Magic Sixes Portuguese companies : Conduril (ISIN PTCDU0AE0003) – Too good to be true ???

Although my last “Magic Sixes” (P/B < 0,6, P/E 6%) Investment, Autostrada was not a runaway success, I still use the screener from time to time to see what companies are “really” cheap.

It might not be a big surprise that some Portuguese companies are among those “cheapies” now. As of today, the following Portuguese Companies are “magic Sixes”:

P/B P/E Div Yield
Ramada Invest 0.380 2.68 10.45%
Orey Antunes 0.440 5.11 15.48%
Grupo Soares 0.400 3.30 7.48%

Ramada is a steel company, Orey a shipping company and Soares a construction company.

As discussed before I also run a “Magic Sixes light” screener with slightly relaxed rules (P/B < 0.7, P/E 5%).

Here we get an additional 5 companies:

P/B P/E Div Yield
Corticeria Amorim 0.67 6.78 7.09%
Sonae 0.66 0.66 7.39%
Sonaecom 0.67 0.43 5.71%
Conduril 0.66 1.50 6.82%
Espirito Santo 0.47 3.44 5.28%

One has to keep in mind that only around 65 Portuguese companies are actually listed, so 8 “dirt cheap” out of a total 65 is quite significant.

A relatively well known problem of most Portuguese companies is their relatively high debt load. With Portuguese banks in trouble (not to speak of the Government), it is intersting to look at debt levels. I usually look at nebt debt / market cap in combination with EV/EBITDA:

Net debt per share Share price Net debt/Marcet cap EV/EBITDA
Ramada Invest 3.03 0.67 452% 6.52
Orey Antunes 0.55 1.15 48% n.a.
Grupo Soares 4.87 0.29 1679%  
Corticeria Amorim 1.01 1.41 72% 4.35
Sonae 0.62 0.45 138% 4.33
Sonaecom 0.76 1.23 62% 3.38
Conduril -33.8 22 -154% 0.55
Espirito Santo 313 5.3 5906% n.a.

Ratios above 100% are very critical in my opinion, because then a capital increase to “save” the company needs to be above current market cap which is highly unlikely.

Based on this list, Conduril looks like a ” bad data” input.

A P/E of 1.5, EV/EBITDA of 0.55 and Net cash above current market cap must surely be a mistake or ?

However a quick look into Conduril’s 2010 annual report shows an amazingly profitable company.

In 2009 and 2010, the company earned net margins 13-14% and ROEs of 30-40%. .

So how comes ? The answer seems to be relatively easy: Conduril is very active in the “hot” African markets Angola, Mozambique and Botswana. I only have 2009 figurtes, but of the 250 mn EUR sales in 2009, 167 mn were in Angola and only 45 mn or less than 20% in Portugal.

Of course doing business in those countries will be quite risky, but nevertheless it is a very intersting case.

Trading seems to be relatively strange. As far as I can see, 1000 shares are traded most of the days at 22 EUR per share, the chart doesn’t really look like a stock chart:

However it is definitely a stock I want to research deeper.

It might also make sense to look at the other less indebted comapanies at some point in time. If one wants to bet on a Portuguese Non-default, those stocks might be more interesting than Portuguese Govies.

5 comments

  • @MMI: I also would not want to buy stocks from companies with a high debt level – fortunately, Conduril does have low debt. The empirical research did not show that a high debt level was good for the stock performance, actually the opposite, if debt is measured relative to equity – it just showed, that debt/MCap is the wrong ratio.

  • Nate,

    thanks for the comment. The accrual issue is significant, agreed,

    However for a construction company it is not unusual to report under “percent of completion method” and run up receivables until the project is finished.

    Soares for example has the same problem but has financed their balance sheet with a lot of debt whereas Conduril manages to obtain more prepayments and vendor financing.

    It is of cours difficult to assess how valuable those receivevables are, especially if the debtor is someone in Angola or Mozambiqui and this is clearly the reason why the stock is so cheap.

    In any case, i will wait until they release 2011 figures before trying to buy any shares.

    mmi

  • Crazy you found Conduril, I thought I was the only other person who’s ever looked into them.

    About a year ago I researched them, I actually emailed back and forth with someone on the BOD for a bit. She sent me the 2010 report once they approved it, but in Portuguese. I translated some of it, and had a Brazilian friend help with other parts. Eventually I worked through it. If you do need to email they apparently only speak Portuguese. I started using Google Translate and having my Brazilian friend double check, but he said the quality of Google Translate was so good I should just stop checking with him. So I did, I’d just type my emails in English, hit translate and send. I got all my responses in Portuguese, translated back without an issue. Technology is crazy..

    The big red flag for me? €34m in earnings €1.4m in cash from operations. So I went back and started calculating accruals for past years, in short the quality of earnings is less than stellar. The company reports a really high EPS yet of the booked profit very little actually hits as cash each year.

    Even given this I tried a number of times to buy some shares. At the time the bid was ~€4/sh. I think this was in February or March when I tried to buy and the last trade was in November of 2010. I tried for a while, never got any shares and moved on. I remember at one point there was a bid of €4 ask of €83, I was hoping I could flip my shares for a 20x profit in a day!

    The African angle is interesting with them, but I question the managing family integrity or at least shareholder friendliness. I have a feeling they could run into liquidity problems and shareholders will get diluted.

    Nate

  • Hello MMI,
    Net debt/Marcet cap is in my opinion not really a meaningful measure for indebtedness as a valuation criterion, because it also depends on the market cap, and that is what you want to be low (relative to other measures).

    And indeed, empirical research shows, that companies with a HIGH indebtedness are performing better (see e.g. Ralf Sattler). It is always the low price/MCap which is what should be preferred. Low price-to-everything.

    Nevertheless, your consideration makes sense, and Conduril would be an interesting stock – if it would not only trade on the Lisbon stock exchange. 😦

    • High Winter,

      thanks for the comment.

      Yes, empirical research might show that indebted companies perform better, but in a special situation like Portugal I would not rely on empirical results, unless they contain a lot of Sovereign defaults, bank defaults and systemic financial crisis.

      For Portuguese companies it will be VERY difficult to refinance debt when due, and the refinancing will have to come from equity injections, at least to a large extent.

      So in those cases (same for Greece) I personally don’t care about empirical results from “normal” markets.

      mmi

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