Europe Stock Writeups

Although recent results suggested that Praktiker is the best placed of the German DIY retailers, the sector continues to have problems.  Since the vast majority of the population rent, rather than own their own homes, they have less incentive than the UK consumer to invest in modernisation and refurbishment. Competition remains severe and while consolidation has started, it will be some years before it fully bears fruit. We came to the conclusion that in a weak market our near-term expectations for the group were too optimistic; this naturally reduced our estimated fair value and hence we sold the stock.

Praktiker is a chain of DIY stores, spun off from German supermarket giant Metro. The pick-up in German consumption will likely help growth, but there are other catalysts too. First, the industry is consolidating and eliminating surplus capacity as long-term property leases (that were too expensive to break early) come up for renewal. Secondly, Praktiker has plugged a geographic hole by buying a rival, and thirdly, the company is rationalising its product range and revamping its outlets, moves that have been well-received by customers.

Sedol	Type	Price	Date
B0P7049	Sell	EUR 24.911	01/11/2007
B0P7049	Buy	EUR 26.207	28/03/2007

The dominant shareholder is the private equity group, KKR. Poor programming and excess debt, coupled with weaker advertising revenues than management itself forecast have resulted in falling market share and profitability. The company is highly geared as, of course, is the de facto parent, KKR. Refinancing for either is now a big potential problem. The dividend pay-out ratio is simply too high (maybe to help KKR), so is starving the company of capital to invest in new programmes. Much growth depends on the Eastern European operations, countries where a sharp downturn in domestic consumption is likely, thus weaker advertising into 2009. 

ProSieben is Germany's largest free-to-air broadcaster and, following the acquisition of SBS last summer, is now a leading player in much of Northern and Central Europe. That acquisition was largely debt-financed and the stock has been heavily sold down as the credit crunch has worsened. There are also fears that advertising spend will slow in the event of a global economic slowdown. However, German advertising spend has been at very low levels for some ten years and is unlikely to fall much further. The group generates good levels of free cash flow, interest payments are well covered and the dividend is safe. In addition there are significant synergies to be exploited from SBS, which the market is currently ignoring. Even with a flat advertising market, cost savings should cause earnings to treble between 2007 and 2009; this should lead to a significant re-rating of the shares.

Sedol	Type	Price	Date
4579131	Sell	EUR 9.936	28/05/2008
4579131	Buy	EUR 12.789	12/02/2008