value and opportunity

East Asiatic was part of my “strange stocks” series almost a year ago.

The stock looked extremely cheap, but the issue was that for their Venezuelan, they had to use the official Bolivar exchange rate. That was my final assessment:

All in all, EAC is not only a “strange” stock but also an interesting stock. Although both subsidiaries are struggling, I see some “real option” value here. The Santa Fe business, if the execute as planned, is worth more or less the whole market cap at the moment. Therefore, Plumrose, the Venezuelan pork producer is like a “free” option betting on a better future for Venezuela. This future is highly uncertain, but some positive signs are also visible.

Now something interesting happened: EAC announced last week that they sold its Venezuelan Business for DKK 390 mn and plan to pay a special dividend of 16 DKK:

• EAC divests Plumrose for a total consideration of approx. DKK 390m
• Due to the requirement under IFRS accounting standards to use the official VEF/USD exchange
rate, the transaction entails a significant accounting loss. However, when measured at the parallel
market VEF/USD exchange rate, the price represents a gain over book value.
• EAC’s Board of Directors considers the price attractive and intends to distribute DKK 200m to
EAC’s shareholders as an interim dividend (DKK 16 per share) once the consideration has been
received in full.

The shareholder friendly approach of the company can be seen via the video they produced, where they are explaining why they sold (very funny, Danish with English subtitles).

With a current market cap of ~1.100 mn DKK, receiving 390 mn DKK in cash is not insignificant. What remains is the Santa Fe subsidiary. That’s what i Wrote back then:

Simple valuation of Santa Fe:

Plan: 5% CAGR until 2016, 300 mn EBITDA. EV/EBITDA of 6-8x realistic ?

Current borrowings 500 mn, growth by 5% in line with sales –> 600 mn debt in 2016

EV of 1.800 -2.400 –> equity value of 1.200 -1.800 in 2016. Discount by 15% for 3 years: NPV of Santa Fee according to this: 790 – 1.180 mn DKK

The problem with that projection is: Santa Fee is not doing well at the moment. Based on the latest Q3 report, Sales for the first 9 months declined by 2% and EBITDA declined even more from 121 mn DKK 9M 2012 to 93 mn DKK 9M 2013. So achieving 300 mn EBITDA in 2016 looks somehow optimistic.

Interestingly, the stock price spiked quickly after the announcement but is now already on the way back down:

If we assume EBITDA for Santa Fe of around 130 mn DKK this year, this business is now implictly valued around 8-9 times EV/EBITDA. Maybe on a depressed level but as I am not a turnaround investor, I will pass on East Asiatic for the time being. Nvertheless, at some point in time, EAC could be a buy if the price stays low and they manage to turn around their remaining operations.