A microcap net-net in Greece

A few weeks ago I read this article about Fairfax Financial’s investments in Greece. In that article Prem Watsa had some interesting comments on the Greek economy:

“In terms of the economy, the last four or five years have been very tough for Greece,” Fairfax Chairman and Chief Executive Officer Prem Watsa said in a June 19 telephone interview. “The economy has come down very significantly, unemployment is high. But on the other hand, we think that perhaps a bottom has been reached.“

I have not looked at Greek stocks before, mostly because I don’t think I have access to a broker that offers the small cap stocks on the Athens Stock Exchange. I hate finding a cheap stock and then not being able to buy it!

But after Watsa’s comments I looked at a bunch of Greek stocks anyway, mainly out of curiosity and because there are not that many other opportunities around. Also, I think it is useful to look at some of these companies and see what the impact is of a depression. Looking at Greek stocks has made me even more wary of companies with debt. If you read a random interview with the late Walter Schloss, you can bet that at some point he would have mentioned that he did not like debt. Looking at a few Greek companies makes you more aware of the dangers of debt. Buffett had this quote about debt in his 2010 letter:

“Borrowers then learn that credit is like oxygen. When either is abundant, its presence goes unnoticed. When either is missing, that’s all that is noticed.”

Many Greek companies learned this lesson the hard way. I like companies that have little debt, in fact I prefer companies with a large net cash position. Avoiding debt is good, but it is even better to carry around a few extra oxygen tanks on your back, so to speak. Perhaps the going will be a little slower and some people (often analysts or economists) will say you’re not being “efficient”, “optimal” or “maximizing your returns”. But you probably won’t blow up either when times get tough and no end is in sight. Family controlled companies often do understand the benefits, I feel. Previous generations of the controlling family have often survived a depression before. The controlling family often has both experience and skin in the game, management teams of mega caps tend to have neither.

I didn’t find many opportunities in Greece. Most companies still carry much more debt than I’m comfortable with, but there are two companies I would consider buying at this point. There are one or two others that could be attractive, but I haven’t looked at yet.

In this post I will discuss the first Greek stock I like and it is a net-net.

AS Company SA

AS Company SA is involved in the production and distribution of toys. To get an idea of the products the company offers you can visit AS Company’s webstore at: http://www.astoys.gr/. The company has licensing agreements with companies like Disney and Warner Bros and sells these licensed products through various toy retailers, gift shops, supermarkets, book shops and their online store.

The investment case for AS Company is fairly simple. As of March 31, 2013 the company has currents assets of €20 million, including €5.7 million in cash, €10.4 million in receivables and €3.5 million in inventories. Total liabilities are €9.3 million, including long-term debt of €2.0 million. Net current asset value is €10.7 million.

AS Company has 21,876,700 shares outstanding and at today’s price of €0.346 the company’s market cap is €7.6 million. The company is currently trading at 0.7 x NCAV and 0.4 x book value.

The income statements since 2008 show a significant decline in revenue. In 2008 the company had sales of €27m and they have declined every year since then, coming in at just €17m for the year 2012. Positive is that the company has managed to stay profitable throughout this period and has produced a lot of cash as well: the company had just €1m in cash in 2008 against almost €6m on March 31, 2013. Furthermore debt was reduced from €7.3 million in 2008 to €2.9m. Plus the company paid dividends in 2008, 2009 and 2010.

It looks like AS Company’s management has navigated through this crisis very well so far. The CEO, Andreadis Efstratios, owns 31% of the shares and the Vice-Chairman, Andreadis Anastasia, owns almost 29%.

One thing to worry about is that sales have still not recovered. For the three months ended March 31, 2013 sales were just €3.8 million against €5.4m in the same period last year. The company was barely profitable, showing income of just €112k for the three months, down from €614k last year.

If sales keep falling the company will start to lose money at some point. I guess that is the problem with depressions: you don’t know how bad things will get and how long they will stay that way. If Prem Watsa is right though, and Greece has seen the worst of this depression, sales might pick up and results might improve. AS Company earned €3.1 million in 2008 and €2.1 million in 2009. Can the company regain the revenue levels that were reached in this period (around €25 million)? If they can, the company will probably not be selling for less than €8 million in the market at that point. I think the large cash position gives the company time to survive a few more bad years if the Greek economy shows no recovery.

All in all, I think AS Company is a good stock to own as part of a basket of net-nets.

The company has basic financial statements available in English and they can be reached through their IR website at http://ir.ascompany.gr/en/. However, there is no detailed information available in English. Investors who would like more detailed information should try to access the Greek version of the IR site, download the full reports and try to piece things together with Google Translate. The Greek reports are there, but I have not spent the time studying them, since it looks like I can’t buy the stock. If you’re considering buying the stock, you should definitely look at the Greek reports, because this post is purely based on the statistical cheapness of the stock. There might be important information in these reports that I’m missing.

A broker for buying Greek microcaps?

If (Dutch) investors can offer me suggestions about brokers that can give me access to Greek microcaps like AS Company, I would appreciate it if you post a comment below, contact me here or send me a message on Twitter. Interactive Brokers and Binck do not offer them.

If I can find a decent option for buying Greek microcaps, I will probably make a post about the second Greek stock I like. It requires some more work though and I can’t spend too much time on stuff I can’t buy! So, if you have a suggestion, please let me know.