This post is going to be a bit different from other posts on this blog. I have limited information about this “dark” company, so I can’t produce a detailed write-up. My main goal with this post is to bring some attention to this company. Usually I’m happy to own stuff like this in silence, but my position here has grown to a size where I’m pretty sure I won’t be buying more. I’ll try to list some of the things I found in my research on this company, but it is far from a complete picture.
All my shares were purchased well before 2019 and at lower prices. Shares have appreciated a lot in the last couple of months and are now trading around $6.00. It is probably good to emphasize up front that I have no idea why the share price has increased this year and who has been doing the buying. If I’m right about Elamex, then I can understand why the stock has moved up, but it is surprising to see it happen so suddenly.
A first look at Elamex’s profile (OTC:ELAMF) on OTCMarkets doesn’t seem to offer much hope for finding information. The company delisted and deregistered its shares in 2005. The deregistration means that the company is not required to file reports with the SEC anymore. There are no other current filings or press releases on OTCMarkets either. To top it off, the company’s website (elamex.com) has been dead for a while now.
Often in situations like this there really is no way to get information. With Elamex it is a bit different. If you look at their old SEC filings and read an old form 10-K you can find the key to getting information about this company here:
The Company is a subsidiary of Accel, S.A. de C.V. (Accel), which owns approximately 57.7% of the Company’s issued and outstanding common shares at December 31, 2004.
(bold text mine)
Fortunately, Accel is a publicly listed Mexican company (ticker ACCELSAB.MX). It posts annual and quarterly reports on its website, it has a page on the Mexican stock exchange (BMV – Bolsa Mexicana de Valores) website and there are even analyst reports about Accel.
Because Elamex is majority owned by Accel, they are required to consolidate Elamex’s operations in their financials. In Accel’s annual reports (Spanish only!) you can find financial information about Elamex as well.
Activities and Financial Performance
I have not done much work on Accel and have only translated bits and pieces of their annual reports and the other documents. I’ve also had to rely on Google Translate. So I might have misunderstood things and have made all sorts of mistakes. Keep that in mind when reading this post.
This is a translated quote from page 8 of Accel’s 2017 annual report:
The Manufacturing Division is composed of Elamex, S.A. of C.V. (“Elamex”), a company with operations of manufacturing and real estate activities in Mexico. Through its subsidiary Mount Franklin Foods, LLC, participates in the processes of production, packaging, distribution and sale of sweets and nuts.
Elamex falls under their “Manufactura” (manufacturing) segment. From what I’ve read in the annual report, I believe that Elamex is the only business that falls under this segment. This is very important, because the company discloses the results of their two segments (the other is “Logística”). So I think the segment results of “Manufactura” fully represent Elamex’s earnings. If I am wrong about that, the picture could obviously look very different.
Elamex’s subsidiary Mount Franklin Foods does have a nice and informative website. Mount Franklin has recently announced the construction of a 220,000 square foot candy manufacturing facility in San Jeronimo and it announced the acquisition of a company called Hospitality Mints LLC last August.
Accel now owns 60.36% of the outstanding Elamex shares (page 17, AR 2017). Mount Franklin has three plants in Ciudad Juárez, located in the Mexican state Chihuahua where it produces sweets. The preparation, packaging, distribution and sale of nuts (peanuts, almonds, walnuts, pistachios, etc.) is carried out in their facilities in El Paso, Texas. At the end of 2017 the company also established an organic and nutritional products manufacturing plant in Sumter, South Carolina. Within the manufacturing segment there are also some real estate activities that are being carried out. The division owns and leases approximately 14,000 m² of manufacturing space in Mexico, which is used by related parties or rented to third parties.
The financial performance of each segment is presented on page 23 of the annual report. Net income of the manufacturing segment was 380.2m Peso ($19.7m USD) on revenues of 5.9bn. Page 1 of the annual report mentions a profit for this segment of 346m ($17.9m USD) though, I’m not sure what explains the difference.
In 2016 net income was 332.4m Peso. The manufacturing segment has been profitable since 2012 when it earned 104.0m Peso on revenues of 3.5bn. The year 2011 was basically break-even and 2010 showed a loss of 51.2m on revenues of 2.5bn.
When Elamex deregistered its shares the company was losing money and this was probably still the case at the time of Elacap’s tender offer (more on this below) in 2007. That purchase of shares by Elacap has proven to be very timely.
It’s possible that 2017 was a particularly strong year. Net income for Q1 2018 was down about 11%. There’s some more recent quarterly information on the BMV-website, but that site won’t load properly for me.
So we know Elamex is a solidly profitable manufacturer of candy and nuts. Its shares are trading OTC for a price of around $6.00. What is Elamex’s market cap? I’m not 100% sure. I’ve not been able to find a recent share count. But there are some old press releases that give some information and that make me fairly comfortable in estimating the current share count.
In 2007, a tender offer was made for Elamex shares by an entity called ElaCap. Elacap was a vehicle of the Chairman of Elamex (Eloy S. Vallina) who was also the beneficial owner of 63.5% of Accel. The results of the tender offer were announced here and there was also a subsequent offering period where another 110k shares were acquired.
From this last press release we can work out that ~2.4m shares represented ~32% of the outstanding shares, which would mean that there were about 7.5m shares outstanding at that point in time. This is the latest date for which I’ve been able to get a share count.
I think the shareholder structure of Elamex might look something like this:
Accel: ~4.53m shares? (60.36% of outstanding?)
Elacap: ~2.4m shares? (32%?)
All other shareholders: ~0.57m shares? (7.6%?)
I’m reasonably comfortable with this estimate, because the ownership percentage of Accel in 2017 (60.36%) is still fairly close to the percentage (57.6%) listed in the last Elamex proxy from 2005. From historical annual reports that I have, I can see that Accel’s ownership of Elamex has increased from 59.72% in 2012 to 60.36% in 2017. I don’t know what happened before 2012.
It seems clear that the overwhelming majority of Elamex shares are held by Accel and entities associated with Eloy Vallina. I think it is unlikely that there has been an effort to dilute outside shareholders in a major way since then, mostly because the stake of the outsiders was so small to begin with. But anything is possible. I don’t have a share count and all I have is a guess based on numbers that are more than a decade old. At the price I paid, it wasn’t important to be right. I just had to be in the ballpark. Perhaps it is possible to find out more about the current share count by contacting Accel or getting the information from the transfer agent. I have not tried.
If the number of 7.5m shares is still reasonably accurate, it would give Elamex a market cap of around $45m USD.
Even though shares have run up a lot this year, they still seem to be trading at a very low P/E multiple. Whether this is really the case and whether they represent good value is for you to work out. Of course there’s much more to valuation than what I’ve laid out in this post. At the time of my purchase I could afford to take a very lazy approach, because the shares looked obscenely cheap. I do think Accel’s balance sheet looks relatively healthy at first glance and I’m not that concerned about the parent company’s financial condition, but I’ve done little work on the company. I noticed there are a lot of related party transactions and those could be a concern.
Another issue is that this is a Mexican company. I don’t know anything about the protection offered by Mexican law to minority shareholders, but I don’t have high hopes in that regard.
It is also unclear how shareholders will ultimately realize the value of their shares. An ideal scenario would be if Accel wants to consolidate its holdings at some point and there is an offer for all the Elamex shares that they don’t already own. Who knows whether that will ever happen? When I bought my shares, I bought a number that I felt comfortable with holding for the next 20 years and fully expected the share price to languish for many years. No catalyst and a “value trap”, right? Wrong. Someone else had figured out there was value here or perhaps insiders were buying, I don’t know.
If you want to talk to me about Elamex, but don’t feel like commenting on this post publicly, you can contact me here.
Disclosure: long ELAMF