Today we want to take a look at 3U Holding (ISN: DE0005167902, Symbol: UUU). It’s a small cap enterprise that caught our attention. The book value at the end of Q3/13 was about three times the current shares price, i.e. 1.29 EUR (by our calculations) vs. 0.42 EUR on Jan 10, 2014! In the chart below you can see that the company is today 80% equity financed, up from 36% in the year 2006. So, let’s take a closer look to find out if this is an investing opportunity from a value investing point of view or a potential value trap… (This is the first part of the analysis, keep in mind that you should do your own research and that this is not a selling or buying advice)
3U Holding aka “3U Telecom” was founded in 1997 to take advantage of the upcoming liberalization of the German fix line telecommunications market in 1998. Because of high margins between monopolistic consumer prices and regulated purchase prices many successful resellers emerged at the time. However, with changes in regulation and competition getting fiercer margins became tight and only a few players survived. Hence, in 2008 3U Holding decided to build a new business line in the renewable energy sector and benefit again from regulation. Its principle is that energy prices are guaranteed for 20 years and the difference to the market price is basically paid by all consumers. In other words, consumers subsidize the profits of investors. In this light the company has grown its book value by 11,4% since 2008.
Structure and Approach
The holding has grouped its investments into three segments, i.e. telephony, so called „services“ and renewable energy, and holds (mostly majority) shares in around 30 firms (see chart below). Unfortunately, the company is reporting on holding level only, i.e. financial statements are consolidated. Hence, to estimate the fair value, we chose to start with the holding’s assets on the balance sheet book and adjust the valuation by strategic considerations, that is
- Rough valuation of assets from the holding’s balance sheet
- Adjustment based on strategy assessment and outlook
Part 1: Rough Valuation of Assets
We value each asset’s book figure at a certain percentage in order to get to our estimated value. These valuation factors are taken out of an example used by Warren Buffet at the time, apart for the solar park in Adelebsen, which is a very special type of asset. So, we have chosen to take a very conservative valuation approach.
It was built in 2012, cost roughly 17 million Euro and produces around 10.000kWh/a. The German government guarantees a price of around 17 Cent per kwh until 2032. Therefore, an annual revenue stream of roughly 1.7 million Euro can be expected. Comparable solar parks work with an OCF margin of roughly 80% resulting in annual cash flows of 1.4 million Euro. Discounted back with a cost of capital of 12% we would arrive at an NPV of 11.7 million Euro. However, as the current, subsidized price is around 3-4 times the market price and the annual subsidies are piling up to 21 billion per year, the political pressure is about to increase. Hence, there is a certain risk, that the government might reduce the guaranteed prices over the next years. We assume this risk with 20% and adjust the NPV accordingly.
Adding the solar park back to the balance sheet we would arrive at valuation of still 0.75 EUR per share, hence still 79% above the share price. Now, keep in mind that the share price has been on a low level for about two years already.
And now, a well-known quote regarding the situation:
If you buy a stock at a sufficiently low price, there will usually be some hiccup in the fortunes of the business that gives you a chance to unload at a decent profit, even though the long-term performance of the business may be terrible. I call this the “cigar butt“ approach to investing. A cigar butt found on the street that has only one puff left in it may not offer much of a smoke, but the “bargain purchase“ will make that puff all profit. (Warren Buffett)
Well, is there a puff left? And is the stock really as cheap as it looks at the first glance? Find out more about the company and the current condition as well as our conclusion in next week’s update!