Stelios Kanakis SA

Stelios Kanakis (company website) is a Greek company that distributes ingredients for confectionery and bakery products. A listing of these products can be viewed here. The company uses two large distribution centers and a number of co-operative distributors to distribute the ingredients to the approximately 2150 customers (in 2012). No customer accounts for more than 5% of the sales.

Financial data:
Share price: €1.81
Shares outstanding: 7,500,000
Market cap: €13.6 million
Book value Sept. 30, 2013: €16.8
Net income 2012: €1.1 million

We all know Greece is experiencing a depression and that this has impacted many companies severely. I think Stelios Kanakis is somewhat of an exception. They have not been immune to the effects of the crisis, but because they are connected to a sector (food products) that is resilient to downturns, revenues have been relatively stable, dropping from €18.7m in 2008 to €17.1m in 2012. This drop, combined with increased competition and an increase in raw material prices has had an impact on profitability: in 2008 net income was €1.8m compared to €1.1m in 2012.

The company is mainly active in Greece. Of the €17.1 million in total revenues in 2012, just €315k were exports. The company does note in its annual report that they are trying to establish themselves in the Balkan countries and Cyprus:

“Having realised the important role in the future for markets of the neighbouring Balkan countries and of Cyprus with regard to the growth of its operations and the perspectives of these markets, the Company continues its systematic expansion at these areas, by constantly hosting technical demonstrations to local professionals, using its properly trained technical department and it is considered that with the further growth and support of its exporting orientation, the Company shall manage to significantly improve its position in the wider geographical area (in the Balkans and in Cyprus), a fact that will have a positive impact on its financial results.”

Positive news is that the company has no debt, has remained profitable in these tough years and has consistently generated free cash flow. A large part of the cash has been returned to shareholders in the form of dividends and more recently, through share capital reduction payments.

One thing I really like about Stelios Kanakis is that the website and annual reports are very detailed and fully translated in English. I have looked at a bunch of Greek micro caps and it is very uncommon for a small company like this to provide that level of detail to investors, let alone foreign investors. When a company goes well beyond the minimum requirements to inform investors, I have found this is usually a good indicator of the shareholder friendliness of that company.

Stelios Kanakis seems to be one of the largest trading companies in its field (source: company website):

Stelios Kanakis turnover

And the company was the most profitable in this period:

Stelios Kanakis pre-tax profits

Another thing that stood out to me about their business is their Center of Gastronomy. Stelios Kanakis operates two of these Centers: one in each distribution center. From the Center they provide technical training and education about the bakery and pastry products that Stelios Kanakis distributes. Sometimes they also partner with the suppliers of the products and the supplier will then send an expert to a Center of Gastronomy to provide the training. This allows the customers of Stelios Kanakis to gain knowledge about the products and to give them new ideas for recipes. I’m not sure if this is enough to call it a “moat”, but it does look like Stelios Kanakis has a relationship to both the suppliers of the products and their own customers that is mutually beneficial. This is a factor that could explain the profitability of the company compared to their competitors.

Book value

Book value on Sept. 30, 2013 was €16.8m and cash & cash equivalents were €3.6m. Total liabilities were just €3.6m. Earlier this month, the company returned another €600k to investors through a capital reduction, so keep that in mind when looking at the financials. The company is probably trading around 80% of book value currently.

Insider ownership & insider buys

Stelios Kanakis is a family controlled company. The CEO and founder, Stylianos Kanakis (‘Stelios’ seems to be a Greek variant / nickname for Stylianos), owns 72.3% of the outstanding shares. His wife, Maria Kanaki, owns 8.0%. This leaves a small float. Also, Georgios Gkoufas, who I think is married to the daughter of the CEO, has been buying shares in 2013 and January of 2014.

It is nice to see a high percentage of insider ownership, but it does raise the concern whether minority shareholders will get a fair deal in a going private transaction. Now the company has completed the construction of its distribution center and the debt has been paid off, it does make you think what the benefits of a stock market listing are for the company. Perhaps it will help in establishing trust in a Greek company for foreign suppliers who are looking for a distributor of their products in Greece.

Thoughts about valuation

When looking at Greek stocks I think you must take the current conditions into consideration and try to look a few years ahead. If we take that mindset and look at Stelios Kanakis, we can see that before 2008 the company had a decent record of growing revenues and profits. In the earlier annual reports there is a section (“Company performance”) where you can see how the company fared in the years before 2008. Return on equity and return on capital employed has basically been cut in half in 2011 and 2012.

In 2007 Stelios Kanakis started using their newly constructed storage and distribution center in northern Greece. This center is used to service the area and includes the Balkan countries. I think we may not have seen the full benefits this new center could provide, because the Greek economic situation turned south quickly after the center was established and the exports are still at a low level.

Depressions don’t last forever and the economic situation in Greece will improve at some point. When that happens, I think Stelios Kanakis should also be able to show some revenue growth and restore its profit margins. I think net income of €2m should be reachable if the economic situation improves a little and raw material prizes stabilize. If the company can grow revenues and expand its business to the Balkan countries, more could be in store. At a market cap of €13.5m the valuation looks pretty depressed. The company trades around 80% of book value, it consistently generates cash and returns a large part of it to shareholders.

Disclosure: long Stelios Kanakis SA

Edit September 2015: I have removed a few paragraphs and a comment about a broker I used for buying exotic stocks. After reading this story, I don’t fully trust them to act in my best interest as a client. Even though I never really recommended using this broker and said I only used them for buying stocks I couldn’t buy elsewhere, I did say in the removed paragraphs that I had good experiences with them so far. For me it is vital though to be able to trust my broker and that is no longer the case here.

After reading the piece by AmsterdamTrader.com I thought it was best to remove the link to the website of this broker from the article and to post this message to clarify. I thought it was a bad idea to leave comments and a link in this article to a company that I no longer fully trust, as it would give people a picture that is notably different from my current opinion about the broker. I should also note that my only connection to this broker is as a client.

Posted in European Stocks and tagged .

7 Comments

    • Not really at this point. I’m not thinking about selling below a €20m valuation for the entire company, even with the current state of operations that I believe is depressed.

  1. Interesting idea. First thoughts: looks cheap but not super cheap. I like that they distribute all earnings, but for the past few years depreciation is quite low, 200k / year for 7m book value. Also almost no CapEx during the same period either. So it’s basically in run-off mode. That might overstate profitability (?).

    • I don’t have a good sense of what their capex will be in a normal environment. You’re right that capex in the past few years has been extremely low and I don’t think that is sustainable. So, normalized capex should be closer to the depreciation expenses and perhaps even somewhat above this level. On the other hand, the company completed construction of a new distribution center in 2007, which increased depreciation.

      I also noticed that in 2008 their real estate was reappraised:

      It must be noted that during the current financial year the company proceeded with a reappraisal of its real estate.
      This reappraisal showed an increase in value of € 1.228.270,86 (land 822.138,72, buildings 406.132,14) which after the deduction of the deferred tax amounting to € 307.068,00 was directly recorded in the company’s equity.

      (from the 2008 AR)

      I agree that the company is probably not super cheap. It’s not going to be a multibagger. That said, I believe it is cheap enough, given that business certainly is not booming at this time and that management has returned a lot of capital to shareholders. The company should have around €4m in cash currently and no debt. They have more cash than they need at this time. Last week the company announced they will pay a dividend in August: http://www.stelioskanakis.gr/innernews.aspx?iid=1533&lang=en&year=2014 . No mention of the amount yet though. This will be the second distribution to shareholders in 2014.

  2. re: capex: I don’t know either but something like 5% over the total asset base seems like a somewhat reasonable assumption in the long run, so something like 400k / year (I haven’t studied the older reports yet). Not extremely significant though.

    + 80% book, lots of info for shareholders and a bet on Greece recovering, insiders buying. – very small free float, much book value is in tangible assets, return on equity not spectacular. Would like it to be a bit cheaper.

    Have you ever looked at Mind CTI? In a sense similar to this, you might like that as well.

  3. Pingback: Stelios Kanakis: results for 2014 | ValueInvestingBlog.net

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