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.

Investors Are Pissed: Dixons Carphone PLC


Dividend payouts have not compensated well enough for shareholders of the past year


Dixons Carphone PLC, a $2.9 billion multinational electrical and telecommunications retailer and services company headquartered in London, United Kingdom, recently traded at a good 30% discount to its book value while having had an attractive 6% dividend yield at a 39% payout ratio.

In its recent 12 months of operations that ended in April, the three-year-old company reported 8.7% revenue growth to £10.6 billion (vs. 3-year average 441%) and profit growth of 83.2% to £295 million (vs. 3-year average 183.2%).

All of Dixons’ segments demonstrated revenue in its recent year. Its UK & Ireland (62% of total unadjusted sales) delivered 2.6% revenue growth, while its business in the Nordics, Southern Europe, and Connected World Services experienced 20% to 40% year over year revenue growth.

Connected World Services, which is 2% of total unadjusted sales, registered an outstanding 40% revenue growth in the past 12 months and an EBIT margin of 9.9% (most profitable) compared to 7.2% a year earlier period.

As of April, Dixon had £147 million in cash and £480 million in debt with debt-equity ratio of 0.16 times (vs. 0.17 times a year earlier). Overall debt declined by £20 million while equity rose £195 million to £3.06 billion.

In the past couple of years, Dixon allocated £463 million in capital expenditures, generated £295 million in free cash flow, reduced its debt by £51 million, and provided £226 million in dividends and share repurchases at an average payout ratio of 79%.

Analysts have an overweight recommendation with a target price of £250.24 vs. £193.40 at the time of writing. Asking 25% margin from Dixon’s book value indicated a per share figure of £224.24 a share.

Meanwhile, Dixons’ shares that trade in the over-the-counter market, would indicate a per share figure of $3 vs. $2.48 at the time of writing.

For sure, this would indicate that Dixon is at good value right now, but sifting through recent events regarding the company. Several shareholders are already wary that the company had cut its profit outlook this fiscal year along with its share price decline in recent years.

In summary, Dixons is a hold at this time.

About Dixons Carphone PLC

According to filings, Dixons’ core retail focus is the sale of consumer electricals and mobile phone products and connectivity.

The company also has a significant services infrastructure focused on maintenance, support, repairs, delivery and installation of hardware and services. In addition, Dixons has developed a business-to-business operation via its Connected World Services division which leverages the specialist skills, operating processes and technology of the business to provide services to third parties.

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

Time to Take Some Profits off the Table: ABN AMRO Group NV


Dutch Bank has performed very well so far this year


ABN AMRO Group N.V. is a €10.4 billion Dutch bank group, consisting of ABN AMRO Netherlands, ABN AMRO Private Banking, the International Diamond and Jewelry Group, and Fortis Bank Netherlands (Wiki) .

AMRO has an attractive 4.3% dividend yield with 49.4% payout ratio along with 9.7x P/E ratio.

In its recent six months of operations, AMRO reported 24% operating income to €4.74 billion and an impressive 83% profit growth to €1.54 billion.

In review, AMRO’s main revenue generator—retail banking (43% of unadjusted operating income—actually experienced a 3.5% decline in operating income, but has remained profitable. Meanwhile, the bank’s corporate & institutional banking business rose 159% while having recorded profit margins of 17.5% compared to losses a year earlier brought by “a larger number of professional clients are being charged negative interest rates on deposits.”

As of June, the bank had €26.6 billion in cash and balances and €384 billion in total liabilities with liabilities-to-equity ratio of 19.4 times compared to 22.3 times a year earlier. Overall liabilities fell by €17 billion while equity increased €1.9 billion.

In the past three years (excluding the recent half), AMRO allocated €1.14 billion in capital expenditures, reduced its debt by €10 billion, raised €994 million in common stock issuance, generated €32.8 billion, and provided €1.74 billion in dividends.

Analysts have an overweight recommendation with target price of €26.89 a share vs. €25.34 at the time of writing.

Having returned 25.56% so far this year, AMRO shareholders should probably cash in some profits in the Dutch Bank and wait for a 20%-30% price drop before accumulating again.

In summary, AMRO is a pass.

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

An Attractive Dividend Provider: Costamare


Recent poor performance may deter conservative investors

Stock: Costamare Inc(NYSE:CMRE) 

Costamare, a $660.6 million Monaco-based owner and provider of containerships for charter, recently traded 40% discount its book value at $6.18 a share (book value of $12.80 as of June).

The company also had an attractive 6.5% dividend yield with an 111% payout ratio in the recent twelve months.

In its recent six months of operations that ended in June, Costamare reported 12% (vs. 3-year average 4.16%) revenue decline to $210.5 million and 42% drop (3-year average -7.5%) in profits to $35.6 million.

In addition to the lower revenue and expenses, Costamare reported $6.4 million in losses in relation to losses in sales of vessels resulting in lower profits.

Going back to Costamare’s balance sheet, the vessel lender had $164.9 million in cash and cash equivalents and $1.05 billion in debt ($119.2 million more than a year earlier) with debt-equity ratio 0.98 times (vs. 0.78 times a year earlier). Equity also declined by $127.2 million leading to book value of $1.07 billion.

Here is Costamare’s CFO on its second-quarter performance

Mr. Gregory Zikos, Chief Financial Officer of Costamare Inc.

“During the second quarter the Company delivered solid results. We recently accepted delivery of three second hand vessels, which have been chartered for periods ranging from 5 to 7 years. During the quarter we entered into debt financing agreements for two of them and we are into discussions regarding the debt finance of the third ship. As of today all of our new building program is fully funded with remaining equity commitments amounting to only US $ 2 million, due in 2018.

On the chartering side, we have no ships laid up. We continue to charter our vessels, having chartered in total 6 ships since the last quarter.

Finally, on the dividend and the Dividend Reinvestment Plan currently in place, members of the founding family, as has been the case since the inception of the plan, have decided to reinvest in full the second quarter cash dividends.

As mentioned in the past, our goal is to strengthen the Company and enhance long term shareholder value. In that respect, we are actively looking at new transactions selectively.”

Cash flow

In the past three years (excluding recent first half), Costamare allocated $94 million in capital expenditures, reduced its debt by $175 million, generated $621 million in free cash flow, and provided $270 million in dividends at an average free cash flow payout ratio of 45%.


With lower business performance in the recent half, Costamare also carried a little more leveraged balance sheet. Nonetheless, the company appeared to have well-covered dividend payouts in terms of its free cash flow generation.

Analysts have an average overweight recommendation with a target price of $8 vs. $6.18 at the time of writing. Applying 30% to its book value indicated a per share figure of $8.96.

In summary, Costamare is a potential buy with $8 per share target price.

About Costamare

(Recent quarter press release; Seeking Alpha) Costamare Inc. is one of the world’s leading owners and providers of containerships for charter. The Company has 43 years of history in the international shipping industry and a fleet of 72 containerships, with a total capacity of approximately 473,000 TEU, including two newbuild containerships to be delivered. Eighteen of our containerships, including two newbuilds on order, have been acquired pursuant to the Framework Deed with York Capital Management by vessel-owning joint venture entities in which we hold a minority equity interest.

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

Take Some Profits: Gazprom Neft


Oil and gas company in Russia has outperformed the broader market while positive free cash flow generation remains a challenge

Stock: Gazprom Neft’ PAO (ADR)(OTCMKTS:GZPFY) 

Gazprom Neft, an $18.6 billion Russian oil producer, currently trades 30% off its book value, 4.8 times P/E, and had an attractive 4.8% dividend yield with a healthy 1.2% payout ratio.

In the recent six months of operations that ended in June, Gazprom Neft, which is 95.68% owned by Gazprom PJSC, delivered a strong 24.3% revenue growth (vs. 6.8% at 3-year average) to ₽872.4 billion (Russian ruble) and 23.1% profit growth (4% at 3-year average) to ₽111.3 billion.

The Russian oil producer also had ₽69.8 billion in cash and cash equivalents and had ₽698.7 billion in debt (₽10.6 billion lower vs. its year-earlier period) resulting in debt-equity ratio 0.49 times (vs. 0.57 times a year earlier).

Also, shareholder equity rose by ₽187.3 billion year over year to ₽1.44 trillion.

Meanwhile, Gazprom Neft ADR shares have actually outperformed the broader S&P 500 index so far this year having generated 16.6% total returns vs. the index’s 14.24%.

In the past three years, the oil company allocated ₽1 trillion in capital expenditures, raised ₽110 billion in debt and other financing activities (net repayments), generated negative or free cash outflow of ₽114.7 billion, and provided ₽85.7 billion in dividends.

Analysts have an average overweight recommendation with a target price of $20.64 per ADR share vs. $19.50 at the time of writing.

In summary, Gazprom Neft is currently trading at its value and is a pass.

Disclosure: I do not have shares in Gazprom Neft, but have shares in Gazprom (ticker OGZPY).

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.

Cash Flow Steadies Danaos’ Vessels


Hard times by one of its customers almost brought down Danaos

Stock: Danaos Corporation(NYSE:DAC) 

The shares of Danaos Corporation, a $153.7 million Greece-based international owner of containerships and chartering vessels, have been hovering near its one-year low in recent memory at $1.40 at the time of writing. Danaos trades at a hefty 69% discount to its book value of $4.50 as of June.

In its recent six months of operations that ended in June, the 45-year old vessel operator reported an 18% revenue decline or $50.5 million lower revenue to $224 million (vs. 3-year average -5.4%), and a disappointing 56% drop in profits to $38.7 million.

Danaos explained that it recorded $41.3 million out of the $50.5 million revenue decline in relation to one of its customers’ (South Korea’s Hanjin) bankruptcy.

To be exact, Hanjin canceled its charter of eight of Danaos’ vessels resulting in marked reduction in the latter’s revenue resulting in $41.4 million reductions in profits, accordingly.

Meanwhile, Danaos stated that these supposedly leased vessels were rechartered at lower rates and in some cases experienced off-hire time in this fiscal year.

In addition, Danaos is in breach of certain financial covenants as a result of the Hanjin bankruptcy.

The company claimed that it is still currently engaged in discussions with its lenders regarding refinancing substantially all of its debt maturing in 2018.

“In the meantime, we continue to generate positive cash flows from our operations and currently are in a position to service all our operational obligations as well as all scheduled principal amortization and interest payments under the original terms of our debt agreements.”

Danaos’ CEO Dr. John Coustas

As of June, Danaos reported $63.8 million in cash and cash equivalents and $2.41 billion in debt ($239.7 million lower vs. a year earlier). The company also had $438.8 million lower in shareholder equity to $494.1 million.

Metrics (3)

1 Operating days

In the recent six months, Danaos reported 9,488 operating days as of June compared to 9,590 a year earlier.

2 Vessel Utilization

In the recent six months, vessel utilization was at 95.3% compared to 95.7% a year earlier.

3 Average Gross Daily Charter Rate

In the recent half, the rate was at $23,606 compared to $28,621 a year earlier.

Cash flow

Cash flow fell by 32% year over year to $90 million brought mostly by lower profits while capital expenditures were $3 million leading to a free cash flow of $88 million (vs. $132 million a year earlier). Danaos also allocated $104 million for debt reduction (net any issuances and other financing activities).


Hampered by one of its customer’s bankruptcy, Danaos appeared to have carried on. The company’s admission that it is still working on its covenants brought by the aforementioned unlucky event accompanied by a leveraged balance sheet makes Danaos a speculative buy.

As of June, Danaos recorded 17.5% lower rate year over year in its chartered vessels again may be attributable to the South Korean customer.

As claimed by Danaos, the company has maintained positive cash flow albeit lower in its recent months of operations making it capable of staying afloat amid turbulent times.

Asking about 65% discount (brought by high leverage and uncertainty) from Danaos’ book value indicated a per share figure of $1.58 a share.

In summary, Danaos is a speculative buy with target price of $1.58 a share—13% higher than its recent price of $1.40.

About Danaos

Danaos Corporation is one of the largest independent owners of modern, large-size containerships. Our current fleet of 59 containerships aggregating 352,600 TEUs, including four vessels owned by Gemini Shipholdings Corporation, a joint venture, ranks Danaos among the largest containership charter owners in the world based on total TEU capacity. Our fleet is chartered to many of the world’s largest liner companies on fixed-rate charters. Our long track record of success is predicated on our efficient and rigorous operational standards and environmental controls.

Danaos’ CEO Dr. John Coustas (second quarter comment)

“continuation…The charter market is moving sideways at levels slightly above the lows of 2016 but we have not yet seen a meaningful improvement to signal a market recovery. Box rates have improved as a result of improved capacity deployment through the alliances and the recent industry consolidation activity has reduced our counterparty risks. On the other hand, consolidation in the liner industry combined with legacy newbuilding orders for large vessels still to be delivered is anticipated to maintain pressure on charter rates for a considerable amount of time. Danaos continues to have low near term exposure to the weak spot market with charter coverage of 87% for the next 12 months based on current operating revenues and 66% in terms of contracted operating days.

Our commitment to provide best in class service to our customers is now being reinforced by the utilization of our in-house developed IT tool for online acquisition and analysis of big data for online performance monitoring of our vessels, a unique feature for efficient ship management in the industry.

During this extended period of market weakness which has presented many challenges, we remain focused on taking necessary actions to preserve the value of our company by managing our fleet efficiently and taking prudent measures to manage and ultimately deleverage our balance sheet.”

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

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.

Strong Investment Performance Guarantees AGNC’s Dividends


Conservative investors may take a pass

Stock: AGNC Investment Corp (NASDAQ:AGNC) 

AGNC Investment Corporation, a $7.8 billion Maryland-based REIT, demonstrates an attractive 10% dividend yield and a 47% payout ratio in the past four quarters.

Other than this attractive payout, the nine-year-old REIT also had $1.12 billion in cash and cash equivalents as of June, and has a book value of $7.75 billion (0.6% higher vs. last year), and has reduced its debt by $3.16 billion compared to its year-ago period.

In review, AGNC responsible reduced its debt remarkably brought by its $3 billion payment to its Federal Home Loan Bank Advances that matured on February leaving the company in much better balance sheet situation at a debt-equity ratio of 0.05 times vs. 0.46 a year earlier.

Meanwhile, AGNC recorded 8.2% net interest income year over year as its recent six months period ended in June, while profits rose to $86 million compared to $921 million in losses a year earlier.

In review, AGNC experienced a remarkable $1.36 billion losses a year earlier brought by its derivative and hedging investments concerning interest rate swaps.

Here is why AGNC use such derivatives (page 30; Q2 2016 filing):

“We use interest rate swaps and other hedges to attempt to protect our net book value against moves in interest rates, we may not hedge certain interest rate, prepayment or extension risks if we believe that bearing such risks enhances our return relative to our risk/return profile, or the hedging transaction would negatively impact our REIT status.

The risk management actions we take may lower our earnings and dividends in the short term to further our objective of maintaining attractive levels of earnings and dividends over the long term. In addition, some of our hedges are intended to provide protection against larger rate moves and as a result may be relatively ineffective for smaller changes in interest rates. There can also be no certainty that our projections of our exposures to interest rates, prepayments, extension or other risks will be accurate or that our hedging activities will be effective and, therefore, actual results could differ materially.”

Company metrics (2)

1 Tangible net book value

As of June, AGNC had a tangible net book value of $19.25 per common shares—$0.06 lower than in March.

2 Economic return on tangible common equity

Economic return (loss) on common equity represents the change in tangible net book value per common share and dividends declared on common stock during the period over the beginning tangible net book value per common share.

The return as of June was 2.5% compared to 3.3% a year earlier.

AGNC Investment Corporation 

According to filings, AGNC earns income primarily from investing in Agency residential mortgage-backed securities on a leveraged basis.

These investments consists of residential mortgage pass-through securities and collateralized mortgage obligations for which the principal and interest payments are guaranteed by a U.S. Government-sponsored enterprise, such as the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”), or by a U.S. Government agency, such as the Government National Mortgage Association (“Ginnie Mae”) (collectively referred to as “GSEs”).

Further, AGNC may also invest in other types of mortgage and mortgage-related residential and commercial mortgage-backed securities where repayment of principal and interest is not guaranteed by a GSE or U.S. Government agency.

Cash flow

In the first half, AGNC’s cash flow from operations declined by 1.3% year over year to $679 million. The company also generated $958 million in Agency mortgage-backed securities (net investment purchases).

The company also allocated $1.35 billion in debt repayments (net issuances and other financing activities), and $679 million representing 55.5% of its cash flow in dividends.

The cash flow summary

In the past three years, the company generated proceeds of $21.4 billion in investment activities (net purchases), reduced debt by $23.1 billion, generated $4.4 billion in free cash flow, and provided $3.27 billion in dividends.


AGNC’s dividend payouts have not been strongly supported by its net income alone in recent years, but REIT’s ability to generate billions of cash flow from its investments have amply did so.

Meanwhile, the REIT’s more than a billion dollar losses in its derivatives a year ago is not the first time it recorded such losses. Back in fiscal year 2012 and 2014, AGNC recorded $1.35 billion and $1.24 billion losses related to derivative instruments.

The company admits that it cannot foresee these hedges to do well in certainty as completely described earlier, but this should be kept in mind by those attracted to the company’s amazingly bountiful dividends.

Analysts have a hold recommendation and a target price of $20.09 a share vs. $21.59 at the time of writing. Applying three-year price-book average and a 15% margin to AGNC’s current book value indicated a per share figure of $14.51.

In summary, AGNC is a pass.


Gary Kain, the Company’s Chief Executive Officer, President and Chief Investment Officer

“We are pleased to report another quarter of solid financial performance for AGNC.”

“Our earnings profile continues to be supportive of our dividend despite an elevated hedge ratio and a reduction in our aggregate interest rate risk position. As we enter the third quarter, returns on levered Agency MBS remain attractive as current valuations reflect the anticipated near-term reduction in MBS purchases by the Federal Reserve. The overhang of possible Federal Reserve tapering has driven wider spreads on Agency MBS over the last year. In stark contrast, the spreads on most credit-centric fixed income investments have tightened to multiyear lows. At the same time, the funding picture for Agency MBS, including rate level and capacity, continues to be very attractive. As such, Agency MBS provide levered investors like AGNC with favorable return potential on an absolute basis and relative to alternatives in the fixed-income and equity markets.”

Peter Federico, the Company’s Executive Vice President and Chief Financial Officer

“For the quarter, AGNC generated an economic return of 2.5% on tangible common equity.”

“In addition to our strong financial results, we continued to expand our use of our captive broker-dealer, Bethesda Securities (‘BES’), as the size of our repo position funded through BES grew to almost $10 billion and we began clearing trades for our TBA securities position. Finally, we increased our hedge portfolio during the second quarter, thus providing us with greater protection against net asset value fluctuations due to interest rate changes. All in all, we believe these actions position AGNC for success across a broad spectrum of market conditions.”

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