A couple of days ago Stelios Kanakis posted their 2014 annual report. I first wrote a post about the company in February 2014. As a quick reminder: Stelios Kanakis is a Greek distributor of raw materials for pastry, bakery and ice-cream products.
As usual, the annual report is in English and does a great job of informing investors about the developments in the business in the past year. In terms of informing investors, the company is exceptional when compared to other Greek small cap stocks (below €100m market cap).
The company had a pretty good year in 2014. Sales increased 5.2% to €17.9 million, the gross margin increased slightly from 34.3% to 34.7% and net income increased 14.1% to €1.7 million (€0.22 per share). This was the first year since 2009 that the company has managed to increase sales year over year. Although Stelios Kanakis has been a very stable performer during the Greek depression, thanks to its connection to the food industry, it is not completely immune to negative economic conditions. Turnover has stalled over the last few years and the company also has difficulty passing along price increases in commodity prices, which depressed earnings in some of the last few years. This year was the first time that things were a little better and in 2015 the company could benefit a little from the decrease in many commodity prices.
A few relatively small negatives in the report: the impairment provisions for receivables were increased by €230k. I don’t think this is a big deal, because the company does not have any customer concentration: no customer makes up more than 5% of total sales. Also, free cash flow of €1.6 million was lower compared to 2013 (€2.3m), mainly due to a much higher income tax payment in 2014 and higher capex (2014: €154k vs 2013: €33k).
Here are some updated figures about Stelios Kanakis:
Share price: €1.90
Shares outstanding: 7.500.000
Market cap: €14.25 million
Cash: €4.6 million
Total liabilities: €4.1 million
Enterprise value: €9.65 million
EBITDA: €2.48 million
P/E ratio: 8.5x
Price to book: 0.80x
It still looks pretty cheap to me.
Stelios Kanakis plans to pay a dividend of €750k (€0.10 per share) in June of this year. I wonder why the management has decided not to return more capital to shareholders. Last year they did a return of capital early in 2014 and paid a dividend payment in June, but there has been no return of capital in early 2015. Why keep €4.6 million in cash in a Greek bank in the current environment when you have a cash generative business like this? Minimizing the money kept in Greek bank accounts seems like the rational thing to do. Perhaps there are limits and rules restricting another return of capital or a higher dividend payment, I don’t know.
This might seem a strange thing to say about a Greek company, but Stelios Kanakis is a high conviction stock for me when I’m purely looking at the underlying business. It is one of the few companies in my portfolio where I’m fairly confident that:
- The business is currently cheap
- The intrinsic value of the business is almost certain to increase at a decent rate
- The business has a moat: Stelios Kanakis is the exclusive representative of 28 of the leading companies of raw materials for pastry, bakery, and ice-cream in Greece. This position is reinforced by their two Centers of Gastronomy in Athens and Thessaloniki, where bakers and pastry makers are shown and taught how to use the ingredients and get ideas for recipes. This requires extensive knowledge about the products, the local market and collaboration with various professionals and institutions, like the French Culinary School Ecole Lenôtre
Of course the biggest issue with the company is that it is Greek and does almost all of its business in Greece. If Greece does exit the Eurozone and reintroduce the Drachme, the picture is not going to be pretty.
That said, the stock has held up very well in the past year. While the Athens Stock Exchange declined about 40% since the date of the first post about Stelios Kanakis, the stock is currently trading at roughly the same price. I don’t really know if that makes sense or not. Is Stelios Kanakis a safer bet in a “Grexit”-scenario? The company doesn’t have a lot of hard assets (e.g. real estate) and does almost all of its business in Greece, unlike a company like Kleemann Hellas that gets about 90% of its revenue from outside of Greece. Kleemann has been a much more volatile stock though and really sold off in the last year as panic gripped the Greek market.
All in all, I still like Stelios Kanakis a lot. It is hard to handicap a Grexit. I don’t know how to do it. A poster on a well known value investing message board claimed the chance is 30%. No further explanations or calculations offered. It amazes me to read precise predictions and confident claims like that. I mostly have doubts when I invest. It has led me to diversify and to focus on areas where the competition is limited. I think Greece is one of those places today. Almost no investor wants to touch it.
Am I properly compensated for owning this stock given the current situation? Is it cheap enough? It is a very difficult question to answer. What I do know is that today I can’t find many cheaper stocks in other markets in the world than the Greek small caps I own. I have also limited my exposure to about 10% of my portfolio, so I have not bet the farm.
Disclosure: long Stelios Kanakis, long Kleemann Hellas