Value Investment in Semapa

In the last months I've been working o an Excel database that uses companies financial data extracted from Bloomberg as a tool to rank interesting companies (see previous posts).The idea is to simplify financial analysis from a value point of view and to be able to focus in more interesting-well -performing companies, regardless of their current price, as first cut to avoid employing scarce analysis time in bad performers.

Since I now live in Lisbon-Portugal I've become familiar with some of the companies in its stock market despite I'm quite negative about the future of this country. I also follow the quarterly reports of the well known García Paramés fund manager (Bestinver) that has some investments in Portugal, namely Semapa and Portugal Telecom (PT). I do not like the high leverage of PT so I used my new "investment tools" to look into Semapa.

Semapa is a holding company which does not hold many investments outside a a 75.9% in Portucel (almost 81% adjusting for treasury shares) so looking at the numbers of Semapa is almost as looking at Portucel numbers. Portucel is the main paper and pulp producer in Portugal. Its main brand is the well known(at least I did know it) Navigator paper.

Semapa HQ in Lisbon

I took the model print-out for Semapa that you can find here and looked at the figures in the most objective way that I could before digging deeper into the company's numbers and facts. The historic track record of the company (1995 to 2011, the "period" from now on) is quite sound:

• Revenues have grown at a CAGR of 12% in the Period (if we look at last 10 years's average, the rate is even higher) in line with the CAGR growth in assets (14%) and equity (17% in book value and 11% in EPS) which are outstanding figures and a very good sign to start with.
• EBIT margin has instead diminished (-3%) so the company has been able to deal with competition (margin pressure) with higher rotation and capital efficiency.
• Average net income to assets (proxy of ROA but not true ROA) is 4.2% p.a., being the 3 maximum ROAs an average of 7.5% and 2.2% the three lowest ones' average.
• The company has not been into negative territory in a single year and the average of the three lowest EPS is equivalent to 20% of the average EPS of the Period.
• Leverage has been an average of 4.6x times assets to equity (currently at 3.7x) , equivalent to a loan to book value of the assets of 80% (72% currently), which is pretty high if not too high to look into anything else. The company has 3.7bn€ in assets and 1bn€ of equity (book value) but it is true it has significant cash cushion. Cash is 400-420Mn€ equivalent to 3.7€ p.s.. It is also relevant to take in account that current leverage is at the lowest part of the historic 6.6x to 3.3x range.
• At current ROA and leverage the company's ROE is at a very decent 12.5% vs. an historic average of 20.3% (or 15.6% for last 10 years). ROA has been more stable so the leverage variations, currently lower than average, explain most of the changes in ROE.

So, only taking the facts from the numbers, and pending further debt analysis I'd say this is a pretty sound and interesting company to invest in. The current european debt crisis we're living and the intervened situation of Portugal may also allow for a good buying opportunity in relation with how the market is pricing this business:

• The company is trading at 5.05€ equivalent to a PER of 6.9x vs. the Period EPS average or 4.6x vs. the last 10 years' average EPS of 1,09€. Using 2011 EPS the PER of the company is 4.9x.
• Historic PER have been an average of 11x so now the company is trading at half its average historic valuation.
• Therefore the implied "equity coupon" (in the logic of WBuffet) would be an impressive 20% in case we think that the current 2011 EPS (1.1€) is a good measure of future performance, which does not sound illogical given that is almost identical to last 10 years' average (1.09€).

So it is potentially a very sound business (pending leverage review) and a more than interesting price given the current euro risk in the market, specially in Portugal. It is clearly a stock to be invested in. I will follow with further analysis.