Main menu
Edison Group
  • Home
  • Equities

    Equities

    View All Equities

    Equities by Sector

    IRLAB Therapeutics

    MCap

    SEK653m

    Last close

    SEK14.10

    ▲ 1.50 (11.90%)

    VolitionRx

    MCap

    USD51m

    Last close

    USD0.60

    ▲ 0.05 (9.82%)

    Portobello SpA

    MCap

    EUR12m

    Last close

    EUR2.38

    ▲ 0.20 (9.17%)

  • Sectors

    Sectors

  • Thematics

    Thematics

    View All Thematics

    Latest

  • Audiovisual

    Audiovisual

    View All Audiovisual

    Latest

Scherzer & Co — Resisting the weaker environment

Scherzer & Co (DB: PZS)

Last close As at 04/11/2024

3.10

▲ 0.02 (0.65%)

Market capitalisation

93m

More on this equity

Research: Financials

Scherzer & Co — Resisting the weaker environment

Scherzer & Co (PZS) was able to offset the impact of subdued equity markets (the MDAX declined 1.3% in H118) through its business of writing options and higher dividend streams. As a result, despite the c 26% share price decline in the case of one of its largest holdings (freenet), the company’s NAV (including the dividend at €0.10 per share) rose by 4.7% in H118. However, the ytd return as at end-August was slightly lower at 2.2%. PZS’s portfolio of extra compensatory claims (ECS) increased to €102.1m (€119m including Allerthal-Werke and RM Rheiner Management), mainly due to the addition of €8.4m attributable to PZS’s stake in Oldenburgische Landesbank.

Milosz Papst

Written by

Milosz Papst

Head of Content, Investment Trusts

Financials

Scherzer & Co

Resisting the weaker environment

Asset management

Scale research report - Update

13 September 2018

Price

€2.77

Market cap

€83m

Share price graph

Share details

Code

PZS GY/PZSG

Listing

Deutsche Börse Scale

Shares in issue

29.9m

Last reported net debt at 30 June 2018

€30.3m

Business description

Scherzer & Co (PZS) invests its funds mainly in domestic equities. PZS looks for companies that are unknown or 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 & Co (PZS) was able to offset the impact of subdued equity markets (the MDAX declined 1.3% in H118) through its business of writing options and higher dividend streams. As a result, despite the c 26% share price decline in the case of one of its largest holdings (freenet), the company’s NAV (including the dividend at €0.10 per share) rose by 4.7% in H118. However, the ytd return as at end-August was slightly lower at 2.2%. PZS’s portfolio of extra compensatory claims (ECS) increased to €102.1m (€119m including Allerthal-Werke and RM Rheiner Management), mainly due to the addition of €8.4m attributable to PZS’s stake in Oldenburgische Landesbank.

Higher dividends and profits from writing options

PZS reported EPS of €0.18, which was 19% higher vs H117. EBIT improved by 17% y-o-y to €5.4m in H118 on the back of an increase in dividend income (€2.0m vs €1.4m in H117), a €1.65m profit on writing options (H117: €0.26m) and lower bonuses to management and employees. In tough market conditions in H118, PZS realised net gains of €4.9m (below the €6.4m in H117), but also had to book higher net unrealised losses at €2.0m in H118 (vs €1.8m in H117).

NAV performance close to market year to date

Although PZS’s NAV performance in H118 (+4.7%) was ahead of both the MDAX (-1.3%) and SDAX (+0.5%), the results weakened somewhat up to end-August. In the first eight months of 2018, PZS’s NAV performance reached 2.2% ytd, which is close to the MDAX’s total return of 2.7%, but somewhat below the growth posted by SDAX (5.3%) and TecDAX (19.1%). This was due to most of PZS’s top 10 holdings recording a share price decline between June and August, including the largest position (GK Software).

Valuation: Slight premium to NAV

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 updated valuation report on AXA, which implies potential income from PZS’s AXA shareholding of €18.8m or €0.63 per PZS share. This is further supported by insider purchases (both board members purchased shares worth €271k in April/May 2018). It should 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

18.5

1.8

12/17

18.8

7.9

0.26

0.10

10.7

3.6

12/18e

12.5

6.5

0.19

0.05

14.6

1.8

12/19e

12.9

6.8

0.20

0.05

13.9

1.8

Source: Scherzer & Co accounts, consensus based on two analysts at 10 September 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: Higher earnings despite weaker markets

PZS was able to record EPS of €0.18 in H118, up 19% y-o-y vs H117, assisted in particular by higher dividend income at €2.0m (compared with €1.4m in H117), profit from writing options at €1.65m (H117: €0.26m) and a decline in personnel expenses to €0.7m (H117: €1.2m) as a result of lower bonuses to management and employees. Income from financial instruments decreased slightly by 4% y-o-y to €7.5m in H118 and included gains from disposals of both current and non-current financial assets of €5.7m (the rest being gains from writing options). This compares with €0.8m of corresponding disposal losses booked in H118 (€0.1m from writing options). However, the company reported net write-downs of financial assets (representing unrealised losses) amounting to €2.0m in H118 (vs €1.8m in H117) as a result of the relatively weak equity markets in the DACH region in the first half of this year and, in particular, as shares of freenet (one of PZS’s largest holdings) fell by c 26% up to end-June 2018. Following the decline in personnel expenses and broadly stable other operating expenses, PZS’s expense ratio (measured as a percentage of average NAV during the period) declined to 1.3% in H118 (not annualized) vs 2.3% in H117. As net debt rose to €30.3m from €24.0m at end-2017, the net debt to equity ratio also increased to 48% from 40% at the end of last year.

Exhibit 1: H118 results highlights

€000s, unless otherwise stated

H118

H117

y-o-y

Income from financial instruments

7,500

7,789

-4%

Other operating income

894

865

3%

Expenses related to financial instruments

(959)

(1,159)

-17%

Personnel expenses

(706)

(1,215)

-42%

Other operating expenses

(389)

(432)

-10%

Income from dividends

1,978

1,436

38%

Write-offs on current and non-current financial assets

(2,903)

(2,637)

10%

D&A

(4)

(4)

3%

EBIT

5,413

4,643

17%

Other interest and similar income

49

23

111%

Interest and similar expenses

(150)

(97)

55%

EBT

5,312

4,569

16%

Income and other taxes

(23)

(142)

-84%

Net profit for the period

5,289

4,427

19%

EPS (€)

0.18

0.15

19%

Source: Scherzer & Co accounts, Edison Investment Research

PZS’s NAV (including the €0.10 dividend paid) increased moderately by 4.7% in H118 in comparison to end-2017, which was ahead of the German small- and mid-cap spectrum, as the MDAX declined by 1.3% and the SDAX appreciated by 0.5% over the same period (although TecDAX went up by 6.4%). Scherzer’s ytd NAV total return performance as at end-August 2018 reached 2.2%, broadly in line with MDAX (+2.67%), but somewhat below the growth posted by SDAX (5.32%) and TecDAX (19.13%). PZS’s NAV progression (ex-dividends) is shown in Exhibit 2.

The company was able to record an increase in NAV in the first eight months of 2018 despite the considerable share price declines of two of its top 10 holdings representing around 23% of PZS’s portfolio as at end-2017 (GK Software was down c 11% and freenet’s shares lost c 26% ytd as at end-August). We estimate that the aggregate negative impact of these two holdings on Scherzer’s returns stood at c 3-4pp. GK Software, Scherzer’s largest holding, reported an 11% y-o-y increase in turnover in H118, but an EBITDA decline to €2.39m from €5.29m in H117 due to ongoing investments. Still, GK Software’s management maintained its FY18 guidance of considerable sales growth and a c 15% EBIT margin in the company’s core business. This is backed by a solid business pipeline (according to the company) following the successful entry into the US market. It is also important to note that GK Software’s share price decline comes after a very strong performance in 2017 (share price almost doubling). The downward trend in freenet’s shares seems to be a result of the fact that FY17 results did not meet the expectations of some analysts, as well as the somewhat disappointing FY18 outlook.

Exhibit 2: PZS’s NAV and share price comparison

Source: Scherzer & Co accounts, Bloomberg

The company’s top 10 portfolio holdings are presented in Exhibit 3. Key changes vs end-2017 include the inclusion of BUWOG (a residential real estate developer and investor), which is currently subject to a squeeze-out procedure where the cash compensation was set at €29.05 per share. Secondly, Oldenburgische Landesbank (which made up 5.78% of PZS’s portfolio at end-2017) left the portfolio following the squeeze-out completion in June 2018, with Scherzer & Co being entitled to a cash compensation of €8.4m. This was added to PZS’s ECS portfolio, which reached €102.1m (or €3.41 per PZS’s share) at end-August 2018 (€119m including portfolios of Allerthal-Werke and RM Rheiner Management), compared with €93.3m (€110m) at end-2017.

Another important (positive) portfolio development is the recent resolution of the Higher Regional Court in Munich related to the domination and profit and loss transfer agreement (DPLTA) between Volkswagen Truck & Bus and MAN. The court set the recurring compensation payment at a gross amount of €5.50 per share (from €3.30 earlier) and the cash compensation at €90.29 vs €80.89 per share previously. PZS expects the resulting earnings contribution to reach €0.4m. Volkswagen later terminated the DPLTA and the minority shareholders now have the option to tender their MAN shares in exchange for the cash compensation.

Exhibit 3: PZS’s top 10 holdings list

Company

% of total
(Aug 18)

% of total
(Jun 18)

% of total
(Dec 17)

Opportunistic/safe

GK Software

12.99%

13.25%

13.72%

Opportunistic

freenet

6.61%

6.19%

9.10%

Opportunistic

BUWOG

6.10%

n/a

n/a

Safe

K+S

5.58%

5.67%

4.00%

Opportunistic

MAN

5.17%

4.24%

2.76%

Safe

Allerthal-Werke

4.76%

4.95%

4.88%

Safe

Innogy

3.99%

3.69%

n/a

Safe

Horus

3.85%

3.83%

4.02%

Opportunistic

Audi

3.60%

3.54%

3.73%

Opportunistic

Mobotix

3.32%

3.28%

2.92%

Opportunistic

Total top-10 holdings

55.97%

55.83%*

54.17%

- 

Source: Scherzer & Co, Edison Investment Research. Note: *Includes holdings not in top 10 as at August 2018.

Valuation

The most recently reported NAV stands at €2.70 per share as at end-August 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 capitalized 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 €2.77. This suggests improved acceptance of potential gains resulting from the ECS portfolio. 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 narrowed slightly and PZS currently trades at a 16% discount to 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

12.8

MDAX

17.9

27.8

20.0

19.2

28.8

17.6

18.0

SDAX

n.m.

54.7

30.9

28.0

23.5

23.4

20.4

Arithmetic average

17.6

33.6

22.5

23.1

23.8

18.5

17.0

PZS

loss

7.2

11.9

9.2

13.6

10.8

14.4

PZS discount

loss

79%

47%

60%

43%

42%

16%

Source: Bloomberg as at 10 September 2018, PZS reports. Note: P/E ratios based on year-end prices.

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

Exhibit 5: Comparable market P/BV ratios

 

P/BV (x)

2012

2013

2014

2015

2016

2017

2018e

DAX

1.5

1.8

1.7

1.7

1.7

1.9

1.5

MDAX

1.8

2.3

2.1

2.3

1.9

2.1

2.0

SDAX

1.3

1.7

1.9

2.0

1.7

1.8

1.6

Arithmetic average

1.5

1.9

1.9

2.0

1.8

1.9

1.7

PZS

0.8

0.8

0.8

0.8

0.9

1.3

1.3

PZS discount

48%

59%

58%

60%

49%

32%

25%

Source: Bloomberg as at 10 September 2018, PZS reports. Note P/BV ratios 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 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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

More on Scherzer & Co

View All

Financials

Scherzer & Co — H121 NAV return above market average

Financials

Scherzer & Co — FY20 results assisted by AXA and Audi

Financials

Scherzer & Co — Successful conclusion of AXA case

Financials

Scherzer & Co — Further squeeze-outs of portfolio holdings

Latest from the Financials sector

View All Financials content

Financials

Metro Bank — Primed for growth

Financials

Manx Financial Group — Well prepared for potential headwinds

Financials

S&U — The time to look ahead

Financials

A net zero perspective – Investing in sustainability, technology & innovation

Orexo — Orexo wins patent litigation appeal

Orexo’s appeal of the US District Court’s invalidation of the ‘330 patent, which had been anticipated for some months, has been successful. Zubsolv is Orexo’s largest and fastest-growing product – we anticipate sales of c SEK620m and over 25% growth in FY18. The initial invalidity of the ‘330 patent had weighed on the shares since 2014 and this overhang has now been removed. The exclusivity of the Zubsolv patents runs until 2019 and 2032. We have updated our valuation ahead of the Q318 results.

Continue Reading

Subscribe to Edison

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

Sign up for free