MLP - Neue Studie - strong sell - - 500 Beiträge pro Seite

[muffins]

May 21, 2002


MLP AG (Germany DAX 30)

Current share price: €49.50

Recommendation: Strong Sell - High Risk


Summary:

We believe MLP’s great growth story is unraveling. The highly topical discussion about managed earnings via liberal accounting practices will soon focus investor attention on other problem areas:

• Undisclosed off – balance sheet risks
• Eyebrow-raising transactions with company executives and employees
• Massive earnings dilution through conflicted acquisitions
• Controversial auditors and stressed insurance partners
• Potentially harmful credit risks

In the face of an absurdly high valuation, we believe MLP will decline substantially from current levels and exit the DAX 30 Index of Germany’s largest listed companies.
Company Activities:

MLP AG offers securities brokerage, life and non-life insurance, asset management, banking services and mortgage loans. MLP operates principally in Germany targeting its products to young university graduates, but is also active in Austria, Switzerland, Spain, the Netherlands and the United Kingdom.


Positives:

The shares are highly liquid with an average daily volume of 439,000 shares on the Frankfurt Stock Exchange. During the last four trading days the share volume has increased tenfold as an article by a prominent German financial magazine (Boerse Online), claiming MLP’s accounting practices have boosted earnings artificially, has attracted tremendous attention.

The company has a record of 30% plus annual earnings growth dating back more than a decade.

The company has thus far enjoyed an excellent standing amongst among the financial community as one of Germany’s purest growth companies.

The shares have an outstanding long-term track record. This out performance however peaked in the fall of the year 2000. Since then the shares have declined by more than 75%.


Negatives:

Before we present the bear case on MLP AG, we fully acknowledge that MLP has to our knowledge not violated any accounting standards or “cooked” the books. However, we believe that analysts are slowly gaining a better understanding of how MLP has managed its stellar earnings performance for a long time.

Below we have outlined some of the major negatives according to our research:

Auditors:

Maybe we should start with the company’s auditors, in our view a mild negative. According to our sources MLP is the largest single audit client of Rölfs WP Partner AG, a national accounting firm also specializing in corporate finance and consulting. Rölfs WP Partner AG came to our attention originally as the auditors of one of Germany’s most controversial financial services groups, the Securenta AG (Goettinger Gruppe). Both MLP and Securenta AG feature similar corporate structures ranging from asset management, banking/financial products distribution, insurance and so forth. For a closer view, please use the search engine “google.de” and look up Securenta AG.


Accounting Review by Deloitte/Touche and KPMG:

The company has asked Deloitte & Touche and KPMG to check its accounting procedures regarding re-insurance claims. This verification assignment, however, obfuscates the business risk and valuation issues.

Let us repeat, there is no double booking, the accounts do not appear cooked. Nor does the German financial magazine claim this. However, the practice of heavy re-insurance sales seriously impacts stated earnings. These earnings may be misleading since they may not reflect a true and fair view of MLP’s financial position. More importantly, the liberal use of permissible, albeit questionable accounting procedures, is first and foremost a valuation and business problem. KPMG and Deloitte Touche have certainly not been asked to pass judgment on these two critical issues and how they relate to heavy upfront policy sales to re-insurers. Maybe they should.

We believe MLP’s earnings are significantly overstated. Critical figures are nowhere to be found (more on this later). Verifying the legality of the accounting procedures completely misses the point.


Dilution:

The company’s key operating units are significantly owned by the company’s two largest single shareholders, Dr. Termuehlen and Manfred Lautenschläger: The company plans to swap subsidiary minority stakes for 29.5 million new shares increasing the shares outstanding to 108.7 million. This 37% dilution merits a closer look.

We estimate that these minorities contribute approximately 9% of group profits while increasing shares outstanding by 37%. More tellingly perhaps, we calculate that these minorities are valued north of 150 times current year “earnings”, a rather ambitious and earnings dilutive transaction. There is already a shareholder lawsuit questioning this integration, while the Small Shareholder Federation of Germany (SDK) seems to be mounting a serious attack against the company. After all, executives and employees will own approximately 50% of the outstanding shares after this transaction.


Earnings management:

We believe the company uses liberal accounting practices, albeit apparently within the legal accounting confines, to manage its earnings. Principally we believe this occurs in the life insurance activities.

Young and fast growing insurance companies frequently have to pay their sales people high commissions on insurance or other financial product sales. In order to fund these high up-front costs, which far exceed premium income during the early stages of a life insurance policy, some policies are sold off to re-insurance companies for their net present value minus a markdown. This allows the young and fast growing insurance company to reduce its negative cash flow while growing sales. The cash value of the policies sold to the re-insurer is booked as revenue and the resulting cash can be used to pay off the selling agents. Ideally, the sell-offs to the re-insurers are managed in a way that the company is cash flow neutral and therefore does not forfeit the attractive future stream on the vast majority of its life insurance plans. Clearly, after effectively selling the policy to the re-insurer, the re-insurer is now legally entitled to receive the premium income on those policies. However, the insurance company continues to process and service the policies.

Clearly, this practice is not unusual and is indeed widely practiced. MLP, however, appears to have taken this practice to an extreme level. Last year, reinsurance proceeds came to a staggering €240 million versus consolidated premium income of €446 million.

It appears that MLP is forfeiting substantial and valuable future premium income by selling a large part of its policies (almost a form of factoring) to re-insurers. This would not be so bad if the company were not paying substantial taxes (€51.7 million in 2001) and dividends (€39.6 million in 2001) on these “net present value” transactions. If the business were ever to slow down or decline, payments to the re-insurers could quickly exceed the insurer’s premium income, therefore leading to a cash squeeze.

None of the major quoted, high growth life insurance companies appear to be employing this practice nearly as aggressively as MLP. Also note that life insurance policies are a great business as life expectancy increases. Policy holders pay in much longer than generally expected when many of these policies were originally configured. Given the positive fundamentals of this business, life insurance policies are rarely reinsured. Why would anyone give up 60% of their future, highly attractive cashflow stream for a heavily discounted net present value?

Our calculations indicate a net profit decline of over 50% for 2001 if the company did not sell off vast portions of its new life insurance policies to re-insurers.


Re-insurers be aware:

Re-insurers, especially Cologne Re (MLP’s largest re-insurer) should be alarmed if MLP provides anything less than formidably convincing answers to the questions raised by analysts and journalists. Cologne Re is, not surprisingly, represented on MLP’s supervisory board. Somewhat disconcertingly, however, Cologne Re has omitted its dividend for this year and postponed its annual investor and analyst conference from May 16th until July 11th without citing reasons. Surprisingly, Mr. Strenger a senior banker from Deutsche Bank, resigned from the supervisory board only two days before the originally scheduled analyst/investor conference. If an insurance company’s business were to contract, or in MLP’s case possibly stagnate or decline, the financial consequences for the insurer would be alarming.


Off-balance sheet liabilities nowhere to be found

The company states in its annual report that it consciously uses off balance sheet methodologies to reduce risks. This however makes little sense. As we know from Enron and many other companies, these off balance sheet liabilities are real and have to be settled one day. At least shareholders are entitled to know how big they are. Unfortunately MLP’s annual report does not spell out these total liabilities from this “factoring” practice neither in its main text nor in its footnotes.

The same is also true about agent commissions. We understand these are paid over six years. While we think it makes sense to pay sales people over longer periods of time, we would like to see the total commissions payable to sales people, at least in the footnotes. Unfortunately, we could also not identify these future liabilities anywhere in MLP’s annual report.


Alarming new business tendencies and absence of recent financials appear to confirm our bear case:

As we mentioned, the company was unwilling to provide us with the accounts of its insurance subsidiary, MLP Lebensversicherungs AG. We then went to the courthouse to obtain the relevant financial statements. Unfortunately, the 2001 annual report had not yet been filed, a fact we find surprising given that MLP’s consolidated accounts are available. However, the 2000 report disclosed some rather alarming figures relating to new business. In 1999, the company registered 69,126 new insurance policies. In 2000, new policies declined to 50,567 or a decline of 27%. In 1999, €79 million in gross premiums were sold to re-insurers versus premium income of €169 million. In 2000, policies sold to re-insurers increased by 63% while premium income increased proportionately.


Employee share purchases and share financing:

The company appears to be generating profits by selling shares to employees. Serious questions need to be answered as to how these sales are funded.

Employees own approximately 9.5% of the outstanding shares of MLP AG (directly and indirectly as 18% owners of the life insurance subsidiary). The share value of these holdings, using an undiluted market capitalization and the present share price, equals to approximately €350 million. A close review of MLP’s consolidated and subsidiary accounts suggests that at least some of the proceeds of these sales are shown as other income while the cost of the shares were booked at par value.

Equally important, some of these share purchases appear fully financed by MLP’s own bank with no interest charged. Given that the share price has declined by more than 75% from its peak valuation already, we wonder what effect these employee loans may have on its lowly capitalized bank and a group with a mere consolidated shareholder equity of €225 million.


Valuation anomalies:

We have compared MLP to the first and foremost global insurer, AIG, and the European life insurance sector to give some basic valuation comparisons:

MLP AG AIG Sector (Europe)
MCAP*: €5.38 bn €190 bn not applicable
Price/Book Value: 23.9x 3.3x 1.9x
MCAP/premium income: 12.1x 4.5x 1.42
PE 2002: 38x 19x 13.2

(Source: Bloomberg, Thomson Financial, IBES)
*For the purpose of this valuation we are using the fully diluted shares outstanding of 108.7 million, which we fully expect to be outstanding after the AGM next week.

The most striking anomaly is the Price/Book Value multiple of 23.9 times. Most analysts argue that MLP’s Return on Equity and earnings growth justify even higher valuations. Another staggering figure is the company’s return on equity (43%) and operating profit margins which are about five times the industry average, especially surprising for a relatively novice insurance company by German insurance industry standards. Cost ratios are particularly intriguing since MLP spends a fortune on its own insurance industry “university” and corporate overheads. Nor is the ratio between support and sales (1/2) staff particularly impressive.

More disturbingly perhaps, each of MLP’s 2560 financial consultants is valued at €2.1 million, a staggering figure. These so-called employees are really independent operators and are not part of the company’s regular pay roll. Moreover, MLP claims 453,000 customers, primarily in the insurance area. Assuming €446 million in premium income and dividing the latter figure by the former, results in monthly premium income per customer of a rather unimpressive 82 Euros.

What if earnings and earnings growth are not what they seem, and what if, as a consequence, restated ROE’s decline to German insurance standards of about 8%?

Holt Value Systems, the leading Cash-flow Return on Investment (CFROI) valuation tool, developed by Nobel laureate Professor Modigliani, arrives at a Best Value of €15 per MLP share using the aforementioned assumptions. Even accepting MLP’s published figures and earnings guidance produces a Best Value of only €30 Euros per MLP share according to Holt.

Quite interesting, we also find the CEO’s statement that he will grow earnings per share at least 30% per annum this decade and that he will earn €2 billion by the year 2010. How can anyone make such a far-reaching statement and retain any credibility with professional institutional investors?

Could MLP in fact be massaging rather than generating their earnings?


Conclusion:

• It appears that MLP has generated material profits from “factoring” substantial future life insurance premiums to re-insurers.
• Furthermore, material profits appear to be derived from share sales to employees as well.
• The company’s premier re-insurer appears to be in some trouble, while the auditor is barely known outside Germany meanwhile auditing a highly controversial sibling of MLP’s. That same auditor provides consulting and corporate finance services as well.
• The company’s CEO makes far-reaching earnings predictions, the likes of which we have never heard from other multi-billion-market cap insurance company CEOs.
• Valuations are stratospheric and only getting worse through a massive earnings dilutive acquisition of minority stakes benefiting the largest shareholder and employees.
• Moreover, we fear that there are significant, high-risk share loans by MLP’s bank to employees.
• Material off-balance sheet liabilities are nowhere to be found.
• There could be a substantial oversupply of shares when employees are finally able to cash in their chips.
• If this company provides anything less than 100% answers to the issues raised by analysts and the media, its reputation may be tainted and its business operations negatively impacted.
• We are completely unable to issue earnings estimates in this case since the company neither provides complete and up-to-date subsidiary accounts nor critical off balance sheet information.
• Therefore, we believe that any major dent in MLP’s growth story could quickly unravel this overvalued company.
• Shareholder societies are alarmed, lawsuits are filed, top-notch investigative journalists have picked up on the story. Much ado about nothing? We don’t think so.
• At 23.9 times shareholder equity, there is no room for error.

Capital is very risk averse. So are we.

Vote with your feet.

Our recommendation: Strong Sell







Disclaimer: This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual client objectives, this report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. From time to time, this firm, its affiliated entities and/or their respective directors, officers, employees or members of their immediate families may have a long or short position in the securities mentioned in this report. These securities may be sold to or purchased from customers or otherwise by United ZurichFinance, it’s affiliated entities, and/or its directors, officers, employees or members of their immediate families, as principal or agent. United ZurichFinance may act in an advisory capacity to and/or serve on the board of directors of the companies mentioned in this report.

The information, tools and material presented in this report are provided to you for information purposes only and are not to be used or considered as an offer or the solicitation of an offer to sell or to buy or subscribe for securities or other financial instruments. United ZurichFinance may not have taken any steps to ensure that the securities referred to in this report are suitable for any particular investor. United ZurichFinance will not treat recipients of this report as its customers by virtue of their receiving this report.

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[qrzuso]

Quelle?

[Wolframit]

Hallo Muffins,könntest du das mal für unsre deutschsprachigen Englischnichtperfektionisten sinngemäß zusammenfassen? Danke.

[muffins]

United ZurichFinance

die Sudie wird heute in London präsentiert und Fondsmanagern fürs Wochenende mitgegeben. :-)

[BULA]

Riskant sind insbesondere die Kredite für die MLP-Aktien, die Mitarbeiter und Berater halten. Wenn der Aktienkurs weiter sinkt (oder nicht wieder steigt), kann hier ein Teufelskreis entstehen:

Eigentlich müssen die Kredite gekündigt werden, d.h. die MLP-Aktien müssen verkauft werden, der Aktienkurs kommt unter Druck. Wartet man noch länger, entstehen u.U. hohe Kreditabschreibungen, die das Ergebnis belasten, Aktienkurs kommt unter Druck...Und auf die Stimmung der Mitarbeiter dürfte dieses Szenario auch schlagen...Was also tun, MLP ???

[newhenry]

@muffins

So,so. Und Dir haben sie die Studie vorab zum Korekturlesen
gemailt und damit Du schon mal short gehen kannst.

Klevere Burschen, die Jungs von Zurich Finance.
Übrigens ein ziemlich windiger Börsenletter.
Schreibt IMO nur ab.

NH

[Pik7]

Da können die unverbesserlichen MLP Optimisten nicht mehr dran herummäkeln, so ausführlich wünscht man sich als Anleger jede Analystenstudie. Am schönsten (und alarmierendsten) fand ich ja den Satz:
"We are completely unable to issue earnings estimates in this case since the company neither provides complete and up-to-date subsidiary accounts nor critical off balance sheet information."
Wann gibt ein Analyst schon mal zu, dass er eigentlich seinen Job (Abschätzung zukünftiger Unternehmensgewinne) gar nicht machen kann

[goldmine]

Das ist die beste Zusammenfassung.

Auffällig:

Alle - ich betone alle - Angaben, die für die Einschätzung der ausgewiesenen Erträge nötig wären, sind nicht erhältlich.

Sowas dürfte wohl kein Zufall sein, man soll die Ergebnisse nicht prüfen können - so wie die Kunden der Fonds LV die Katze im Sack kaufen.

Insgesamt noch problematischer als bisher gedacht. Bei der Cologne Re ist bereits ein unabhängiger AR zurückgetreten - und das ist kein unbekannter sondern Hr. Strenger, ehemaliger DWS Chef.

Sieht so aus wie bei EM.TV - entweder ist es ein echtes Wunder oder die größte Luftblase unter den Versicherungsaktien.

CU, goldmine

[F 50]

Wer bitte ist "United ZurichFinance" ?

Genaue Quellenangabe des Artikels.

Unter google ist "United ZurichFinance" nicht zu finden.

[interna [KommA]]

Wie auch immer, der Artikel ist gut geschrieben, ohne Polemik und mit vielen Details. Damit unterscheidet sich der Artikel angenehm von anderen Analysten.

[teicker]

Der Artikel ist sehr umfassend und leider auch richtig.

Mit tun alle MLP `ler echt leid - die grösste Schuld haben meiner Meinung nach aber die Banken die durch Ihre ständigen Kaufempfehlungen uns in diese Aktie getrieben haben.

[daddygreenspan]

Vielleicht sollte die Optimisten mal einen Blick auf die MLP-Seite werfen.
Dort werden dann so schwammige Statements von Rückversicherern zitiert: http://www.mlp.de/de/uebermlp/pdf/statement_koelnische_rueck…

Ebenso eine sehr verhaltene Reaktion von MLP:
http://www.mlp.de/de/uebermlp/pdf/statement_koelnische_rueck…


Wäre alles korrekt bei MLP, hätte man schon längst eine Verfügung gegen BO beantragt und das Magazin sofort aus dem Verkehr ziehen lasse, zusätzlich wäre schon längst was über den Stand der rechtlichen Schritte bekannt geworden.
Es wird wie immer laufen, erst große Empörung, dann Wechsel in der Führungspitze und am Scluß Eingeständnis von Wachstumsstagnation und Unregelmäßigkeiten.
Der Kurs wird in Wellen auf 20 Euro gehen !!!!!!!!!!!
Gott sei Dank, ich habe noch einen längerfristigen Put nachgekauft um bis zum Ende zu profitieren !!!

Good trades
Daddy G.

[daddygreenspan]

Sorry,

Angabe zu Reaktion von MLP muß heißen:
http://www.mlp.de/de/uebermlp/investor/dsp_aktuelles3.cfm


Gruß
Daddy G.

[walter37]

Die Homepage von United ZurichFinance AG ist www.uzfinance.com

Alternativ würde ich mal auf der HP von MLP die Studien von bekannten Investmenthäusern runterladen.

Der Verfasser der "Studie" hat leider, wie sonst üblich, darauf verzichtet, seinen Namen oder e-mail unter die Studie zu schreiben.

Das muß er wohl noch lernen.

[F 50]

walter37,

danke für die Quelle. Die o.a. Studie zu MLP ist offensichtlich noch nicht dort auffindbar!?

[bajan island]

Danke.Die meilenweit beste Analyse zu MLP,die ich bis jetzt finden konnte.
Spiegelt meine Meinung zu fast 100% wieder.
Denke aber,dass 15 Euro noch optimistisch sein werden.
Sehe Kurse um die 3- 10 Euro.

[BULA]

Manchmal braucht ein Invetsmenthaus keine Studien abzugeben. Goldman Sachs hat neue Optionsscheine auf MLP begeben - gleich 11 Stück - merkwürdigerweise alles Calls.

Jeder möge sich seinen Teil dabei denken...

[F 50]

24.05.02

Die MLP-Aktie fährt Achterbahn. Steigen Sie jetzt ein?



Votum

Nee, von Bilanztricksern kaufe ich nichts. 50 %
Wenn die Aktie noch weiter fällt, schlage ich zu. 31 %
Ich habe schon Gewinne realisiert. 3 %
Bloß nicht, ich sitze meine Verluste aus. 7 %
Weiß nicht. 7 %



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