Scherzer & Co — Upward NAV trend continues

PZS reported strong H117 numbers, with EBIT improving to €4.64m from a €1.09m loss last year. The company realised net capital gains of €6.40m (compared to €0.92m in H116) and posted a 22% y-o-y increase in dividend income to €1.44m. PZS benefited from the favourable stock market environment, as the DAX gained c 7% in the first half of the year, while mid- and small-caps appreciated even more (MDAX +10%, SDAX +14% and TecDAX +20%).

PZS’s NAV currently stands at €2.64 (as at 31 August 2017) compared to €2.29 at end-2016. This represents ytd growth of 17.5% (adjusted for the €0.05 dividend payment made in June), which is ahead of PZS’s five-year NAV CAGR of 15.6%. Performance was driven particularly by some of the current top 10 portfolio holdings, such as GK Software, Lotto24, Horus or Pfeiffer Vacuum Technology, but also Wüstenrot & Württembergische (W&W). Importantly, the company has been able to outperform the large- and mid-cap indices so far in 2017, as the DAX and MDAX increased by c 5% and 11%, respectively (the SDAX and TecDAX grew by 19% and 25%, respectively).

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, PZS shares are now trading broadly in line with NAV. An additional stock driver is the recently updated valuation report on AXA, which implies a potential income from PZS’s AXA shareholding of €18.8m or €0.63/PZS share. It must be noted that the NAV does not include any income from potential ECS profits.

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PZS reported an H117 EBIT of €4.64m compared to a €1.09m loss in H116. This was supported by net realised capital gains of €6.40m (vs €0.92m in H116) and a 22% y-o-y increase in dividend income to €1.44m. Furthermore, the company recorded positive value adjustments of €0.84m (up 61% from €0.52m). This was somewhat offset by the lower result from covered writing strategies at €0.23m (H116: €0.56m). Income from ECS was negligible in H117 (€2,000). However, PZS highlighted a recent positive ruling in its September investor presentation, resulting in an ECS gain of €1.4m. As at end-August, the original value of tendered-in shares stood at approximately €89m or €2.97 per share (compared to €95m and €3.20 by end-2016 respectively). Taking into account the investments in Allerthal-Werke and the RM Rheiner Management, the compensatory claims amount to €112m.

On the expenses side, the company recorded €2.64m in write-offs of financial assets and securities held as current assets compared to €3.53m in H116. Personnel expenses doubled y-o-y to €1.2m, driven by higher bonuses (up to €0.9m from €0.3m last year). Finally, net financial expense stood at €0.07m, ahead of last year at €0.03m. Consequently, EBT reached €4.57m vs a €1.12m loss in H116 and net income came in at €4.43m (H116: -€1.12m), translating into an EPS of €0.15 (vs a loss of €0.04 in H116).

Net debt increased to €23.4m in H117 from €18.6m by end-2016, implying a net debt/equity ratio of 41% (FY16: 34%). PZS’s NAV as at end-June reached €2.55 per share, whereas last reported NAV (as at 31 August) was even higher at €2.64 per share. Adjusted for the €0.05 dividend paid in June, this represented a 17.5% increase from €2.29 at end-2016. This was ahead of PZS’s five-year NAV CAGR (2011-16) of c 15.6%. Over this period, the company was able to outperform blue chips (the DAX posted a five-year CAGR at 12.3%). However, it is worth keeping in mind the fact that PZS is more inclined towards small- and mid-caps, which generally outperform the broad market amid an upward trend. The last reported NAV level is broadly in line with the current share price of €2.63.

PZS’s top 10 portfolio holdings are illustrated in Exhibit 3 below. As at end-June, 59.87% of PZS’s overall portfolio consisted of investments treated as ‘opportunistic’ (including special situations, new business orientation, restructuring/recapitalization, and sustained business models with high-growth outlook) and the remaining 40.13% represented the so-called ‘safe’ investments (companies with a ‘natural’ valuation floor, high asset quality, strong/strategic major shareholder, strong earnings quality, etc). The top 10 holdings make up 52.9% of the current portfolio (vs 53.9% at end-2016). With respect to recent major portfolio changes, the company reduced its stake in Wüstenrot & Württembergische (W&W) to cash in some of its capital gains.

The most recently reported NAV stands at €2.64/share as at end-August 2017. In the past, PZS’s shares have traded at prices below the stated NAV. This appears to be a function of the asset value minus the capitalised management costs, which were approximately 10% of revenues. As such, the average discount to NAV before 2016 was approximately 15%. Since the successful ECS transaction in 2015 and the subsequent newsflow (eg the AXA valuation case and the successful sale of the FIDOR Bank stake), the discount has declined and the stock trades close to last reported NAV of around €2.64. This suggests the improved acceptance of potential gains resulting from the ECS portfolio. However, there is no visibility of future gains.

Based on P/E, PZS has traded well below the market averages in the past five years. We believe that the main reason for this is the low visibility on potential gains from the ECS portfolio. However, given recent successful transactions, the discount started to decline in 2016 and has continued to do so in 2017.

PZS’s valuation is mainly based on asset value, also described by 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.

PZS has reported profits every year since 2012. Despite this, the stock has traded below both its own book value and German market valuations. Nevertheless, the company has achieved positive absolute returns each year, documented by the increase in NAV (even after dividend payment).

In addition, the NAV progression does not fully reflect the ECS portfolio. On 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.

The AXA case, however, 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 approximately €18.8m, or €0.63 per PZS share (before taxes and other costs). The €0.63/share gain is equal to a 24% increase in current NAV.