Unrecognized heroes: Spin-offs: Which companies open up high-yield opportunities for investors | message
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by Sven Parplies, Euro on Sunday
D.he start was disappointing: On the first day of trading, the share price of Siemens Energy slipped below 20 euros and also below book value. The parent company Siemens distributed the shares to its shareholders for free at the end of September. Many investors cashed in immediately – and thus possibly a mistake!
Shares in so-called spin-offs often perform better than average in the long term. The index of American spin-offs calculated by Standard & Poor’s has outperformed the broad US stock market by one percentage point on average since it started in January 2003.
Siemens Energy is the fourth spin-off in the history of the DAX: Bayer spun off its specialty chemicals under the name Lanxess in January 2005, Siemens spun off lighting technology with Osram in July 2013, and Eon spun off conventional power generation as Uniper in September 2016.
From the stock exchange’s point of view, all three creations were very successful: In the first twelve months of self-employment, the shares of the DAX spin-offs rose by an average of 81 percent based on the calculation of € uro on Sunday. The parent companies achieved only 36 percent in the same period, the DAX 25 percent. In the longer term, the spin-offs have been able to further increase their lead.
At the European level, the spin-off of the Ferrari luxury division from the Fiat group is a great success. The Ferrari share has turned up around 270 percent since it started in January 2016. However, there are also negative cases. Like the retail group Metro, which split into Metro and Ceconomy in 2017. Since then, both stocks have depreciated significantly.
Shares given away
It is not unusual for corporations to separate from individual divisions. In the best case scenario, the business unit is sold directly to a competitor. This usually brings the highest revenues because the buyer has a strategic interest and can reduce costs by integrating the takeover.
The alternative is an IPO. The parent company sells the shares in the division to many small investors. In a weak stock market environment, however, it is difficult to achieve an optimal price this way.
The last resort is a spin-off. From the point of view of the parent company, this is the most unattractive solution, because the papers of the new company are distributed free of charge and therefore do not bring any money into the till. The spin-off, on the other hand, offers investors the opportunity to invest in an unpopular and therefore low-rated turnaround candidate. The first few days on the stock exchange are turbulent for spin-offs. Many investors are only interested in the parent company. Index funds are even obliged to part with the spin-offs. Investors therefore initially had to be prepared for unusually high price fluctuations. At Siemens Energy, it is calculated that around a third of the papers could change hands in the first few weeks.
In order for the new share to go up in the long term, the operational business must improve. This can be done more easily on one’s own two feet than in a complicated conglomerate in which investments are often directed into the large and therefore internally powerful sectors. “As an independent group, we now have the necessary entrepreneurial flexibility to help shape the global transformation of the energy markets sustainably and economically,” emphasizes Siemens Energy CEO Christian Bruch. The energy division was a problem case within the Siemens conglomerate. The low oil price is putting a strain on business, and demand for large gas turbines, which have long been an important driver of sales, fell to a 20-year low in 2018. The performance in the operational business had been disappointing over the past few years, stated the Deutsche Bank at the stock exchange of Siemens Energy.
However, the basis for a turnaround in the operational business has been laid: Renewable energies should play a growing role, for example through the majority stake in the wind turbine manufacturer Gamesa. Incidentally, the parent company would also benefit from price increases at Siemens Energy. He still holds 35 percent of the shares and should throw the papers on the market at a later date. But then against payment.
Siemens Energy is a typical spin-off: a company with a number of problems, but also the prospect of a trend reversal. For the financial year that ended at the end of September, analysts calculate a net loss of just under one billion euros for Berlin. After that, black numbers are expected. At the spin-off, the share remained below the level expected by analysts. The average target price of the stock market professionals is currently 27 euros.
Some spin-offs become takeover candidates soon after their independence. At Uniper, the energy group Eon outsourced its power plant and trading business in 2016. In the meantime, the Finnish utility Fortum has taken control of 75 percent of the shares. A realistic scenario is a complete takeover. Then prices over 30 euros for the Uniper share should be in there. There is currently a dividend yield that is well above the DAX level.
The Cologne fund managers are looking for stocks, but also bonds and derivatives that offer above-average potential due to special situations. The Squad Aguja Opportunities sees opportunities in acquisitions, changes in management of a company or spin-offs. Around a third of the fund was recently invested in securities from Germany. The social media platforms Pinterest and Xetra-Gold were among the largest positions.
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