Switzerland’s Hidden Gems: The Sovereign Society Unveils a Treasure-Trove of Value-Play Shares

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Switzerland’s Hidden Gems: Value-Play Shares

by Sven Lorenz

The Sovereign Society has discovered one of the most undervalued markets in the world. If you want to invest in incredibly cheap shares, look no further than Switzerland. Their roving investment correspondent Sven Lorenz describes a hidden secondary market for shares traded off-exchange that give you the choice of 800 additional companies—some of them market leaders with a strong asset base. That means huge potential for value-play share spotters.)

Looking to purchase shares in companies for less—sometimes much less—than the value of their assets? Look no further than the world’s premier asset haven—Switzerland.

We’re not talking about well-known Swiss blue chips like Nestlé or Credit Suisse. For investors with access to the right information, the scope of Swiss stocks goes well beyond the 300 companies listed on the Zurich Stock Exchange.

Shares in the secondary Swiss market used to change hands through specialized banks and specialized securities dealers only. Until last year, closing a deal often involved mailing the actual share certificates to the buyer and paying the seller by bank transfer. The archaic system, has been replaced by an electronic communication network (ECN) similar to a stock exchange. Anyone with Internet access can tap into this hidden market.

So far, only the Swiss have shown interest in this sector, and most of the time they stick to local companies where they know the management. But with the introduction of fully electronic trading, the time is ripe for some of these outstanding value plays to come to the attention of the wider investment community. We’ve pinpointed three outstanding opportunities for you: shares that trade significantly below their net asset value, more so than shares that you would find in the United States or other Western European markets.

Buy a Deregulated State-Run Monopoly at a 93% Discount to NAV

If you want to invest into the Old Economy, Zuckerfabriken Aarberg Frauenfeld AG (ZAF) (ISIN CH000 6234014) is as low-tech as you can possibly get. ZAF processes sugar beets and is Switzerland’s largest producer of sugar.

The company came into being when the state-run sugar plants of Aarberg and Frauenfeld merged in 1997. Several cantons (Swiss states) still hold 54% of the shares, but the Swiss market for sugar has already been partially deregulated and ZAF’s management is free to run the company for greatest profits.

In the medium term, a listing on the Zurich stock exchange and a privatization of the states’ remaining stake is likely. However, a public placement of the cantons’ stake won’t occur at the current share price. At 14 Swiss Francs (SFr), ZAF—shares are trading at an enormous 93% discount to the estimated NAV of SFr200. It’s hard to value the company by looking at its past earnings, because of large investments into modernizing its plant, changes in the Swiss government’s sugar policy, and seasonal fluctuations.

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The company is currently a bit of a sleeper, and the shares won’t excite day-traders. But there is one thing that should make investors take notice: via the company’s official announcements, the major shareholders have made it known that they are keen on purchasing further shares—anyone wanting to sell is welcome to approach them. The rather overt insider buying is a sign that there is more to come, but only once those in the know have accumulated enough shares.

The company has just 1.704 million shares outstanding, giving it a market cap of SFr23.8 million. There are usually not more than a few thousand shares changing hands per day. If you want to stash away money in the safe Swiss franc without foregoing the chance of a large, long-term capital gain, this share is one you should take a closer look at. At least you know insiders aren’t dumping their shares onto you, but rather you will have to compete with them when trying to buy into the company.

Rock Solid Swiss Real Estate at a 50% Discount

Shareholders of Biella-Neher AG (ISIN CH000 1519484), the leading Swiss producer of office supplies, didn’t have much to celebrate last year. Turnover rose by 8.2% to SFr177.8 million (US$224 million), but operating profits slid 93% to SFr0.53 million. Thanks to its investment portfolio, Biella’s net profit still came out at SFr1.9 million. In conservative Switzerland, such a yearly result was called a “catastrophe” by local shareholders. In the last two years, the share price has roughly halved from SFr9,500 to its current SFr4,400.

The bombed-out price makes the share a tempting turnaround and value play. Biella’s poor operative performance has been caused by an ill-fated acquisition in Austria, where the company bought a former competitor. The company is likely to dispose of the Austrian subsidiary and focus its business on its domestic market. With the Swiss market always having earned Biella a profit, achieving a relatively quick turnaround should not be overly difficult.

What really attracts us to Biella is its rock-solid Swiss balance sheet and asset base. At SFr4,400 the share trades at half its book value of SFr8,649. In addition, for decades the company used profits to accumulate real estate. Biella’s real estate holdings have an estimated market value of almost SFr10,000 per share. In other words, with these shares, you can buy Swiss real estate for 50% of its value and get the entire operative business free. A Swiss shareholder activist holds 11% of the shares and I expect Biella shares to catch up with their book value in the next 12-24 months, once the problems in Austria have been solved.

A Local Railway Monopoly Unlikely to Ever Suffer from a Lack of Passengers

Local monopolies are one of my favorite investment themes, especially when you can combine high quality earnings with a huge base of undervalued assets. Such is the case with Pilatus Bahn AG (ISIN CH0009005973) of Kriens, near Lucerne (or “Luzern,” as the German-speaking Swiss call the town). The company operates the steepest cogwheel railway in the world, going to the top of Pilatus Mountain in the Swiss Alps. The peak is more than 2,000 meters above sea level and offers one of the most spectacular views of the Alps in Europe.

In a world where most CEOs hype their company’s prospects, it’s refreshing to see how the Swiss describe their companies in the most conservative terms possible. Pilatus Bahn’s CEO, André Zimmermann, described the 2003 tourism season as being “at a low.” Well, the number of passengers riding the railroad up to the peak of Pilatus peak rose 11.8% to 321,457, and revenue from the sale of tickets climbed 12.8% to SFr10.8 million. The hotels, restaurants, and shops on the mountaintop brought in another SFr5.0 million in revenues, up 12.9% from the previous year. Despite the increase in business, the company’s costs sank by 2%, leading to cash flow of SFr3.9 million, up a whopping 50%.

Is the tourism industry at a low point? Because of the CEO’s extreme caution, the company’s balance sheet is bursting at the seams. Taking into account the real estate the company has piled up over the years, the share’s net asset value comes out at an estimated SFr3,000. The share price is currently just SFr425, or 14% of NAV. The cash flow in 2003 amounted to SFr151 per share, leaving the company with a market cap equal to just 2.8 times cash flow. Shares don’t come much cheaper than that.

A local investor controls 17% of the shares, and it appears that Pilatus shares are carefully but constantly accumulated via the open market. Pilatus shares perfectly match our aim of zealously protecting your capital while helping you invest for superior gains. Here, too, the easier tradability and the improving transparency of the sector should make the share price gradually catch up with the much higher NAV. With just 26,400 shares outstanding, the company is valued at SFr11m.

Only the Early Bird Catches the Worm

Be warned: the potential of this sector won’t stay secret for much longer. Buy these shares now while it’s still only insiders paying attention. One of the leading banks specializing in trading these shares has already launched a new website, and a once unknown investors’ magazine for the sector has also revamped and expanded its operation. The leading Swiss financial newspaper, Finanz & Wirtschaft, has recently increased its coverage of these shares, too.

Wider coverage is likely to strengthen interest in undervalued titles like Pilatus Bahn, ZAF, and Biella Neher. You don’t need a crystal ball to see all the pieces falling into place to create a rush of buyers for these extraordinary stocks. One caveat: all of these shares are thinly traded and you should always place limit orders.

How to Trade

At the moment, banks outside Switzerland aren’t aware this market exists. Theoretically, trading these shares via Reuters should be possible via just about any broker. But judging from my experiences with U.S. and European brokers, most of them deem the extra hassle not worth the bother. The easiest and most efficient way for trading is likely to be an account at a Swiss bank.

You can find current quotes, volumes and bid/ask quotations on http://www.trade-net.ch, which has an English-language option. The Cantonal Bank of Berne, a major Swiss bank, operates the website. Through it, you can open an online brokerage account. But this is merely one option if you want to open an account in Switzerland—any Swiss bank can trade these shares.

Sven Lorenz is The Sovereign Society’s roving Profit Hunter, relentlessly scouting out unknown and undetected companies in overlooked markets. You can profit as he flushes out companies with hidden reserves or earnings potential not yet priced in by the market.