Berling SA

One of the few places where I’m still finding some cheap and small companies is Poland. Last year I made my first investment there in a company called Śnieżka.

This post is about another Polish stock that I recently bought: Berling SA (ticker: BRG:WSE).

Berling SA is a wholesaler of refrigerating and air-conditioning equipment. The company offers compressors, chillers, condensers, condensing units and air-cooling equipment. The customers of the company are contractors and other companies that provide the installation and maintenance services to the end users of the equipment. In 2008 Berling acquired Arkton which is a manufacturer of refrigeration equipment.

Some basic financial information about the company:

Share price: 4.09 Polish Zloty (PLN)
Shares outstanding: 17.55 million
Market cap: 71.8m PLN (€17.4m)
Book value 31-03-2015: 86.0m
Cash 31-03-2015: 32.9m
Total liabilities 31-03-2015: 9.6m

Sales in 2014 were 81m and down 20% from 2013. I can’t find a good explanation for this decline in the reports which I tried to decipher with Google Translate. I think the construction sector in Poland is cooling off significantly and that should also have an effect on Berling. There are a few other construction related companies in Poland that also look cheap and that have seen their stock prices beaten down after reporting poor recent results as well. Still, Berling made almost 7m in 2014. It does look like the poor trend is continuing in 2015 though, with net income in Q1 of 0.9m, down from 1.5m in Q1 2014.

The company is very cash rich with almost 33m in cash on the balance sheet and just 9.6m in liabilities. There is no debt. Cash generation has been solid. In 2014 Berling had operating cash flow of 15.6m, but it should be noted that working capital flows released 4.6m of cash. In 2013 working capital consumed 13m of cash, so cash flows can be lumpy, which is to be expected for a wholesaler of equipment that is linked to the construction sector. Capital expenditures are low and have been less than 1m in the last few years. The most important thing is that Berling has a very strong balance sheet and that surviving a few leaner years should not be a problem.

Berling has paid nice dividends since becoming a public company. In 2014 the company paid out 5.3m and 3.7m in 2013. It looks like minority shareholders are being treated fairly in this regard.

Insider ownership

Berling is a family controlled company. The Berling family holds a 61.4% stake through an entity called “DAO sp. Z oo”. Hanna Berling is president of the company and holds a 50% stake in DAO sp. The chairman of the Board is Thomas Berling, who holds 25% and the remaining 25% is held by Marcin Berling, also a board member.

Thomas Berling purchased 80.000 shares on the open market in January at 3.80 Zloty per share. It is a good sign to see an insider buying at a price that was close to the current stock price.

Valuation

I don’t have a good idea about what the normalized earning power of this company is. Berling earned 11m in 2011 and 2012 and peaked at 13m in 2013, before falling to about 7m in 2014. This year looks to be even tougher for the company. Perhaps they will only make around 4m this year. I think taking cancelling out the boom and bust years is fair and just taking 2014 earnings of 7m as a base is reasonable. Applying an earnings multiple of 10 seems pretty conservative. Adding the cash gives us a value of about 100m PLN.

The company is probably not a multi-bagger, but I do think there is some reasonable upside from the current stock price. The main thing to like about Berling is their strong balance sheet which should offer good downside protection. At 0.83x book value, a cash rich balance sheet and the company’s low capital expenditures, I think Berling is a good company to ride out the current slump in the construction sector in Poland.

Because this is a micro cap company with a majority shareholder it should be no surprise that the shares are illiquid.

Disclosure: long Berling SA