Aplisens SA: a growing Polish micro-cap at 8.8x earnings

Investing in Poland has proven to be a bit challenging for me. The main problems are that almost all of the small companies only report in Polish and that protection for minority investors is weak. It is a common occurrence at Polish micro-caps for insiders, sometimes with the help of a couple of large outside shareholders, to buy out the minority shareholders at a very cheap price. A fairly recent example was AviaAM Leasing.

Still, I’m finding some cheap companies in Poland and sometimes you can find situations where the downside seems well protected.

I picked up some shares in Polish company Aplisens SA (WSE:APN). Aplisens is a manufacturer of measuring instruments. Their products include pressure transmitters, temperature sensors, flowmeters, hydrostatic level probes, displays & data loggers and power supplies.

The financial statements for 2017 are available in English, but all the more recent reports are exclusively in the Polish language.

Some summary financial data for Aplisens:

Market cap: 125.9m PLN (about $33.4m USD currently)
Outstanding shares: 12,592,700
Net income 2018: 14.3m (excl. minority interests)
Book value March 31, 2019: 164.6m PLN
Trailing P/E: 8.8x
Price to book value: 0.76x

On the company’s website you can find a table showing the financial results since 2008. This table shows that the company has been able to grow revenues and profits nicely and that the balance sheet is very strong as well. As of March 31, 2019, Aplisens had cash of 9.5m and total assets of 180.7m against total liabilities (incl. the minority interest) of just 16.0m. There is no debt.

The company has spent 12.7m on capex in 2018, which far exceeds its depreciation of 7.1m. An analyst report mentioned that Aplisens has not fully grown into the expanded size of its production facilities yet, so there should be some room for improved operating leverage. Management expects around 8-10m of capex for 2019.

Insider ownership

The president of the Management Board, Adam Żurawski, owns 21.7% of the outstanding shares. Board member Andrzej Kobiałka owns another 8.7%. There are a few other individuals who own substantial stakes. This means that the float for this company is quite small with just 21.75% of the outstanding shares.

The low float and the fact that this company is a true micro-cap are probably factors that explain why shares are trading at these depressed levels. Aplisens will simply be too small for most funds.

Downside protection

I think Aplisens has an above average chance of being taken private at some point by the management, perhaps with the help of a couple of other shareholders. If they do decide to take this step it will almost certainly result in a disappointing price, at least compared to the true business value of the company. So I think in situations like this you need to be confident that even in this scenario you’ll do OK as a minority shareholder.

I think Aplisens does offer some hope in this regard. The company completed a tender offer in October, 2017. In the offer, they bought 4.09% of the outstanding shares at a price of 14.80 PLN per share. The offer was oversubscribed. There was an earlier offer in May, 2017 where 0.55% of the shares were bought at 13.0 PLN per share.

If management does try to take the company private, I think they would have to at least offer something that somewhat exceeds the price of the last offer they made (14.80 PLN). The company has continued to grow since the last offer and it would be hard to make a case that minority shareholders today deserve a lower price than what was offered in 2017.

Of course they are more likely to pursue a going-private effort when the economy is in a slump and the company’s earnings are down. Even in that scenario, I believe it would be tough to lose money from today’s share price level.

Conclusion

I think Aplisens offers good downside protection at today’s price of 10.00 PLN. At a trailing P/E of 8.8 and a substantial discount to book, the shares look cheap to me. The company pays a nice dividend each year and the company is growing nicely as well. Results for Q1 of 2019 showed double digit growth in revenues and net income. Even if the company makes an opportunistic offer to take the company private it seems hard to lose money at the current price.

Meanwhile, you have some optionality in the possibility that management makes another tender offer at a substantially higher price than today’s share price. If they make an offer that exceeds the October 2017 offer, there should be roughly 50% upside from today’s price. There’s also always a chance a neglected stock like this gets noticed by other investors at some point. I haven’t really found a good business specific reason why the share price has dropped to the current level. I believe this is more due to the general Polish market, as I’ve found a few other Polish small caps that also sold off in Q4 of 2018 and that haven’t recovered either.

Disclosure: long Aplisens SA (WSE:APN)