Monday, February 12, 2024
HomeValue InvestingEurokai KGaA (ISIN DE0005706535) – Playing the “Time arbitrage game” with the...

Eurokai KGaA (ISIN DE0005706535) – Playing the “Time arbitrage game” with the possibly cheapest Port Stock in the World 

Disclaimer: This is not investment advice. PLEASE DO YOUR OWN RESEARCH !!!!

Some reason for not reading this post:

  • You have already posted YTD Performance numbers on FinTwit
  • You don’t like capital intensive stocks
  • You don’t like cyclical stocks
  • You prefer stocks that have positive share price and/or fundamental momentum
  • You require short term catalysts/Share buy backs/activists etc.
  • You like simple businesses with simple structures
  • You think Germany/Italy/Europe is going down the drain anyway

In such a case, do yourself and myself a favor and move on.

For anyone still reading, please find here the “Elevator Pitch”, the “Pros & Cons” section as well as the summary. All the gory details are available in this 21 page PDF file:

  1. Elevator Pitch:

Hamburg based Eurokai is a 6th generation family owned & managed Container Port owner and operator. The company is ultra conservatively financed (significant net cash and “extra assets”) and ridiculously cheap compared to peers and recent M&A  transactions, although TIKR and Bloomberg incorrectly show much more expensive multiples. 

Based on my calculation. Eurokai trades at ¼ or ⅓ of the valuation compared even to the cheapest Peer group stock and M&A multiples. 

Although there is no explicit catalyst and 2023 was a difficult year, both for container trade and also for infrastructure in general, Eurokai represents a very attractive, contrarian opportunity to partner with a family on great assets at a really low price.

In the mid-term there are some developments (Generational change, new port projects) that could help to get the valuation of Eurokai closer to its peers which in my opinion outweigh the general risks and a few more specific ones. Therefore I think Eurokai is an interesting deep value play for the patient investor who does not need to beat any short term market benchmarks but who has the luxury of engaging in “time arbitrage”.

L) Pro’s & Con’s

As always, before coming to a conclusion, here is a collection of Pro’s and Con’s 

  • Extremely cheap but well run infrastructure asset
  • 6th generation family owned/managed, long term orientation
  • financially extremely conservative
  • Decentralized organization 
  • 5% dividend yield for waiting
  • several potential “soft catalysts” in the next few years
  • only covered by 1 analyst, TIKR/Bloomberg numbers misleading, very hard to understand

+/- Change to 6th generation happened in 2023

+/. Larger Capex projects planned

  • No hard catalysts, potential for a “value trap” kind of situation
  • high complexity for a small cap
  • some fundamental risks (China/Taiwan, Hamburg vs Rotterdam)

M) Summary, Return expectation & “time arbitrage”

I have to admit that my decision process for Eurokai took a lot longer than usual. I have been looking at Eurokai many times in the past 15-20 years and never got comfortable until yet.

Part of my motivation might not be 100% rational, for instance I just like ports which was the initial motivation to go really deep. There is clearly a non-zero probability that the stock will not be “discovered” over the next 3-5 years and I will “only” be able to collect dividends. Investor consent at the moment seems to be that a cheap stock without a catalyst is like dead wood and will always stay cheap. David Einhorn for instance has mentioned often that the capital market is broken for value investors and that the only alternative is to look at catalysts like share buy backs or take overs..

On the other hand, I do think that the valuation is so absurdly low, that even if we assume a significant discount to the cheapest competitors, the stock could easily double or triple and it would still be modestly valued.

In my opinion, maybe also driven by the incorrect data in tools like TIKR or Bloomberg, few people understand the undervaluation and even fewer think that it is a suitable investment. Eurokai is illiquid, has a low Beta (0,6) and for anyone managing against a benchmark is almost guaranteed to underperform for some extended time.

However, as my only real “edge” is a longer time horizon as the typical market participant and an above average capacity to suffer underperformance, I find the stock very interesting. I think this is something that I would call “time arbitrage”: As a private investor who is not in a hurry, I do have to luxury to invest in something  where there is no clear exit or catalyst. The arbitrage here is that I think over time there is an increasing possibility that something happens that might lead to a re-valuation.

My worst case scenario over 4-5 years in this case is the current dividend yield of 5%. I think over 3-5 years there is a good chance that at some point the market discovers (again) this gem and then the share price could easily go up by +100% or +200% and the stock would be undervalued.

If I assume a 50/50 chance of this event happening, my expected return would be north of 10% p.a. over 5 years with in my opinion very little real downside. Often, stocks that are as cheap as Eurokai are often in some kind of existential trouble, which in my opinion is not the case here. That’s good enough for me.

As I want to retain some flexibility, I allocated 3% of the portfolio into Eurokai pref shares at around 26 € per share and will monitor closely how the market will take up 2023 numbers going forward. I also plan to attend the AGM in Hamburg this year to get a better feeling for the company. 

Bonus track (for all Time Arbitrageurs):



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