Kleemann revisited

In July 2013 I wrote a post about the Greek elevator manufacturer Kleemann Hellas. Today, as the Athens stock market touches a two year low, I’ll revisit Kleemann.

Share price: €1.30
Shares outstanding: 23.648.700
Market cap: €30.7 million
Net current asset value (Sept. 30, 2014): €34.3m
Book value (Sept. 30, 2014): €80.3m

At the time of the initial post Kleemann’s market cap was €36.7 million, so the company has become a bit cheaper. It is even a net-net today, trading at 0.90x NCAV and at 0.38x book value.

Meanwhile the company has continued to make progress. Sales were up about 3% and amounted to €94.8m in 2013. Kleemann generated €8.5m in operating cash flows and spent €0.8m on capital expenditures in 2013. The earnings statement continued to look ugly, due to provisions for doubtful debtors of €4.3m in 2013, down from €5.7m in 2012. Kleemann’s debt on Dec. 31, 2013 had come down to €21.3m from €28m on March 31, 2013.

I explained the provisions in more detail in the first post. I still think that the cash flow tells the real story and that one should focus on Kleemann’s free cash flow and their debt levels to track the performance and progress of the business.

For 2014 there’s a similar picture. Last month the company released financials for the third quarter of 2014. Sales were €67.8m, up 9.6%. The provisions for doubtful debtors continued to impact earnings and were higher than in the same period last year: €2.8 mln (9 months 2013: €1.8m). Operating cash flow in the first 9 months reached €10.7m and capital expenditures were €2.7m. The company apparently invested in an investment property, which could explain the higher capex. I have not found more information about this investment. Debt has come down to €17.3m and Kleemann had a cash balance of €25.8m. International sales now account for 85% of Kleemann’s revenue.

The improved balance sheet has also given Kleemann room to return capital to shareholders. In 2014 Kleemann paid out €1.9m in dividends and in July it also paid out a return of capital of €2.6m (€0.11 per share).

The main thing I don’t like about Kleemann are the provisions that remain stubbornly high. I would have expected this number to come down over time, as Greek receivables decrease, but in 2014 provisions will end up higher than they were in 2013. This could be due to the company understating the problem in earlier years.

I think a lot of this is going on at Greek companies right now. Companies pretend their customers will still pay, banks pretend the companies will repay their debts and the state pretends the banks are still solvent. Recently I ran a screen for Greek companies trading well below book value and there are still many zombie companies around where I do not see how they can possibly survive. Still, a few years of pretending has also allowed some other companies to deleverage significantly and they are now in a much healthier financial position.

On a related note I’d like to add that even though I’ve been pretty positive about some Greek small caps on this blog and on Twitter it’s good to emphasize that these are the exceptions. The overwhelming majority of Greek stocks I would not consider for investment. There are perhaps only a dozen or so small companies that I would consider owning if the price is right.

Anyway, at this price I’m not sure if the provisions really matter that much. I think the cash flow statements tell the real story. Kleemann’s financial position continues to improve, the company now has more cash than debt and it has increased the pay-out of cash to their shareholders, reflecting their strong financial position.

I don’t know how the political situation in Greece will resolve itself and what the consequences will be for Greek companies. Will we see the Drachme being reintroduced in 2015? I don’t know the answer. It seems unlikely to me as I think Greece’s situation was more dire in 2011 and 2012 than it is today. The chance is not zero however. The Syriza party is likely to win the elections and their leader Alexis Tsipras has promised the Greeks an end to austerity. Greece seems on a collision course with the EU.

At this point I will not increase my exposure to Greece. I have added to my Greek small caps during the crash of the last few months, but I don’t want the Greek stocks to make up much more than 10% of my portfolio.

The renewed uncertainty about Greece has led to a large sell-off of the Greek stock market. The Athens Stock Exchange is down 29% YTD and Kleemann is down about 37%. I can’t find company specific reasons why Kleemann is down so much, even more than the Greek stock market. The sell-off seems pretty indiscriminate. In 2012 shares traded around €0.60 at one point, so I think Kleemann’s decline is just a consequence of the broader Greek sell-off.

A lot of investors use EV/EBITDA as a valuation tool to compare companies and I have tried to calculate this multiple for Kleemann to become more familiar with using this and finding out when it is useful. Let me know if I have made any mistakes.

I think Kleemann trades at 3.6x EV/EBITDA:
Enterprise value: €32.4m (Market cap: €30.7 million + debt: €17.3m + minority interests: €10.2m – cash: €25.8m)
EBITDA 2013: €9.0m. The EBITDA for 2014 looks to be broadly in line with that of 2013.

Kleemann is one of the cheapest companies I can find at the moment. I have bought a position and it will be a loser in my portfolio in 2014, that’s for sure. Let’s hope for a better 2015 for Greece and Kleemann’s stock.

Disclosure: long Kleemann Hellas