CNP and Pargesa: Opportunities to Profit From a Weak Dollar

by: George Fisher

CNP (OTC:CNAPF) and Pargesa (OTCPK:PRGAF) offer intriguing medium-term opportunities for investors looking to profit from a weakening U.S. dollar against the Euro and Swiss Franc (CHF). The combination of narrowing of discounts to their respective net asset values (NAV), of increasing dividends and of better performing, listed assets are all accentuated when exchange rate trends favor foreign holdings. Specifically, the Euro or Swiss Franc.

The Players:

CNP is the investment vehicle of Albert Frere, the Belgian billionaire. The firm is comprised of direct and indirect holdings of both listed, public companies and privately held firms. About 75% of its assets are in listed companies, mainly using an indirect ownership in GBL, another Belgium-based investment firm. Read here for more info on CNP, specifically the comment section for additional insight:

Pargesa is the intermediary investment firm that is positioned between CNP and GBL, and is domiciled in Switzerland. Read here for more info on PRGAF.

GBL, Group Bruxelles Lambert, is the investment holding company that owns large stakes in the following companies: Total (NYSE:TOT), LaFarge (OTCPK:LFRGY), GDF Suez (GDFZY.PK), Imerys (OTC:IMYSF), Pernod Richard (OTCPK:PDRDY), Suez Environmental (OTCPK:SZEVY). GBL is one of Belgium’s top ten companies with a market capitalization of 10 billion Euros.

CNP owns 54% of PRGAF; PRGAF owns 50% of GBL; GBL is the owner of record of the above listed share holdings. CNP and GBL are listed on the Brussels Exchange and comprise about 9.5% of the exchange’s index, the BEL20. PRGAF is listed on the Swiss Exchange.

CNP's company website is here; Pargesa's company website is here; GBL's is here.

GBL’s Shareholding:

Previous articles have described these various companies. Each of these companies is a European-based global leader in their respective industries. For example, Total is one of the six “super majors” global oil companies and GDF Suez is the world’s largest utility firm.

CNP and Pargesa:

CNP and Pargesa offer slightly different exposures to European business opportunities. CNP is a more diverse company with about 25% of its asset value in privately-held companies; management is active in strategic oversight of their investment. Pargesa is more of a holding company, mainly focused on its 50% ownership of GBL. GBL’s holdings represent a bit less than 60% of CNP NAV while GBL’s holdings, plus directly held shares in the same companies represents virtually all of Pargesa NAV.

NAV Discounts & Dividends:

CNP is currently trading at a 26% discount to its NAV, as reported on its website. As of Dec 28, NAV was Euro 50.50 ($65.23) and recent share prices trade at Euro 38.50 ($50) . Over the past four years, CNP’s discount to NAV has ranged from -28% to +6%, with an average of -15% discount.

Pargesa’s discount to NAV is 20%. As Dec 17, NAV was CHF 102.13 ($105.61), and recent share prices trade at CHF 81.05 ($83.94). Since 2007, Pargesa’s discount has been quite high with an average year end discount of 25%. However, between 2003 and 2007, the discount to NAV was much narrower at 13%.

CNP has historically paid a dividend as a stated goal to increase shareholder returns. Over the past four years, the dividend has increased by an average of 5.7% annually. Current dividend is Euro 0.84 ($1.09) for a 2.2% yield. Pargesa’s dividend has been relatively flat at CHF 2.72 ($2.81) and offers a 3.3% yield.

There is a Belgian withholding tax on dividends paid to non-residents and a higher foreign withholding tax in Switzerland. These amounts are deducted from dividend payments to U.S. residents, and the amount withheld could be credited against U.S. taxes owed to the IRS. However, dividends paid into tax-advantaged retirement accounts may be subject to the foreign withholding tax without offsetting IRS taxes due. As with all tax issues, investors need to research their particular situation as it relates to foreign tax withholdings.

Triple Play:

Over the medium-term, if the U.S. dollar weakens against the Euro and Swiss Franc, and if the NAV continues its historic growth along with discounts continuing to narrow, and if dividends continue to increase, returns for U.S. investors could be intriguing.

The Dollar has fluctuated against the Swiss Franc from .80 in 2007 to its current 1.03. The Dollar to Euro exchange has been more volatile with the rates ranging from approximately 1.30 in 2007, to 1.60 in 2008, to a low of 1.20 low in 2010, to 1.30 today.

Over the next 2 years, with an average NAV growth of 7% annually and a reduction in the NAV discount to 15%, CNP share prices should climb from its current Euro 38.50 ($50) to around Euro 50.00 ($64.54), for a gain of 30%. At a 6% dividend growth rate, the 2013 annual dividend could be Euro 0.95 ($1.22), for an additional 4.8% return. Total 2-yr return could be in the 35% range, or around 17.5% a year.

If, over that same timeframe, the U.S. dollar weakens against Euro by 11% to 1.45, representing about a 50% retracement of its previous decline, the overall returns should improve for U.S. investors.

For example, in 2011, at a current 1.30 exchange rate, CNP share price of Euro 38.50 converts to USD $50.50 [$50 on January 10, 2011- Ed.] and the dividend of Euro 0.84 converts to $1.09. In 2013, at a 1.45 exchange rate, CNP share prices could trade for Euro 50.00, converting to $73.25 and the potential dividend of Euro 0.95 could convert to $1.38. Using these variables, capital gains in U.S. dollars would be 45% and the cash dividend would add an additional 5.4% for a total potential return of 50% over 2 years, or 25% a year.

Some of GBL’s portfolio above did not perform well in 2011. For example, TOT shares, as priced in Euros and traded on the Paris Exchange- and which represent a large percentage of CNP and PGRAF NAV, have declined about 9% over the past 52 weeks. In comparison, the S&P Energy SPDR, XLE, has returned a gain of about 12%. TOT ADR shares have been in a three and a half year sell-off, matching oil / natural gas production declines. TOT has a secure balance sheet and one of the industry’s best historic returns on capital. Analysts believe Total’s fortunes are improving with important production acquisitions, such as its recent investment in an oil sands project. TOT is beginning to be recognized currently as one of the best value stocks in the large-cap major oil sector.

With improving individual company performance relative to their competitors, NAV annual growth could top its historic 7%, increasing CNP capital gains potential a few more percentage points.

Pargesa’s overall returns may be slightly less due to slower NAV growth and to not as much narrowing of its NAV discount. In addition, there is less volatility in the exchange rate of Swiss Franc : USD than the Euro : USD. Investors seeking less volatility in their exchange rate exposure may find PRGAF to be a bit more conservative.

On the other side, if the USD were to strengthen against the Euro and Swiss Franc, investment returns will be more muted. If exchange rates were to remain unchanged from current rates, CNP could offer a 15% to 17% annual return and PRGAF could offer a 10% to 12% annual return.

Both of these companies are listed on foreign exchanges and are offered as non-bank sponsored ADRs on the NASDAQ Pink Sheets. Low liquidity inherent with pink sheet trading can be overcome as many brokers allow access and trades on European exchanges. As usual, trading in illiquid stocks needs to be individually evaluated and limit orders should be standard procedure.

What is intriguing is the collection of well-managed listed European companies that are at the center of these firms. Selecting CNP will add the assets and investment expertise of the Frere family to these core holdings. Much like many very successful businessmen, Albert Frere offers both a complex case study and a rich history. Buying into either of these firms should be viewed as an investment in the ability of the Frere family to continue its tradition as one of the premiere European business concerns.

To some shareholders, there are similarities between Warren Buffett and Albert Frere, where successfully managing long-term capital and opportunities is as critical as operating specific businesses.

CNP and Pargesa offer different currency exposure to the same set of core assets. CNP financials and dividends are reported in Euros while Pargesa are reported in Swiss Franc. Take your pick. For me, I have some of both.

As always, investors should conduct their own due diligence, should develop their own understanding of these potential opportunities, and should determine how it may fit their current financial situation.

Disclosure: I am long TOT.

Additional disclosure: I have been a shareholder in OTC:CNAPF since 2011 and in OTCPK:PRGAF since 2010