Europe Stock Writeups

A developer/investor in German commercial property, where the market has none of the signs of significant stretch or overheating so evident in much of the rest of Europe, particularly the UK and Iberia. Net margins appear stable, and with some scope to rise. However, the significant level of borrowing may prove difficult to refinance on the highly favourable terms of even six months ago, and the whole sector is likely to be dragged lower by considerable recent risk aversion to almost all forms of geared property investment, hence our sale. 

Dawnay Day Treveria IPO'd on AIM in December 2005 with the sole intention of acquiring a portfolio of German retail real estate assets. It is chaired by ex Land Securities boss, Ian Henderson. It is targeting EUR2.3bn of assets within 18 months, and by end September 2006 had EUR 1.9bn secured, so will likely exceed its target. The properties are a mixture of high street shops, in-town shopping centres and retail warehouses, primarily in western Germany. The company recently raised its dividend payout ratio from 85% to 90% of recurring net income, which means it is likely to deliver a 2007 dividend yield of 5.6%. Current net rental yields in German retail real estate are over 6.5% compared to a cost of debt of around 4.7% - a highly attractive proposition to any property investor! Together with anticipated rental growth of just 2% in a recovering German economy, the reduction in net rental yields should deliver 18% compound growth in the company's property portfolio net asset value. Assuming the stock trades at a 10% discount to forecast portfolio net asset value, this still means there is over 20% upside plus a substantial dividend yield. A cheap play on recovering German retail and real estate property.

Sedol	Type	Price	Date
B0RFL71	Sell	EUR 0.791	20/12/2007
B0RFL71	Buy	EUR 1.304	17/01/2007

Deutsche Beteiligungs was sold after it hit our target price. This target price involved valuing the its portfolio of German company stakes at or close to market value, and to warrant holding the stock for longer, we thus had to build in some optimistic assumptions either on stock market valuations or on the company's ability to find additional opportunities. Whilst we believe there are likely to be plenty of good opportunities remaining in the German mittelstand, the concern for us would be the ability for Deutsche Beteiligungs to ever realise this value if the re-sale market for these stakes (the stock market) was to contract. With the valuation full and the risk that the company may not be able to realise some of its investments going forward, we thus took the prudent approach and sold, banking substantial profits in the process.

Deutsche Beteiligungs AG is a leading German private equity firm, specialising in mid cap "old economy" companies in Germany's Mittelstand (transaction values are typically EUR50-250m in size). The company has been operating for 40 years and has a 15% share in the German MBO market, making it one of the market leaders despite its smaller size. The stock is trading at a 30% discount to the fair value of its portfolio.

Sedol	Type	Price	Date
5066331	Sell	EUR 24.78	23/03/2007
5066331	Sell	EUR 23.59	21/03/2007
5066331	Sell	EUR 23.147	16/03/2007
5066331	Sell	EUR 23.754	26/02/2007
5066331	Sell	EUR 23.70	23/02/2007
5066331	Buy	EUR 14.446	11/01/2006
5066331	Buy	EUR 12.748	27/06/2005
5066331	Buy	EUR 12.306	10/06/2005

Germany's incumbent operator: strong balance sheet and a good yield, plus having restructured, an improving free cash flow. Yet the company again appears determined to embark on world domination, such as the approach to take over Sprint in the US. Globally, telcos are embarking on another round of consolidation. Deutsche Tel appears to want to be a leader, raising fears of further equity issuance (dilution) and rising debt. Better to switch into those companies which are going to be 'consolidated'.

Deutsche Telekom is currently a much unloved company. However, it is starting to sort out its act in much the same way that other incumbents have done across Europe. The German Government has legislated that it can maintain exclusive use of its fibre optic cables until it has recovered the costs of its investment. It has strong cash flow and a high, well covered dividend, making it a buy.

Sedol	Type	Price	Date
5842359	Sell	EUR 11.674	13/05/2008
5842359	Buy	EUR 13.04	01/03/2007
5842359	Buy	EUR 13.59	16/02/2007