kvanefjeld project (Greenland)
• Kutessey II (Kyrgyzstan)

Storkwitz, located near the town of Delitzsch, is confirmed to contain JORC-compliant REE resource. In comparison to Norra Kärr the ore body in Storkwitz is much more difficult to access as it begins at 300 meters below surface and continues to greater depths trending straight down. It is currently estimated to contain 20100 tonnes rare earth oxides (half indicated and hald inferred). The drilling data covers up to 700 meters, but the ore body is estimated to possibly continue up to 1200 meters. In comparison, Norra Kärr ore body starts near surface and current drill holes are up to 150 meters making it feasible for open pit mining.

Kvanefeld in Greenland is potentially a huge project. Compared to Norra Kärr, the project is far bigger. Due to uranium it likely will also be more controversial. Resources are split to three different deposits within a grid of 7x8 kilometers. There does not seem to be infrastructure (roads, power..) so it is going to take more capital expenses than Norra Kärr. Target for operations to start is same as for Norra Kärr (~2016).

Note: all information about the projects in or near Europe where gathered in June before I finished my previous articled on Tasman Metals.

 The author is long Tasman Metals and considers the investment as very high risk one as all junior miners typically are.