LS Invest: Heads I win big, tail I win a little
Special Situation: German Small-Cap offers at least 50-100% upside, with little downside
This is not investment advise and meant for entertainment purposes only, I hold a position in the discussed company and therefore may be biased in my opinion.
My last write up (and investment) was about Centrotec, you can read it here).
While the outcome included some luck (Centrotec sold its main division for €700m euro + €300m in stock options) I believe the odds has been stacked heavily in my favor in this situation.
So while I was looking for a new investment, I finally came to conclusion to search in the same pond, i have found Centrotec in. Delisted German small caps.
First, thank you to Matthias Schmitt, from you I’ve got both ideas, if you speak German or are willing to use a translator, make sure to follow him on Twitter and Youtube.
I honestly believe German delisting stocks represent one of the best risk-reward profile on the stock market right now.
Here is why:
A major stockholder decides to delist the stock from the major exchange to (usually) over the counter exchange in Hamburg. While this delisting is announced, the shareholder makes a voluntary offer to buy shares at the average stock price from the last 3 months. While the acceptance of this offer is voluntary a lot of funds are not allowed to be invested in delisted stocks, therefore the liquidity after the delisting is dramatically decreased.
In addition, being listed in Hamburg, eliminates the need to post quarterly results, decreasing the information a shareholder has, further, and therefore representing another potential edge (illiquid & informational).
Mostly the reason to delist is that the major shareholder wants to further increase his stake in the business at a very cheap valuation. Since the price of the offer is linked to the share price, delisting was something that became more and more used right after the Covid crash - and may continue in this weak stock market environment.
After the major shareholder owns more than 90% a squeeze out is possible.
In comparison to the voluntary offer after the delisting, the squeeze out is a necessary offer the remaining shareholders have to take because it takes the company private.
The company gets valued by a third party auditor by usual valuation methods, such as Book value, Sum of the parts or a discounted cashflow analysis.
So a squeeze out more or less guarantees that you will get the fair value of the business, however we are not done here.
If even only one shareholder disagrees with the price of the squeeze out, using the “Spruchwertverfahren”, the company gets valued again, resulting often in an increase compared to the initial price after the squeeze out. But the “Spruchwertverfahren” often takes 5-10 years.
Now enough about the general delisting situation, let’s dive into LS Invest:
LS Invest owns 9 hotels in Germany, Spain, Austria and the Dominican Republic and 2 Rehabilitation clinics in Germany.
The company has a book value of €417m (8,42€ a share) and trades at €287m (5,6€ a share). Lopesan Touristik, S.A. owns 89,6% of outstanding shares. When he owns 90%+ a squeeze out is possible. In case of a squeeze out the minimum valuation would be book value of 8,4€ a share, representing a 50% upside from the current share-price.
Why does this opportunity exist:
As described above, the delisting of the company in 2021 decreased the accessibility and liquidity of the stock.
Furthermore, this year they stopped reporting quarterly results, so the information is limited. This is especially important because Covid was a difficult time for them, resulting in negative adj. EBITDA in 2020 and 2021.
Even in 2019 they generated negative EBITDA, however this was mainly due to investment in a new hotel in the D.R. and a renovation in a hotel in Spain.
So not only is this company illiquid, more difficult to acquire shares in, the last three years look pretty ugly, too.
After a closer look, it becomes apparent that the numbers don’t look that bad. Profitability in 2019 was decreased by the acquisition of the new Hotel in the D.R. and renovation of the hotel in Spain.
The EBITDA numbers in 2020 are highly inflated due to Insurance money and government funding they received because of covid.
But we can take the 2019 numbers to estimate the 2022 numbers and therefore the normalized earning power of this business.
Basically, I imagine the hotels and Germany and Austria and the Reha centers to be on an equal level of 2019, but the hotel in Spain and the D.R. should give the company a reasonable earnings boost. The Q1 numbers confirm this estimation.
Hotel in Spain did €2,5m in rev and €0,6m in EBITDA, while the hotel in the Dominican Republic did €14m and €3,4m in EBITDA.
Overall the company reported rev. of €25,1m with an EBITDA of €4.9m.
Why the company is worth more than the current Market Cap;
2 Potential Scenarios:
1. Scenario: Squeeze-Out in the next 12 months
The first, most likely and best scenario would be a squeeze-out. Everything looks like this will happen soon, but this has been said now since more than one year. The truth is, nobody knows when and if it will happen. The actions of the major shareholder point toward a Squeeze-Out. His ownership increased from 51% at the end of 2018 to now 89,6%. He delisted the stock in 2021 and now stopped reporting quarterly results, decreasing the communication with shareholder to a bare minimum.
So, I would say 80% chance of a squeeze out in the next 12-16 months.
If a Squeeze out happens, the absolute minimum valuation of this company would be book value. As of the end of Q1 2022, book value is at €417 million, divided by 49,5 shares outstanding = 8,42€ per share.
Current share price (15. November 2022) = 5,6€
Minimum upside in a Squeeze-Out = 50%.
But I believe the company is worth more than book value because their hotels are worth way more than their value in the balance sheet represents.
In 2019 LS Invest wanted to sell their hotel in Spain for €68million, they even signed the contract, agreed to keep operating the hotel until 2021, but eventually the contract was rescinded. This exact hotel is carried at €29,4 million on the balance sheet.
So It is very reasonable to assume that most of the hotels are worth more. The hotels in Germany, for example, are pretty old and therefore already have depreciated very much.
It is certainly impossible to calculate the exact value of every hotel, but given the fact that the hotel in Spain is 2,3x times worth the value on the books, it seems reasonable to assume 1,2 - 1,5x book value is probably in a conservative range of valuation.
This would lead us to: 10-12€ / share. I have no idea of the exact value, but I am sure that I am directionally right.
Probable upside in a squeeze out: around 100%.
2. Scenario: No Squeeze out in the next 16 months
As I already wrote, even though, the actions of the major shareholder, seem to point to a squeeze out, there has been rumors that it will happen soon since more than 1 year. So it might take another 2 years as well.
In this case, we could still value the company on its book value, but probably the market will value it on its earnings, also.
Management said they expect €16-20m in EBITDA for 2022.
Annualizing the Q1 numbers would lead to €20m EBITDA and adjusting the 2019 numbers for the D.R. (around 10 m in EBITDA) and Spain (at least 3m in EBITDA), would lead to 25m in EBITDA.
So If we take the multiple of the hotel in which did 4,6 in EBITDA in 2018 and would have been sold for 15x EBITDA, we come to a value of €300-375m (6-7.5€ per share).
This is obviously not as attractive as the Squeeze-Out, but it should show that even if the Squeeze-Out won’t happen in the near future, the stock is still undervalued and higher demand in the tourism industry in 2022 should lead to solid numbers.
One more free call option:
In 2022 LS invest acquired the remaining 50% stake in ANFI, they acquired this company out of bankruptcy and the press release stated: “For a price of 20 million (…), the Santana Cazorla Group’s ownership of a number of properties and similar tangible assets in dispute was confirmed.”
I don’t know how much those properties are worth, I have read they these properties alone could be worth 300m. I don’t know if that’s the case, but they are certainly worth something, so we might add that to the valuation of the Squeeze-Out.
All in All, I believe this to be a very interesting situation with a very, very favorable risk-reward. Although I don’t know when the Squeeze-Out will happen and I also don’t know whether the company is worth 9€, 12€ or 14€ per share.
The odds are heavily stacked in my favor.
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