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| Index
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| Switzerland’s
Hidden Gems: The Sovereign Society Unveils a Treasure-Trove of Value-Play
Shares |
| by Sven
Lorenz |
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| 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.) |
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| 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. |
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| 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. |
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| 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The archaic system, has been replaced by an electronic communication network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. |
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| 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. |
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| Buy a Deregulated State-Run Monopoly
at a 93% Discount to NAV |
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| 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. |
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| 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. |
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| 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. |
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| 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. |
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| Rock Solid Swiss Real
Estate at a 50% Discount |
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| 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. |
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| 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. |
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| 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. |
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| A Local Railway Monopoly
Unlikely to Ever Suffer from a Lack of Passengers |
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| 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.
(Note: The Sovereign Society’s
Offshore Convenient Account partner banks in Austria and Denmark cannot
purchase these shares, but our Liechtenstein partner bank can do so. For
information about the Liechtenstein Convenient Account, please contact
Julia Fernandez c/o Weber, Hartmann, Vrijhof & Partners, Ltd., Adliswil,
Switzerland. Tel.: +(41) 1-709-1115. Fax: +(41) 1-709-1113.
E-mail: whvp@active.ch
Link: http://www.swissbankaccount.com
-
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. |
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