Pure Foods: About to Become Purely Undervalued


Company president provides his estimated company value

Last week, San Miguel President Ramon Ang provided an estimated value between $9 billion to $10 billion once Pure Foods combines with San Miguel’s food, beer and liquor businesses.

At today’s exchange rate, this estimated value would fall to ~₱471 billion.
If Pure Foods reach this estimated value it would propel the company from its current 34th largest company to somewhere between Gokongweis’ JGS Summit Holdings and Ayala’s Bank of the Philippine Islands and becoming part of the top 10 largest companies in the Philippines.

The specifics are yet to be provided by Pure Foods and/or San Miguel.

Should Pure Foods continue as planned, raise $1.5 billion (₱78.5 billion) through share issuance, and peg a speculated rights offering at ₱615 (average price of Pure Foods shares in the past thirty days), the company would need to add about 128 million shares to its already diluted 181.7 million shares would result into 309 million shares outstanding.

This would indicate a ₱1,607/share as per a midpoint to Mr. Ang’s valuation ($9.5 billion divided by 309 million shares). This would suggest a possible 160% return from today’s Pure Foods share price of ₱618.50 (2/18/2018).

Disclosure: I have shares in Pure Foods.

Undervalued Wholesale Distributor: Essendant


Looking forward to a further price drop

Essendant, which is four more years turning to a centennial-old company, has suffered quite a wreck in its share price in recent years. From a high of $45.88/share back in January 2014, and now down to $9.66/share (1/28/2018).

So far this year, however, the Illinois-based company seem to have turned the strong tide and was up ~4%.

The leading national wholesale distributor of workplace items also had an attractive 5.8% dividend yield, along with a nearly 30% discount to its book value of $510 million.

The company is scheduled to report its year-end 2017 figures on Wednesday, February 22, 2018.

Meanwhile, the company’s third-quarter performance that ended in September 2017 reported a 6.7% decline in overall revenue and a disappointing $265.4 million in losses compared to $66.2 million in profits the year earlier.

What brought down Essendant to losses was its two goodwill impairment charges that summed to $285.2 million in relation to its office and facilities.

“Challenging industry dynamics and sales declines persisted, particularly in our national accounts channel.”

“This year’s sales declines were largely unanticipated and outpaced our ability to reduce costs. Accordingly, I have worked with our leadership team and our Board to identify and launch the key strategic drivers that will improve our performance: improving efficiency across our distribution network and aligning our cost base, driving sales performance in key growth channels, and developing supplier partnerships that leverage our network and capabilities. We will act with urgency to execute against these priorities and reset our cost structure. We are targeting annualized cost savings in excess of $50 million by 2020. We have launched efforts to achieve these savings and will continue to refine this savings target and provide updates as we develop our detailed plans.”

Ric Phillips, President and Chief Executive Officer of Essendant.

Ric Phillips, meanwhile, is Essendant’s newly installed CEO and had taken the role just last June 2017. Robert B. Aiken, Jr., former CEO, resigned after less than two years in the jobjob, and left for TreeHouse, a packaged foods/beverages manufacturer.

Interestingly, Aiken also just had resigned from TreeHouse after less than a few months on the job as TreeHouse’s President.

According to filings, Essendant’s product offerings may be divided into the following primary categories: (1) janitorial, foodservice and breakroom supplies, including foodservice consumables, safety and security items; (2) technology products such as computer supplies and peripherals; (3) traditional office products, including writing instruments, organizers and calendars and various office accessories; (4) industrial supplies, including hand and power tools, safety and security supplies, janitorial equipment and supplies, welding products; (5) cut sheet paper products; (6) automotive products, such as aftermarket tools and equipment; and (7) office furniture, including desks, filing and storage solutions, seating and systems furniture.

Essendant also has one customer, W.B. Mason Co., Inc., which constituted approximately 11% of its 2016 revenue (~$600 million).

In the past three years, Essendant’s revenue has grown 1.83% on average, but margins have eroded.

Meanwhile, the company’s overall debt outstanding was at $509.9 million as of September (0.9x debt-equity; -$271 million lower since December 2016).

Looking back in three years that ended in 2016, Essendant was able to reduce its financing activities by $115 million and was able to generate $279 million in free cash flow. Accumulative dividend payouts were a healthy 23% of its free cash flow in the period.

Unappealingly, Essendant’s book value has declined (as a matter of write-downs) in the recent quarters. My rough estimations suggested a value per share of $11.23 (~13% higher than today’s share price of $9.66.

If Essendant should again fall in the upcoming earnings release, then it may be a good sign to pick up some of its shares.

Disclosure: no shares in any of the companies mentioned.

Undervalued Russian Company

RusHydro traded just half its equity


Stock: RusHydro PJSC ADR RG2A, Federal Hydro-Generating Company RusHydro PAO (RSHYY.PK)

RusHydro, a €4.6 billion Russian renewable sources energy producer, traded at half its book value while having also having attractively delivered a trailing dividend yield of 6.1%.

According to its filings, RusHydro operated in the hydropower industry since 2004 and now produces 12.95% of Russia’s electricity.

Income statement
In its recent six months of operations, RusHydro delivered 3.7% revenue decline and an unattractive 17.5% drop in profits. Profit dropped more secondary to the company’s increased financing costs in the period.

In the past three years, RusHydro averaged 6.05% revenue growth and 26.7% profit growth.

Balance sheet
From December, RusHydro increased its debt by ₽82 billion leading to a debt-equity ratio of 0.23x (vs. 0.13x in December). Shareholder equity, meanwhile, increased by ₽47 billion to ₽694 billion.

Cash flow
In its recent six months of operations, RusHydro generated a healthy ₽5.9 billion in free cash flow, while having raised ₽7.4 billion in financing activities (net repayments including dividends).

In the past three years, RusHydro reduced its overall debt by ₽9.3 billion (net issuances) and provided ₽25 billion in dividends despite having generated a hefty free cash outflow of nearly ₽20 billion in the period.

Nonetheless, analysts have an average overweight recommendation on RusHydro’s ADR shares (RSHYY) with a target price of $1.86 (vs. $1.34 at the time of writing), or a possible 38.8% upside.

Applying a 35% discount on its equity and a 10-year growth rate at its outstanding shares resulted in a per share figure of $1.87.

Disclosure: I have shares in RusHydro.

Undervalued Electric Provider: Korea Electric Power

Significant value as stock is trading just a third of its equity


Stock: Korea Electric Power Corp ADR KEP, 015760.KS

Korea Electric Power, a ₩24.4 trillion power transmission and distribution of Korea’s energy, caught my attention as it just traded 66% discount to its equity as of December 3, 2017. Korea Electric also has a trailing dividend yield of 4.92%.

As of December 31, 2016, Korea Electric Power and its generation subsidiaries owned approximately 74.7% of the total electricity generation capacity in Korea (excluding plants generating electricity primarily for private or emergency use).

In addition, the Korean electric company is 51.1% owned by the Korean Government, as mandated by its country’s laws. This stipulation makes the company an even more secure bet for conservative investors out there.

Income statement
As for its recent six months of operations, however, Korea Electric showed 3.1% revenue reduction year over year and a not so impressive 69% drop in profits.

In contrast, the electric company recorded 3.62% revenue growth and 390% profit growth averages in the past three years.

Balance sheet
In the recent six months, the company also took in more debt in the same period net repayments and other financing activities having added ₩662.8 billion from last year resulting to a total liability to equity ratio of 1.52x (vs. 1.56x a year earlier).

Cash flow
In the recent six months, Korea Electric also generated a free cash outflow of ₩2.3 trillion compared to positive 1.5 trillion a year earlier.

In comparison to its three year period, the utility company reduced its overall debt by nearly ₩9 trillion, raised ₩853 billion in share issuances, and provided ₩2.7 trillion in dividend payouts out of its ₩4.6 trillion free cash.

Analysts have an average overweight recommendation on the company with a target price of $22.39 per ADR share (vs. $17.57 at the time of writing) indicating a possible 27.4% upside.

Sticking on the conservative side and placing a good 35% off its book value provided a value of ₩36,309 per share or $33.51.

Minus the possibilities of having a war being brought by its country’s neighbor and having returned total losses of 4.9% so far this year, Korea Electric Power is of definite value.

Disclosure: I have shares in Korea Electric Power.

Pepsi Cola Philippines is Undervalued


Pepsi’s numerous vice presidents and directors should consider handing out more dividends

Stock: Pepsi-Cola Products Philippines Inc. (PCOMP: PIP) 

Pepsi Cola Products Philippines, a ₱11.08 billion (Philippine peso) Muntinlupa-based beverage company, currently trades near its one-year low at ₱3 per share. Pepsi trades at 14.3x P/E (vs. 16.41x sector) and 1.2x P/B (vs. 3.44x sector). Pepsi also had a 2.3% dividend yield.

Founded in 1989, the 28-year-old Pepsi sells several products including Pepsi Max, 7 Up, Gatorade, Lipton, Cheetos, Lays, and etc. Only 0.05% of the company’s sales were generated from abroad.

Major Pepsi shareholders include a 38.9% ownership by a Korean conglomerate, Lotte Chilsung Beverage, and another 25% is owned by Dutch-based Quaker Global Investments.

In its recent six months of operations, Pepsi reported -1.7% decline year over year in its revenue (vs. 3-year average growth of 10.52%) to ₱17.9 billion, and -16.3% profit drop (3y ave. -1.89%) to ₱468.1 million.

Pepsi reasoned out that it experienced the slowdown in its business brought by ‘overlap of last year elections’ and ‘unrest in Mindanao.’ The beverage company also stated it spent more on manufacturing footprint thus leading to lower profits for shareholders in the period.

In particular, Pepsi’s carbonated soft drinks business (73% of revenue) experienced -2.5% revenue decline and maintained segment margin profitability of 23.3% compared to its year-earlier operations. The carbonated soft drinks business, which includes brands Pepsi-Cola, 7Up, Mountain Dew, Mirinda, and Mug, has consistently been the revenue generator of more than 65% for Pepsi in recent years.

Pepsi’s non-carbonated beverages, which include Gatorade, Tropicana/Twister, Lipton, Sting energy drink, Propel fitness water, Milkis and Let’s be coffee, delivered weak -4% revenue growth while also having maintained 23% segment profitability.

More interestingly, a consistent loss-generating business—Pepsi’s snacks segment (Cheetos and Lays)—delivered significant 79% jump in revenue but still delivered a loss of ₱7 million in the period vs. ₱18 million losses a year earlier.

Meanwhile, Pepsi had ₱551 million in cash and ₱4.2 billion in debt (+₱54 million vs. one year earlier) with debt-equity ratio of 0.45x (vs. 0.47x last year). Overall equity rose ₱518 million to ₱9.38 billion in June.

In the past three years, Pepsi allocated ₱8.7 billion in capital expenditures, raised ₱931 million in debt/other financing activities (net repayments), and provided ₱488 million in dividends representing 19.6% of its accumulative ₱2.49 billion in free cash flow.

COL Financial, a leading brokerage in the Philippines, recently (10/3/2017) recommended for investors to ‘SELL INTO STRENGTH’ without providing any target price. Applying three-year revenue growth and PS multiple averages and a 15% margin indicated a per share figure of ₱3.86 a share vs. ₱3 at the time of writing, indicating a possible 28% upside.

Pepsi does exhibit steady business growth in recent years except for its recent six months of operations. The company’s decision to mention ‘unrest in Mindanao’ affecting its business makes some investors question management’s competence in transparency as NO exact figures were provided—geographically—in how much Pepsi exactly makes in the island.

Meanwhile, the presence of Pepsi’s major shareholders would hopingly keep the company from diluting its existing shareholders from issuing more shares as it never did in recent years, while its strong balance sheet and plentiful cash flow should raise shareholders demand of more dividend payouts.

Pepsi has kept its allocation to dividends flat in recent years.

Brought by good upside to a conservatively calculated per share figure of ₱3.86, somewhat reliable management (to mention 11 vice presidents and seven directors), and potential dividend payouts in the future, Pepsi is a buy.

Disclosure: I have shares in Pepsi Cola Products Philippines.

*If you are one of the Pepsi Philippines board members/directors/vice presidents, I urge you to consider raising the idea of allocating more cash flow to dividends in your next board meeting as this would better serve not only the minority shareholders but also lift confidence in your major shareholders, Lotte and Quaker. This blog and its contents also have been forwarded to the aforementioned major shareholders as of its publication date (10/12/2017).

Letters including this blog were printed and sent to your office addressed to the Korean CEO Yongsang You; Quaker European Investments @Zonnebaan 35, 3542 EB Utrecht, Netherlands; and Lee Jae-hyuk of Lotte Chilsung Beverage @269, Olympic-ro, Songpa-gu, Seoul, Korea.

Undervalued Russian Oil Company: Lukoil


Foreign exchange losses have been lessened


Lukoil, a $44.8 billion Russian oil company, currently trades at 0.6 times its book value, 7.1 times its earnings, and carries a 6.2% dividend yield at a profit-to-payout ratio of 44.6%.

Also, the 26-year-old Lukoil generated a healthy 10.9% rise in its revenue to ₽2.79 trillion (Russian Ruble) and a far more impressive 90.7% profit increase year over year to ₽201 billion.

As observed, Lukoil recognized ₽58.6 billion less in foreign currency losses compared to its year-ago period which help add hefty amounts of profits for the company.

In terms of performance, it is worthwhile to review Lukoil’s operating segments—1 exploration and production; 2 refining, marketing and distribution; 3 corporate and other business.

1 Exploration and production (E&P)

In the recent half, revenue from E&P grew 0.1% year over year to ₽790 billion (22% of unadjusted revenue) and profit margin of 13.2% compared to 15% a year earlier.

2 Refining, marketing and distribution

Revenue grew 12.5% year over year to ₽2.74 trillion (76.7% of unadjusted revenue) and profit margin of 2.6% compared to 2.3% a year earlier.

3 Corporate and other business

See company filings for further details. I consider this segment less important than the rest brought by its 1.1% revenue contribution as of the recent period.

Sales and profits

In the past three years, Lukoil had 4% revenue growth average, -7.1% profit decline average, and profit margin average of 4.1% (Morningstar).

Cash, debt and equity

As of June, Lukoil had ₽299.7 billion in cash and cash equivalents and ₽648.9 billion in debt with debt-equity ratio 0.19 times compared to 0.22 times a year earlier.

Overall debt declined by ₽50 billion while equity increased by ₽117.8 billion to ₽3.34 billion.

The cash flow summary

In the past three years, Lukoil allocated ₽1.9 trillion in capital expenditures, reduced its debt by ₽72.6 billion, generated ₽551.6 billion in free cash flow, and provided ₽314.6 billion in dividends at an average free cash flow payout ratio of 57%.


Having performed just -2.24% in total losses (including dividends) so far this year does not justify Lukoil’s strong turnaround in its first half of operations. As one of the largest oil companies in Russia, being affected by currency fluctuations greatly affects Lukoil’s bottom line.

Meanwhile, Lukoil has an admirable balance sheet accompanied with prudent dividend payouts compared to its free cash flow generation capability.

Analysts have an average buy recommendation on Lukoil with a target price of $60.84 per ADR share compared to $53.09 at the time of writing.

In summary, Lukoil ADR shares are a buy with a target price of $60.

Disclosure: I have some Lukoil ADR shares.







Why Don’t You Raise More on Your Dividends, First Philippine Holdings?


Lopez-led company is undervalued

Stock: First Philippine Holdings Corporation (ticker FPH) 

First Philippine Holdings has been trading at about half of its book value in recent years, including at the time of writing at 67.60 Php per share.

Book value: in simple terms, book value is a company’s total assets minus total liabilities.

This means that an investor who buys the company’s shares in the stock market is buying it at just 67.60 Php a share compared to the company’s actual book value of 141.60 a share. Obviously, this is a wide and safe margin.

In review of its assets, First Philippine has 14% of its assets identified as intangibles. Conservative investors would typically deduct this from a company’s total assets to get a net book value figure. Applying this to First Philippine would provide a per share figure of 47.62 a share, which is quite below today’s price.

Nonetheless, weighing whether to use net book value or book value as a target price and as a pure investment decision would certainly be careless. Analyzing a company’s recent operations would help improve and direct an investment decision.

**This article consists of the company’s operations and figures. For quicker reading jump ahead to the conclusion part.**

In its recent six months of operations, the 37.4 billion Pasig City-based Philippine conglomerate reported 17% year over year revenue increase to 51.48 billion and a contrasting 28.4% drop in profits to 6.02 billion.

As it turned out, First Philippine recorded 19% higher in costs and expenses and lower profits in other income resulting in lower profitability for its shareholders in the period.


First Philippine trades at a good discount compared to its peers. The company had price-earnings ratio 4.2 times vs. industry average of 21.4 times, 0.5 price-book value vs. 1.7 times, and price-sales ratio 0.4 times vs. 2 times.

The company also has trailing dividend yield of 2.96%.

Total returns

The company has provided a meager 0.96% total returns so far this year compared to the iShares MSCI Philippines ETF (ticker EPHE) 15.45% (Morningstar).

I consider EPHE as a barometer of the overall Philippine Stock Market’s performance.

First Philippine Holdings

According to filings, First Philippine Holdings (FPH) Corporation was incorporated and registered with the Philippine Securities and Exchange Commission on June 1961.

FPH and its subsidiaries are engaged primarily in, but not limited to, power generation, real estate development, manufacturing, construction, financing and other service industries.

FPH is 46.47%-owned by Lopez Holdings Corporation (Lopez Holdings), a publicly-listed Philippine-based entity.

FPH owns several companies including 66.2% direct ownership of First Gen, 60% of Batangas Cogeneration Corporation, 100% of First Philec, 86.58% of Rockwell Land Corporation, 100% of First Balfour, among others.

FPH conducts the majority of its business activities in four areas:

1 Power generation – power generation subsidiaries under First Gen.

In its recent six months operations, revenue in the power business grew 12.9% year over year to 42.7 billion (81% of unadjusted revenue) and had a profit margin of 11.8% compared to 20% a year earlier.

2 Real estate development – residential and commercial real estate development and leasing of Rockwell Land and First Philippine Realty Corporation (FPRC), and sale of industrial lots and ready-built factories by First Philippine Industrial Park (FPIP) and First Industrial Township (FIT).

Revenue in real estate business grew an impressive 78% to 6.75 billion (13% of unadjusted sales) and generated margins of 17% compared to 18.8% a year earlier.

3 Manufacturing – electrical transformers and other manufacturing subsidiaries under First Philippine Electric Corporation (First Philec).

Revenue in the manufacturing jumped 20.5% year over year to 1.08 billion (2% of unadjusted sales) and generated a margin of 17.7% compared to a negative (loss) margin of 7.5% a year earlier.

4 Construction and other services – investment holdings, oil transporting, construction, geothermal well drilling, securities transfer services, healthcare, and financing.

Revenue in the construction business fell 22.9% year over year to 2.26 billion (4% of unadjusted sales) and generated losses of 417 million compared to profits of 3.86 billion a year earlier.

Sales and profits

In the past three years, First Philippines generated revenue decline average of -0.5%, profit increase average of 61.7%, and profit margin average of 7.3% (Morningstar).

Cash, debt and book value (equity)

As of June, First Philippine had 50.4 billion in cash and cash equivalents and 173.8 billion in debt with debt-equity ratio 2.22 times compared to 2.28 times a year earlier.

Overall debt increased by 7.86 billion year over year while equity rose 5.8 billion to 78.5 billion.

Cash flow

In the first half that ended in June, First Philippine’s cash flow operations rose by 19% to 20.2 billion brought by higher cash flow from its inventories and other currents.

Capital expenditures were 4.06 billion leaving the company with 16.1 billion in free cash flow compared to 10.5 billion a year earlier.

The company also raised 2.71 billion in debt net repayments and other financing activities, while having provided 604 million or just 3.7% of its free cash flow in dividends.

The cash flow summary

In the past three years, First Philippines allocated 69.6 billion in capital expenditures, reduced its debt by 25.2 billion (net any issuances and other financing activities), raised 1.87 billion in share issuances, generated 20.87 billion in free cash flow, and provided 3.54 billion in dividend payouts representing free cash flow payout average of 3.1%.


First Philippine’s significant stakes in various companies in the Philippines essentially builds up a strong fortress around the conglomerate’s business model.

Nonetheless, the company had shown poor performance in its construction business despite the recent #BuildBuildBuild program of the Duterte administration. Still, investors should be relieved since construction (and other businesses) comprise of less significant business for First Philippine.

The company derives most of its business from its power generation business where it has maintained steady business growth, but at the same time suffered lower profitability brought by higher expenses.

Although praise could be provided as First Philippine has focused on reducing its debt in recent years, the company has carried a highly leveraged balance sheet while having provided minimal amount of dividends to shareholders in the same time period.

Meanwhile, multiplying three-year book value growth followed by a 35% margin indicated a per share figure of 96.63 a share compared with 67.55 at the time of writing.

To give credit, First Philippines has increased its dividend payouts in recent years, but further consistent increase as could be obviously supported by the company free cash flow may attract certain more conservative and dividend-seeking investors in the company’s stock.

In summary, First Philippines is a buy with 95 a share target price.

Disclosure: I have shares in First Philippines and plans to accumulate more. As a member of the Alpha Investments Philippines, (active members) of the group also thinks that FPH is undervalued.

Correction 10/2/2017 12:49 PM CST: Majority has been replaced by Active Members in the disclosure statement.

A Hidden Gem? Maiden Holdings


Weak performance warrants discount in target price

Stock: AGNC Investment Corp (NASDAQ:AGNC) 

Maiden Holdings, a $662.6 million Bermuda-based holding company, primarily focused on serving the needs of regional and specialty insurers, currently trades 40% off its book value and just 0.2 times its sales compared to 1.3 times its industry average.

The holding company also has an attractive 7.7% dividend yield.

Meanwhile, the company has a couple of unattractive figures as well. In the recent twelve months, Maiden had generated losses of $45 million while having provided a total of $75 million in dividend payouts thus explaining that it has no trailing price-earnings multiple and dividend was actually not supported by company profits in the period.

Having no capital expenditures and mostly reliant on ‘Reserve for loss and loss adjustment expenses**’ for the bulk of its cash flow, dividend payouts actually represented just about 14% of its free cash flow in the recent 12 months.

**Maiden on its Reserve for Loss and Loss Adjustment Expenses (10-K)

“We are required by applicable insurance laws and regulations in Bermuda, the U.S., Sweden and by U.S. Generally Accepted Accounting Principles (“U.S. GAAP”) to establish loss reserves to cover our estimated liability for the payment of all loss and loss and loss adjustment expense (LAE) incurred with respect to premiums earned on the policies and treaties that we write. These reserves are balance sheet liabilities representing estimates of loss and LAE which we are ultimately required to pay for insured or reinsured claims that have occurred as of or before the balance sheet date. The loss and LAE reserves on our balance sheet represent management’s best estimate of the outstanding liabilities associated with our premium earned. In developing this estimate, management considers the results of internal and external actuarial analyses, trends in those analyses as well as industry trends. Our opining independent actuary certifies that the reserves established by management make a reasonable provision for our unpaid loss and LAE obligations.”

For further details, turn to page 14 of Maiden’s recent annual filing.

Quarterly performance

In the first half that ended in June, Maiden registered 13.3% year over year growth in its revenue to $1.51 billion and a contrasting $1.9 million loss compared to $58 million a year earlier.

In the period, the company recorded 19% higher in expenses and minus its preferred dividends led to losses for the common shareholders.

Maiden Holdings

(10-K) Maiden was founded in 2007. The company specializes in reinsurance solutions that optimize financing and risk management by providing coverage within the more predictable and actuarially credible lower layers of coverage and/or reinsuring risks that are believed to be lower hazard, more predictable and generally not susceptible to catastrophe claims.

Maiden’s tailored solutions include a variety of value-added services focused on helping its clients grow and prosper.

In addition, Maiden’s principal operating subsidiaries are rated “BBB+” (Good) with a stable outlook by S&P Global Ratings (“S&P”), which is the eighth highest of twenty-two rating levels.

On September 1, 2016, A.M. Best Company (“A.M. Best”) upgraded Maiden’s principal operating subsidiaries’ financial strength rating to “A” (Excellent) with a stable outlook, which rating is the third highest of sixteen rating levels, from “A-” (Excellent) with a positive outlook.

The company provides reinsurance in the U.S. and Europe through its wholly owned subsidiaries, Maiden Reinsurance Ltd. (“Maiden Bermuda”) and Maiden Reinsurance North America, Inc. (“Maiden US”).

Internationally, Maiden provides insurance sales and distribution services through Maiden Global Holdings, Ltd. (“Maiden Global”) and its subsidiaries. Maiden Global primarily focuses on providing branded auto and credit life insurance products through insurer partners to retail clients in the European Union (“EU”) and other global markets. These products also produce reinsurance programs which are underwritten by Maiden Bermuda.

In 2016, Maiden generated 86.3% of its gross premiums written in North America and the rest in other countries.

Maiden has two reportable segments: Diversified Reinsurance and AmTrust Reinsurance.

Diversified Reinsurance

Diversified Reinsurance segment consists of a portfolio of predominantly property and casualty reinsurance business focusing on regional and specialty property and casualty insurance companies located, primarily in the U.S. and Europe.

In the first half, gross premium written in the diversified business fell 1.6% year over year to $472.9 million (29% of unadjusted total premiums) and lost $26.3 million compared to losses of $11.7 million losses a year earlier.

As could be expected, Maiden’s diversified recorded far worse combined ratio** of 106.4% compared to 103.2% a year earlier.

**(10-Q): Calculated by adding together net loss and LAE ratio and the expense ratio.

AmTrust Reinsurance

AmTrust Reinsurance segment includes all business ceded by AmTrust to Maiden Bermuda, primarily the AmTrust Quota Share and the European Hospital Liability Quota Share.

Gross written premium for AmTrust grew 7.8% to $1.16 billion (71% of unadjusted total premiums) and lost $6.3 million in the first half compared to an underwriting income of $43.9 million (4.1% margin).

The combined ratio for the AmTrust business was 100.6% in the period compared to 95.1% a year earlier.

Sales and profits                    

In the past three years, Maiden registered a three-year revenue growth average of 9%, and a contrasting 21.9% profit average decline, and profit margin average of 2.56% (Morningstar).

Cash, debt and book value (equity)

As of June, Maiden had $246.8 million in cash and cash equivalents and $254.4 million in notes with debt-equity ratio of 0.17 times compared to 0.23 times a year earlier.

Senior notes decreased by $97 million year over year while book value declined by $30 million to $1.5 billion.

The cash flow summary

In the past three years, Maiden generated an accumulative $1.76 billion in cash flow from operations, reduced its debt by $154 million, raised $6 million in common share issuances and $160 million in preferred share issuances, and provided $197 million in dividends and share repurchases ($1 mil) at an average payout ratio of 11%.


Looking at Maiden’s recent performance would not please any prospecting investors. Certainly, the company has carried a strong balance sheet that makes Maiden as creditworthy as it stated in its filings.

Nonetheless, Maiden’s business (especially its ‘Diversified Reinsurance’) has failed to generate any underwriting profits at all in the recent couple of years including the recent six months.

Analysts have an average overweight recommendation with a target price of $10.25 a share vs. $7.75 at the time of writing. Asking 50% discount from Maiden’s book value indicated a per share figure of $8.66.

In summary, Maiden is a speculative buy with target price of $9.


Art Raschbaum, Chief Executive Officer of Maiden (second quarter)

“The emergence of adverse loss development in both of our key operating segments has impacted our second quarter 2017 results. We do not believe that the development observed in the quarter is analogous to the trend observed across our portfolio over recent quarters which specifically emanated from elevated commercial auto liability frequency and severity from the 2011-2014 underwriting years, a phenomenon which has plagued many in the industry. While the AmTrust Reinsurance segment adverse development is relatively modest in the context of the overall historical portfolio assumed, as we have committed to in the past, it is our practice to respond to confirmed adverse development promptly. In response to observed elevated claims activity which we noted in our first quarter earnings call, Maiden’s audit activity has confirmed claims operational changes in AmTrust’s U.S. small commercial lines business which are believed to have contributed to a portion of the increased emergence in related casualty lines. We have however increased our reserves in these lines in the quarter in response to elevated severity in specific jurisdictions.

“In the Diversified Reinsurance segment, adverse development was observed in the segment’s casualty facultative business and from a small number of treaty accounts. Despite the adverse development in the quarter, year-to-date treaty commercial auto which has been the source of significant development over many recent quarters, has been benign, giving us increasing comfort that we have addressed this issue. In the quarter, Maiden also experienced elevated non-cat property loss activity in its Diversified Reinsurance segment. As we have observed in prior quarters, the most recent underwriting years continue to perform within expectations. Despite the underwriting results, we did benefit from strong investment income, up 14.7% from the prior year period driven by increased investable assets. Absent adverse development, this will improve both return on equity and operating results in future quarters.”

Disclosure: I do not have shares in any of the companies mentioned.

An Undervalued Pakistan Bank: Habib (HBL)


Recent possible blunder could be avoided in the future by a prudent management

Stock: Habib Bank (ticker HBL.KA)

The largest bank in Pakistan, HBL or formerly known as Habib Bank Limited, has been consistently trading at very low valuations in recent years.

The oldest bank in Pakistan that was founded in 1941 traded at price-earnings ratio 8.1 times, price-book ratio 1.4 times, and price-sales ratio 2.4 times.

In addition, the bank has an attractive dividend yield of 7.6%.

**1 USD equals 105.39 Pakistani Rupee

Meanwhile, HBL may be fined $630 million for “grave” compliance failures relating to anti-money laundering rules and sanctions at its only U.S. branch.

**This article consists of the company’s operations and figures. For quicker reading jump ahead to the conclusion part.**

Should a fine be implemented and just half of the said fine at about $315 million would translate into 33.2 billion in Pakistani Rupee (PKR). This penalty would be certainly handled well by HBL as it had about 214.4 billion PKR in cash as of June 2017.

In review, HBL also grew its book value by 2.2% year over year as of June to 196.4 billion PKR having had its debt increase by 95 billion PKR at a debt-equity ratio of 1.98 times compared to 1.53 times a year earlier.

Quarterly performance

Six months into HBL’s operations this year, the bank grew its revenue by 9.4% year over year to 54.2 billion PKR and a contrasting 2.7% decline in profits to 15.49 billion PKR in profits at a margin of 28.6% compared to 32% a year earlier.

Among its expenditures, HBL recorded 11.4% higher in administrative expenses resulting in lower profits in the period.

Total returns

HBL, meanwhile, has returned poorly to its shareholders so far this year having generated 28.44% total losses compared to the Global X MSCI Pakistan ETF (ticker PAK) 15.8% total losses (Morningstar).

Habib Bank

Established in 1941, HBL has a rich legacy spanning over 75 years and is an integral part of the country’s economic progress.

According to filings, HBL is Pakistan’s largest bank with a global reach, operating over 1700 branches and 2000 ATMs and with more than 10 million relationships.

In 2016, Habib derived 97.6% of its profits before tax from Pakistan and 2.5% in Asia and Africa. The bank generated losses of 48.3 million in the regions Europe, Middle East and America.

Habib has six segments.

1 Branch banking

This segment consists of loans, deposits, and other banking services to individuals, agriculture, consumer, SME and commercial customers.

In the recent half, total income in the branch banking business grew 13.4% year over year to 30 billion (52% of all incomes) and generated profit before tax margin of 37.7% compared to 33.8% a year earlier.

2 Corporate banking

Corporate banking consists of lending for project finance, trade finance and working capital to corporate customers. This segment also provides investment banking services including services provided in connection with mergers and acquisitions and the underwriting / arrangement of debt and equity instruments through syndications, Initial Public Offerings and private placements.

Total income was flat in the first half to 4.39 billion (8% of total income) and had margins of 84.7% compared to 85.2% a year earlier.

3 Treasuries

Treasuries consist of proprietary trading, fixed income, equity, derivatives and foreign exchange businesses. Also includes credit, lending and funding activities with professional market counterparties.

In the first half, total income for Treasuries fell 20.9% year over year to 9.98 billion (17% of total income) and had margins of 87.5% compared to 95.2% a year earlier.

4 International banking

International banking is considered as a separate segment for monitoring and reporting purposes and consists of the Group’s operations outside of Pakistan.

Total income in international banking business grew 1.1% to 7.3 billion (13% of total income) and had losses of 81 million compared to 243 million in losses a year earlier.

5 Asset management

This represents HBL Asset Management Limited.

Total income in Habib’s asset management grew 12.8% to 369 million (1% of total income) and generated 42.3% margin compared to 22.9% a year earlier.

6 Head office

This includes corporate items and business results not shown separately in one of the above segments.

Total income for the head office grew 21% to 5.76 billion (10% of total income) and generated margins of 67% compared to 79% a year earlier.

Sales and profits/performance metrics (three-year average; Morningstar)

Revenue growth: 14.2%

Profit growth: 14.2%

Profit margin: 33%

Return on assets: 1.64%

Return on equity: 20.5%

Cash flow

In the first half, Habib’s cash flow from operations declined by 90% year over year to 8.5 billion. The bank recorded much higher cash outflow in relation to its lending to financial institutions, net investments in held-for-trading securities, advances, and other assets among others.

Capital expenditures were 15.3 billion leaving Habib with -6.9 billion in free cash outflow compared to 80.8 billion a year earlier.

Nonetheless, dividend payouts were 7.07 billion and raised 52 million in financing activities.

The cash flow summary

In the past three years, Habib allocated 14 billion in capital expenditures (net), raised 7.16 billion in debt (net repayments), generated 565.8 billion in free cash flow, and provided 56 billion in dividend payouts at an average payout ratio of 11%.


Taking such reckless risk and getting entangled in possible wrongdoings in the United States resulting in marked penalties is just as plain as having a group of rotten apples in Habib’s US’ bank. In simple terms, the region (including the Middle East and Europe) has by far generated losses for the bank in recent years and there could be no other prudent reasons for the largest Pakistan bank to partake in such.

Meanwhile, the bank’s profitability has suffered in recent first-half operations brought by higher operating expenses despite overall growing revenue.

Habib’s branch banking business (52% of total income) has consistently grown and remained profitable in the recent period, while the bank’s international operations (13% of business) has delivered consistent losses.

Habib also has grown its book value and had even more leveraged balance sheet in the recent period, while having maintained good and for what it seemed conservative dividend payouts to its shareholders in recent years.

Applying five-year book value growth and a 20% margin indicated a per share figure of 196.36 PKR per Habib share vs. 185 at the time of writing.

In summary, Habib is a hold with 195 PKR target price.

Disclosure: I do not have shares in any of the companies mentioned.

Invesco: A Cautious Buy


Stock: Invesco (ticker IVZ) 

Increasing asset under management should help deliver growth

Invesco, the $13 billion Georgia-based asset management company, delivered 4.7% revenue increase to $2.45 billion in its recent six months of operations and a more impressive 16.8% profit increase to $451.6 million.

Operating expenses rose 6%, while the company recorded $28.6 million higher other income such as from its unconsolidated affiliated equity earnings and others, resulting in higher overall profitability.

So far this year, Invesco has underperformed the broader S&P 500 index has generated 10.9% total returns vs. the index’s 13.2% (Morningstar).

The asset manager also trades at discount compared to industry averages such as 14.6 in PE vs. industry’s 21.2.


Invesco was founded 82 years ago and according to filings, Invesco Ltd. is an independent investment management firm dedicated to delivering an investment experience that helps people get more out of life.

Invesco has specialized investment teams managing investments across a broad range of asset classes, investment styles, and geographies.

The company provides a comprehensive range of investment capabilities and outcomes, delivered through a diverse set of investment vehicles, to help clients achieve their investment objectives.

Invesco has a significant presence in the retail and institutional markets within the investment management industry in North America, EMEA (Europe, Middle East, and Africa) and Asia-Pacific, serving clients in more than 100 countries.

In 2016, Invesco generated 53% of its operating revenue in the United States, 22% in the United Kingdom, 13% in Continental Europe/Ireland, and the remaining in other countries.

Assets under management (AUM)

Invesco’s ending AUM as of June 2017 rose 10.1% year over year to $858.3 billion.

Sales and profits

In the past three years, Invesco logged 0.64% revenue growth average, (-)3.15% profit decline average, and 18.6% (Morningstar).

Cash, debt and book value (equity)

As of June, Invesco had $1.97 billion in cash and cash equivalents and $6 billion in long-term debt with debt-equity ratio 0.75 times compared to 0.73 a year earlier. Overall long-term debt rose $402 million while equity increased by $316 million to $7.97 billion.

Meanwhile, 27% of Invesco’s $28.2 billion assets were identified as goodwill and intangibles.

Cash flow

Invesco’s cash flow from operations rose 350% year over year in its six months of operations to $781.6 million brought mostly by higher cash flow from the company’s cash held by consolidated investment products, sale of trading investments (net), and payables.

Capital expenditures were $60 million leaving Invesco with $722 million in free cash flow compared to $109 million a year earlier.

The company allocated $297 million in debt reduction net issuance and other financing activities while having dividends and share repurchases represent 40% of the free cash flow in the period.

The cash flow summary

In the past three years, Invesco allocated $405 million in capital expenditures, raised $4.05 billion in debt (net repayments and other financing activities), generated $1.98 billion in free cash flow, and provided $2.7 billion in dividends and share repurchases.


Invesco’s recent half operations indicated steady growth in operations so far, and along with its other income generating assets, further improve the company’s level of profitability for the period.

Nonetheless, certain metrics indicated a slow decline in recent years. Invesco’s ROA and ROE dropped to 3.36% and 11.1% in 2016 compared to 4.97% and 11.82% in 2014.

Invesco also carried a leveraged balance sheet accompanied by more than a quarter of goodwill and intangibles. The company also has maintained significantly generous payouts to shareholders in recent years.

Analysts have an average buy recommendation with a target price of $38.12 a share vs. $32.78 at the time of writing. Average revenue estimates multiplied with past multiples with a 20% margin indicated a per share figure of $21.

In summary, Invesco is a cautious buy with $36.9 target price.


Martin L. Flanagan, president and CEO of Invesco (IIC)

“Our focus on delivering the outcomes clients seek by providing strong, long-term investment performance helped us achieve an adjusted operating margin of 39.3% during the second quarter.”

Disclosure: I do not have shares in any of the companies mentioned.