Is this Greek elevator company ready for lift off?

In my previous post about Greek net-net AS Company I mentioned I like another Greek stock.

The name of the second company is Kleemann Hellas SA (company website). Kleemann produces elevator systems. Products include: hydraulic elevating mechanisms (piston, power unit, car frame), electromechanical elevating mechanisms (machine, car frame, counterweights), cabins, electronic controllers, electronic systems and compact type elevators for elevating cargos.

The name of the company sounded German to me. It turns out that the company was established in 1983 after it signed a contract with German company Kleemann Hubtechnik GmbH, giving the company a license and the right to use their know-how. It is funny, the more you look into Kleemann the more you find out there is not that much “Greek” about the company right now.

Kleemann first caught my eye, because it is trading at a large discount to book value: Kleemann’s market cap is €36.7 million while book value on March 31, 2013 stood at €80.1 million.

The second thing that I noticed is that there is a large disconnect between the income statement and the cash flow statement. Viewing the income statement an investor might look at Kleemann with concern. From 2008 to 2012 revenues have fallen from €117m to €92m, while net income dropped from €10m to a small loss of around €100k in 2012. The cash flow statement shows a very different picture though: in 2012 the company generated around €11m in cash.

Looking into this deeper I found that an important cause for the discrepancies are increases in provisions: €5.0m in 2012 and €3.5m in 2011. From the 2012 annual report:

“It is noted that the Group’s financial results include a provision of 5.6 mln euros for doubtful debtors, from 3.3 mln euros in 2011. Such a high provision was made in context with the Group’s prudent policy and concern clients in the Greek market, who were affected from the economic crisis.”

The demand for Kleemann’s products is related to the building activity in the regions where Kleemann is active. Kleemann has a 72% share of the Greek lift market. Therefore it is not surprising that Kleemann was impacted by the Greek depression. Not only has the company lost a lot of Greek sales, because of decreased building activity, it also turned out that some of their Greek customers could not pay their bills, forcing Kleemann to take these provisions.

Kleemann: misunderstood?

I think “the market” currently views Kleemann as a Greek company with substantial debt (€28m), declining earnings and stagnant sales (around €91m from 2010-2012), but I believe this picture is wrong. The principal reason is that Kleemann today is very different from the company it was in 2007-2008.

If you look at this company presentation (PDF), you will see that almost 59% of Kleemann’s sales in 2007 were Greek. After the financial crisis broke out, management has focused on internationalization and has been very successful: in 2012 the percentage of international sales was 78%. Kleemann expects international sales to increase to 90% of total sales in 2013. The company still only has a 2% share of the world market, but says it is one of the seven largest lift companies in the world. One of the countries where Kleemann has been succesful is Russia: in 2012 the company had €11.5 million in Russian sales, doubling the 2011 sales. Also Turkey is an important market with €19.8 million in sales.

Meanwhile Greek sales are down from €62.7 million in 2007 to just €20.1 million in 2012. Instead of a Greek company suffering from a depression, you could also view Kleemann as a strongly growing company in emerging countries.

The declining Greek sales and the impact of doubtful debtors on the income statement is distorting the picture. Another useful piece of information is on page 52 of the 2012 annual report. There you can see the composition of the receivables. Greek receivables are currently €28.9 million, down from €39.8m in 2011.

It seems to me that the impact of the severely depressed Greek market on Kleemann should continue to decrease. Kleemann looks like it will continue to grow strong internationally. One extra contributor to growth could be their Chinese subsidiary that was established late in 2012 and that is now ready for operations. China is the main growth market for the elevator industry.

Also we should not forget that Kleemann continues to be the market leader in Greece. If the Greek economy recovers at some point in the future and building activity picks up again, Kleemann will benefit as well.

Kleemann’s balance sheet looks reasonably healthy. The company has €26.2 million in cash, against €20.6 million in short term debt and €7.7 million in long term debt. Kleemann has managed to restructure it’s existing debt in March and April 2013:

“The parent company with the Extraordinary General Assembly of shareholders on November 14th, 2012, decided the issue of one or more joint bond loans up to 13.5 million euros. Through this decision, the administration of Kleemann aims at the restructuring of its existing bank loans by lengthening the repayment period as well as the reduction of its total bank loans. It is noted that the Group has an excellent capital structure, with net loans on 31/12/12 amounting to just 2.7 million euros.
[…]
In context with the aforementioned Extraordinary General Meeting, the Management proceeded in March 2013 in signing a new bond loan amounting to 6 million euros, and within the first half of April will have signed another bond loan of 7,5 million euros.”

Kleemann is family controlled: the Koukountzos family owns 67.1% of the shares. Here is a short recent video interview with the General Manager of Kleemann, Nikolaos N. Koukountzos: http://www.youtube.com/watch?v=Jb7D5VRQjjw.

Conclusion

I really like the company and don’t see why it deserves to trade at such a large discount to book value and such a low multiple of free cash flow. Even though the share price has more than doubled in the last year, the company still looks very cheap. The main reason I don’t own Kleemann yet is that I don’t have a broker that can give me access to the Greek market. I have received suggestions for using Fidelity for this.

Currently I’m still thinking about Kleemann. I think I will only go through the hassle of opening another brokerage account if I’m confident enough to make it a fairly large position. I thought it was best to fist write this post. Perhaps some of you can kill this stock idea and dampen my enthusiasm for Kleemann. You can give feedback by commenting on this post, using the contact form, or by e-mailing me: info at valueinvestingblog.net

Disclosure: no postion currently.

Posted in European Stocks and tagged .

14 Comments

  1. Pingback: Some links | valueandopportunity

  2. Great blog. The company is certainly cheap, however its ultimate potential rests on three things in my opinion:

    – great, not good, Greek recovery over the long term that enables new high rise construction.
    – perfectly executed expansion into international markets / into niches that are not dominated by the major competitors.

    Took me a while to find this article I read long ago, but it’s good: http://www.economist.com/news/business/21573568-things-are-looking-up-liftmakers-top-floor-please

    The only way I can see this company executing well is by moving internationally into areas where their competitors don’t focus – namely low rise lifts (low margin) and to either adopt their business model or build a better mousetrap. That being said, it is still pretty cheap.

    An additional haircut for family control (if they are responsible stewards and treat minority shareholders fairly, then good) but I didn’t do any research as it’s probably not worth the hassle to open a new brokerage account.

    • Thanks for the link to the article. The lift business seems like a decent business to be in.

      You make a good point about the competition. Is there room for a small company like Kleemann to compete with these very large companies internationally? Especially in China, which seems to be the place to be when you’re in the elevator business.

      I read somewhere that Kleemann had worked with a Greek designer / artist to come up with innovative lift designs. Some of them looked quite nice I thought. As a small company you might be able to give extra attention to design and aesthetics compared to much larger competitors and get an edge that way. I think it would make sense to focus on a niche for Kleemann. In the interview Koukountzos from Kleemann said one reason they established a manufacturing facility in China was to be able to compete in the middle segment of the market there. That seems tougher and riskier to me and it remains to be seen if they will succeed in that segment of the market.

      • The problem is the most lucrative part of the industry is in service and maintenance – recurring revenue, high margin, and very sticky. However this business requires substantial scale in each geography to reach the high ROEs available.

        I can’t really see the company competing in the high end – this is technologically highly intensive as the current frontier is in cable technology-carbon fibre and I don’t think a small company like this possesses the smarts or deep pockets to finance such efforts.

        The middle and low markets seem like the only playground for the company. There is plenty of room for bribery and such (keep in mind they are Greek, so they are at least highly exposed if not highly competent in this area, and are playing in an industry [construction] in which corruption is a defining characteristic) which must play at least some role in the company’s competitive position.

  3. Hi,

    In the PDF there was more debt. Are you saying as of the dad of your post, debt ( short and long term debt) is down considerably. Also you said cash flow was 11 million. What was FCC ?

    Thanks

    • The debt numbers I took from the Interim Financial Statements for March 31, 2013. Short term bank liabilities at that date were €20.6m and long-term bank liabilities were €7.7m. I just realized I also mentioned FT.com data somewhere in the post, but I think their debt number includes some payables. I corrected this in the post to reflect the March 31 data.

      For the cash flow numbers I used the data on page 36 of the 2012 annual report. I took €11.8m in operating cash flow and subtracted capex of €0.6m.

  4. Hey, great post,
    Regarding the brokerage account, you might want to have a look at the local banks, many of them have London branches.
    Piraeus Bank (winbank.gr) – I trade with them
    National Bank of Greece (nbg.gr)
    EFG Eurobank http://www.eurobankequities.gr/
    Alphabank

  5. ran the numbers. doesn’t see it. this is what i did
    2012a
    Total Revenue : €92.3mn
    Gross margin : 31% stable over last 3 years
    operating expenses: flat at €24mn to €25mn
    EBIT : €3.3mn
    PBT : €2.52mn
    PAT: €1.7mn
    EBITDA : €6.6mn

    Balance sheet data as of 30th June
    Gross long term liabilities : €21.7mn
    Cash: €24.5mn
    Net Cash : €2.8mn

    EBITDA margin = 7% for 2012a
    EV/EBITDA = 5x on 2012a
    EV = €33mn
    Implied market cap = €35.8mn
    Current market cap = €38mn
    < 10% upside.
    ROCE is very low. used low EBITDA multiple.
    Was cheap at 0.8euro not 1.6euro.

  6. Hi, I am a stockholder of Kleemann Hellas and AS Company, I have invested in them with my bank in France(Crédit Mutuel).
    At the beginnig both strocks were not available, so I called my bank and after one day I could buy these stocks.
    I hope that your broker will make some efforts.

    P.S. Great Blog…

  7. We are installing Kleemann lifts over 10 years and after they start using Serial controller the quality is dropped to bottom. New elevators have serious electronic problems. Elevator goes out of order showing strange error codes impossible to decet the reason. many problems with car and landing calls, have to push many times when it finally register the call and etc.
    Communication with factory is difficult, they do not offer solution just guessing a’la try this and try that. Seems that they don’t know itself what is the cause of electronic problems.

  8. Pingback: Kleemann revisited | ValueInvestingBlog.net

  9. Pingback: Tender offer for Kleemann by management | ValueInvestingBlog.net

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