Europe Stock Writeups

Kalina is a relatively small, local cosmetics manufacturer but with a significant market share across Russia. The company has a strong local distribution base and sales force, which is expensive and difficult for foreign competitors to emulate. Rapidly rising local consumer expenditure is fast spilling over into 'fripperies' and Kalina, with its mid-to-low market brands, is in a very strong position to benefit. The company has little debt, is lowly rated, yet producing high teens growth at the EPS level. To any foreign competitor keen to expand, it is an obvious take-out (similar to the recent acquisition of Lebedyansky (juices) by PepsiCo).

Sedol	Type	Price	Date
7130922	Buy	USD 33.40	31/03/2008

Karstadt Quelle (Arcandor), one of Germany's leading retailers, is cash starved but asset rich. Debt fuelled expansion resulted in the company hitting the wall, pushing management to refinance its debt schedule in 4Q04. In contrast to previous restructuring plans by the company we think assets will be sold, reducing debt, pushing operating margins back up to 3.8% in FY06 (-9.4% in FY04) and free cash flow positive (targeting FCF yield of 3.5% in FY06 versus -27% in FY04). In January the company sold its logistics business while selling its sports-TV channel DSF in February. We expect them to sell their speciality stores which number 75 over the next 18 months. Karstadt also owns 50% of Thomas Cook. 

Sedol	Type	Price	Date
5786565	Buy	EUR 11.917	13/12/2005
5786565	Buy	EUR 11.00	04/11/2005
5786565	Buy	EUR 9.04	06/06/2005

KPN is the Dutch incumbent telecoms operator, which also benefits from a leading share in Belgium and a decent, number-three position in Germany, where it has  been gaining market share. As elsewhere in Europe, earnings are recovering due to the elimination of weak competition and cost-cutting. KPN is further along this road than others and is able to return large amounts of cash via buy-backs to shareholders. It is also the only fully privatised telecommunications stock in Continental Europe and therefore would be available to any player seeking to consolidate the sector further.

Sedol	Type	Price	Date
5956078	Buy	EUR 12.86	17/10/2007

Despite strong demand for agricultural machinery, Kverneland's management have failed to turn strong top-line growth into rising margins. This appears to be due to capacity constraints and labour shortages - partly caused by a failure to take account of rising demand during recent restructuring programmes. Without margin expansion, the valuation case no longer stacked up and we sold the shares.

Norwegian listed Kverneland is a leading manufacturer of agricultural equipment. It has the number one position in ploughs and a strong brand in seeders, bailing machines and grape harvesters. It has had an awful few years, with high energy and steel costs coupled with inefficient production. A two year restructuring process, which has reduced costs and head count is now coming to an end, which will drive up margins. In addition the company is an obvious beneficiary of higher agricultural commodity prices, as cash-rich farmers replace old kit. Its strong position in Eastern Europe, where a great deal of machinery needs replacing, is another boon.

Sedol	Type	Price	Date
4498786	Sell	NOK 10.00	06/11/2007
4498786	Buy	NOK 10.3135	28/02/2007