COVER 50 S.p.A.

A quick post on a small recent position for me, COVER 50 S.p.A. (COV.MI). The company is listed on the Euronext Growth Milan market in Italy since 2015. The Growth Milan market was formerly known as AIM Italia.

COVER 50 primarily produces and sells pants and trousers under the PT Torino brand. These are high-end pants and jeans and this is certainly reflected in the prices charged to consumers.

Here are some summary financial data for COVER 50:

Share price: €8.50
Outstanding shares: 4.40m
Market cap: €37.4m
Cash & investments: €20.4m (adj. for €0.40 dividend payment in May, 2022)
Debt: €3.0m
Enterprise value: €20.0m
Net income 2021: €2.5m

The company has a lot of excess cash. This makes the company look somewhat expensive if you just look at a measure like a price/earnings multiple, but the economics of the business are actually pretty good. The company has limited capital needs. For instance: the total amount for property, plant & equipment on the balance sheet is just €0.3m.

One note on the cash: on December 31, 2021 there was €11.6m in bank deposits and an additional €10.6m in “altri titoli”, which translates as “other securities”. The disclosure around this line item is limited:

[…] the other amounts relate to the purchase of funds, bonds and insurance policies. These instruments were considered by the Directors as a short-term investment and therefore were classified under current assets. The net increase for the year is mainly related to investments in bonds and bond funds.

Source: page 21, Consolidated Financial Statements for 2021 (Google translation from Italian source).

It sounds to me that these investments in other securities can be considered as cash-like in nature, but I could be wrong. The value of these investments could also have been impacted to some degree by the recent rise in interest rates.

Insider Ownership

The Fassino family is the controlling shareholder of the company. They hold their shares through an entity called Fhold SpA. Their stake is 74.4% of the outstanding shares. The result is that the remaining shares are also fairly illiquid.

Business development since IPO and Covid impact

Revenue growth was quite low since the company’s IPO, but at least there was some. Revenue grew from €24.7m in 2015 to €29.9m in 2019. Net income in those years ranged from €4.0m to €3.1m. Then Covid hit and revenue fell to €22.0m and net income fell to €0.95m. This included a tax benefit, otherwise the fall would have been even greater. The business has recovered nicely in 2021 though, and some management comments from the 2021 report show that business is on track to go back to pre-covid levels of revenue and profits:

The year was characterized by a clear recovery in company profitability and an increase in turnover, the negative effects caused by the Covid-19 pandemic and the consequent lockdown period, which negatively influenced the results for the year 2020, were very attenuated and we expect that they will be completely canceled out in the current year in which we believe we can return to pre-pandemic levels of turnover and profitability, in the hope that the situation of uncertainty due to the latest events will not generate situations of global crisis.

Source: page 1, Management Report for 2021 (Google translation from Italian source). Bold text mine.

The company did not expect any adverse effects from the war in Ukraine at that point in time:

After the end of the year, it should be noted that the international situation has deteriorated strongly due to the recent tragic events that have involved Eastern Europe, generating strong concern and uncertainty on the markets. In this regard, it should be noted, however, that from these circumstances, without prejudice to the normal uncertainty connected with their evolution, which is not foreseeable to date, no significant effects are currently expected for the Company such as to impact the operation and the business.

Source: page 32, Consolidated Financial Statements for 2021 (Google translation from Italian source). Bold text mine.

So it looks as though COVER 50 can return to making around €3.0m or so in 2022. Of course, if the economic situation deteriorates further, particularly in Europe, that will probably change the situation. The company generates around 42% of its revenue from Italy and there are some exports to other European countries as well. I don’t have any particular insights on the macro situation.

US subsidiary: PT USA Corp.

The improvement of the company’s US-based subsidiary results should contribute to the overall recovery of the company. This subsidiary was established in September, 2015 and the company had just reached enough scale in 2019 to get to a break-even result in that year. Then the pandemic broke out and the subsidiary was back to making substantial losses:

Year	US Sales	Operating profit
2021	€2.6m	$116k / (€103k)*
2020	€1.7m	($545k)
2019	€3.8m	€9k
2018	€3.0m	(€139k)
2017	€2.5m	(€234k)
2016	€0.8m	(€703k)

* I’m not sure the operating profit number for 2021 is correct. In the Management Report an operating profit of $116k USD is reported, but the Financial Statement for 2021 on page 9 shows a €103k loss for the US subsidiary. Anyway, the table shows the trend in sales and the operating results of the US subsidiary up to Covid. If the company can get the US operations back to growth, it should finally begin contributing to the overall profitability of COVER 50 instead of depressing it.

Q1 2022 data

The company posted some data for Q1 of 2022 (.pdf) that showed a continued recovery. Revenue increased by 17.1% from €8.5m to €9.9m and EBITDA increased by 27%, from €2.2m to €2.9m.

Take-private candidate

I think there’s a decent chance that the company will be taken private in the next few years. It makes a lot of sense for the Fassino family to take that path:

• the company probably doesn’t have a future need to raise capital
• you can get rid of the burdens of being a listed company
• the company is trading very cheaply
• they can use the company’s cash to finance an offer
• in the case of continuing high inflation, the purchasing power of that cash will keep eroding

Shareholders will probably not receive a fair price in a scenario like that, but I think the outcome should still be good for minority shareholders. The company was making €3m pre-Covid, with a loss-making US subsidiary. If the US subsidiary can be moderately successful, the company should be able to get to €3.5m to €4.0m of net income. It seems hard to argue that an enterprise value of €20m is anywhere near fair in that case. I think an offer of around €12 would still be a great deal for the controlling shareholder.

A recent example of a take-private offer on the Milan Growth market is Piteco.

Conclusion

I think COVER 50 is a decent addition to a diversified portfolio. The large cash balance should provide some downside protection in case a recession does hit Europe. I also think there’s some optionality of a future take-private offer that an investor is not paying for at today’s price. Perhaps an earnings recovery for 2022 could be a catalyst for a higher stock price as well. The US operations have been a drag on earnings for years, but the company was gaining traction before Covid hit.

The company has paid a dividend this year of €0.40, which is a 4.7% yield. No dividend was paid in 2020 and 2021, but there were dividends in the years 2017-2019. So even though the cash balance is way too high, the company’s dividend record is not terrible.

For me personally, I also like to get a bit more exposure to European stocks. It’s a region where I’ve not had much exposure in the last few years, simply because I couldn’t find that much. That’s beginning to change a bit this year now that prices have declined and I’m looking a bit more actively in the region. I think investing in a selection of situations like this will work out well in aggregate.

Disclosure: long COVER 50 S.p.A. (COV.MI)