Quick check: Grindeks AS (ISIN LV0000100659) – P/E 4.9, P/B 0.6 Baltic value or “red flag” alert ?


Via my “home forum”, someone brought up the Latvian Pharma company Grindeks AS. The company looks similar form the business model to Hungarian company EGIS and Croatian Krka which I covered some months ago

Valuation wise, the stock looks like a clear “no brainer”:

Market cap: 62 mn EUR (at ~7 EUR per share)
P/E trailing 4.9
P/B 0,59
P/S 0,6

ROIC, ROE, net margins all solid “double digit” numbers. My own, mechanical “Boss Score” would indictae a fair value of at least 3 times the current market cap.
The only issue coming up is the fact that the company never paid a dividend.

There is also a quite obvious reason why the stock is cheap: The majority of sales goes to neighbouring Russia, which clearly is not very popular with investors these days. As I do not have an issue with this “Headline risk” as long as I get compensated accordingly, I looked into the annual report 2013 in order to find out more.

As with Australian Vintage, I scan the report for unusual or problematic things first.

In Grindeks case, I was puzzled by a quite unusual balance sheet position called “Advance payments for financial investments “ something which I haven’t seen before. The explanation in the notes says the following:

In 2012 the Company has signed purchase agreement with Dashdirect Limited regarding purchase of the controlling interest in the equity of HBM Pharma (Slovakia). As of the date of signing these financial statements the agreement is partly completed. The main activity of the HBM Pharma is production of the medical substances. As of December 31, 2013 the Company’s and Group statement of financial position contains advance payments related to the before mentioned purchase agreement in the amount of EUR 11,670,000. The Group management is certain that this deal is going to be finalized during 2014.

In my experience, it is not uncommon to take over M&A targets in several steps, but it is quite uncommon to pay money first and get nothing in return. A few days ago, Grindeks issued another news item which covered this strange transaction.

The numbers look OK, Grineks seem to pay only 6 times P/E of the target company. However another sentence looked strange:

Orders of JSC «Grindeks» make up about 30% of the total “HBM Pharma” s.r.o. turnover

So they are buying a company where they are the biggest customer anyway, also strange. So I decided to google a little bit and found this:

On July 8, 2010 Lithuanian-domiciled Central and Eastern European (CEE) specialty pharmaceutical company Sanitas, AB sold its 100% shareholding in subsidiary HBM Pharma s.r.o in Slovakia to Latvian company Liplats 2000, SIA. HBM Pharma was primarily engaged in toll manufacturing activities and the entity has been sold with all of its existing toll manufacturing contracts. As previously announced, sales, marketing and regulatory divisions in Slovakia and the Czech Republic were separated from HBM Pharma and retained in Sanitas Group prior to the divestment.
Sanitas acquired HBM Pharma (previously named Hoechst Biotika) from Sanofi Aventis in July 2005.

So a Latvian company called Liplats 2000 bought HBM in 2010. Googling further, I found this document on HBM’s website, describing a cross border merger between Liplats 2000 and HBM. The most interesting part of this document ist the last line in the final page: From Liplats side, a guy called Kirovs Lipman signed.

Now Kirovs Lipmans happens to be the majority shareholder of Grindeks. So effectively, Grindeks is buying this M&A target from theit majority shareholder (and former CEO). This is from Grindeks annual report:

Kirovs Lipmans – Chairman of the Council Born in 1940. Kirovs Lipmans has been the Chairman of the Council of “Grindeks” since 2003. Simultaneously K.Lipmans is also the President of the Latvian Hockey Fede
ration, the Member of the Executive Committee of the Latvian Olympic Committee, the Chairman of the Board of “Liplats 2000” Ltd. and JSC “Grindeks” Foundation „For the Support of Science and Education”, the Chairman of the Council of JSC “Kalceks” and JSC “Tallinn pharmaceutical plant”, also the Member of the Council of JSC “Liepajas Metalurgs”. Graduated from the Leningrad Institute of Railway and Transport

So to summarize it at this point: Grindeks never paid any dividends but makes a major acquisition and pays money upfront to a company controlled by the majority shareholder, without any disclosure of this potential conflict of interest.

Of course, theoretically, this could have been an “arm’s length” deal with no disadvantages for Grindeks, but the probability that something is “fishy” is quite high, combined with the fact that they never paid dividends.

Maybe I am too cautious here, but an undisclosed significant “related party” transaction is a big red flag for me.

Coincidentally, Grindeks also issued Q1 numbers a few days ago which didn’t look good. Sales in Russia tumbled. This seems to be a very Grindeks specific problem, as for instance Krka showed strong Russian sales in Q1 despite the “Russian crisis”.

Just to be clear: A “red flag” doesn’t need to be the ultimate “value driver”. Reply SpA is a good example. Since my “red flag” alert, the stock made a whopping 276% return.

For me, Grindeks is, depsite the attractive valuation, an absolute no -go. Undisclosed related party transactions combined with a lack of dividend makes this a speculation rather than a value investment. I don’t know if there are Corporate activists in the baltics, but this would be a good target. Additionally, they seem to have some specific operating issues as well, so no buy, watch only.


  • Hello Value… a lot of things have happened, even dividend payments. Do you consider an update of your research?

  • Wow!
    At their homepage, at the general meetings report, Grundeks remained indecisive about profit distribution and dividend:

    ‘”3. Distribution of profit for the year 2013
    To leave this item of the agenda without review and to assign the Board of joint stock company «Grindeks» to convoke the extraordinary shareholders meeting after financial statements for six month of 2014 are published, including in the agenda the item about distribution of profit for the year 2013 and preparing the draft decision based on the results for six month of 2014.”

  • Hello, thank you very much for the great detective work! Grinnex came up as a highly interesting pick on my stock screener, and I found your post via w:o – because of these compliance issues, I will not touch it – you just saved me a lot of work…

    But may I ask one question: why is it that important to you that a stock pays a dividend? I personally don’t regard dividends as an advantage (I like retained earnings in a company for tax reasons, as long as they are being reinvested well).

    • stand alone, paying a dividend is not important. But if you invest in “unknown territory” with questionable corporate governance and a dominating shareholder, paying dividends reduces risk.

      • If I understand you correctly, you view dividends in such a an “unknown” situation as a favorable signal that the company is shareholder friendly – and even to minority holders? Thanks for your reply.

  • Nase_weis_nix

    One point inside the acquisition taget´s (HBM Pharma) old financial statements drew my attention:
    “Receivables from a subsidiaries and controlling body corporates” increased significantly between 2009 and 2010 to app. 9 Mio EUR.
    2009: 356 272 EUR
    2010: 8 789 579 EUR
    2011: 9 023 892 EUR
    A loan was granted to it´s parent company “Liplats 2000” which merged with HBM in 2012/13 to new HBM.
    Now I get confused and cannot follow anymore. Are more recent documents available?
    How “Dashdirect Limited” is now related to HBM after the merger?

    Merger documents incl. financial information:

    • Can’t help you here but it seems HBM paid for its own acquisition to Lipman.

      • Nase_weis_nix

        As Grindeks looks promising – I digged deeper:

        Holding structure seems to be:

        Dahdirect Limited
        owns 100% of
        Liplats 2000 SIA
        owns 100% of
        HBM Pharma s.r.o.

        see last page of http://www.hoechst-biotika.sk/repository/recptai/SLO_docs/zmluva_zlucenie.pdf

        Liplats and HBM anounced merger to HBM new in 2012
        (no news regarding completion on HBM´s website)

        According Slovak register it looks like merger was conducted on 01.07.2013.

        At least the registration of a company change (holding?) was done.
        zrušené Osoby (Cancelled Person): Liplats 2000
        Nové Osoby (New Person): Dashdirect
        As I did not learn Slovak language, somebody may confirm.

        Strange that Grindeks announced a purchase agreement with Dashdirect Limited in 2012 – at the time it seems they did not own HBM but only Liplats shares.

        In terms of Dashdirect Limited I can´t find substantial information (Owners, executives, …), only basic Cyprus register data: https://efiling.drcor.mcit.gov.cy/DrcorPublic/OrganizationFileContents.aspx?id=410227&nameid=655171&regno=275245&name=dashdirect&number=%25&lang=EN&searchtype=optStartMatch&tname=%25&type=%u0397%u0395&subtypecode=101

        Further thoughts:

        I´m curious, whether HBM received appropriate compensation for the loan from Liplats during merger.

        Worst case HBM handed out money to Liplats, which may then handed further to Dashdirect (as compensation for any “services”). Finally HBM and Liplats are merged, with prior cash extraction to Dashdirect, a tax-optimised cyprus holding company. The devalued subsidiary may then be sold to a new investor (Grindeks).

        One should keep in mind Cyprus financial crisis took place in 03/2013 with bail in / haircut of banking accounts. This may have affected Dashdirect. If money was handed out to Dashdirect on a loan basis, redemption may be difficult.

        I also doubt financial numbers inside Liplats Excel report by comparing with HBM statements.

        E.g. in my opinion Liplats provides information on HBM loan in “Trade accounts payable”. This number almost fits to HBM numbers in “Receivables from controlling body corporates” in 2010 statement when converted to EUR. According HBM 2011 statement this number increased by accrued (not paid) interest. In Liplats 2011 column the number did not change.
        2010 HBM – 8.789.579 EUR
        2010 Lipla – 8.755.250 EUR (6.128.675 LVL with 1 EUR app. 0.7 LVL)
        2011 HBM – 9.023.892 EUR
        2011 Lipla – 8.755.250 EUR

        I can´t prove, that fraud is taking place. Above points may be ordinary negligence or mistakes.
        But as mmy007 wrote: If there are doubts – and there are some – investment is a no-go.
        Lessons I had to learn like many others the hard way.

        Thanks for your excellent blog!

        • #nase,

          thanks for your “forensic” research. Indeed, this looks very intransparent. Maybe everything is OK, but I would not want to bet on this.


      • Thank you for your detective-like research!

        “Strange that Grindeks announced a purchase agreement with Dashdirect Limited in 2012 – at the time it seems they did not own HBM but only Liplats shares.”
        As far as I unterstand, HBM was bought by Liplats in 2010 http://www.baltic-course.com/eng/markets_and_companies/?doc=26316
        So it seems to have been a pyramid holding: Dashdirect holds 100% of Liplats 2000; Liplats holds 100% of HBM.
        The Merger of HBM and Liplats should have simply been a reduction of the middle holding level – and making it harder to understand the game.

        “Worst case HBM handed out money to Liplats, which may then handed further to Dashdirect (as compensation for any “services”). Finally HBM and Liplats are merged, with prior cash extraction to Dashdirect, a tax-optimised cyprus holding company. The devalued subsidiary may then be sold to a new investor (Grindeks).”
        Quite possible. But as long as HBM will be anyhow close to hold the profit of the further years (2 Mio€), the aquisition price of 13 Mio € = P/E of 6.5 sounds like a fair deal for Grindeks.
        At least as long as the balance sheet of HBM is OK and not full of debts, as it would make EV/EBIT looking awful. I am curious to see the next balance sheet of Grindeks with HBM included.

        “I also doubt financial numbers inside Liplats Excel report by comparing with HBM statements.”
        I also do not fully understand these numbers. But if I take a look to the long financial terms of Liplats in 2010 and 2011 of 9.25 Mio LVL. In June 2010, when Liplats bought HBM, 10.25 Mio LVL = 13.1 Mio€. Quite exactly the price Grindeks later paid for the aquisition of HBM. So I suppose the aquisition of HBM by Liplats 2000 was prefinanced by this loan from Grindeks.

        Disclosure: Still long.
        I suppose the main shareholder is not playing completely fair to minor shareholders. But seeing that Grindeks made a profit in EVERY of the last TEN years I do not expect a heavy scam. Scammers usually dont wait for that long time for robbering a company.
        Regarding the stable & profitable business in a nice industry, the strong balance sheet and the very attractive valuation of the share I supppose to have a fair safety margin even for a perhaps nasty main shareholder. 🙂

  • Glad to have you back and posting regularly again…..

  • Great post!
    Kennt sich evtl. jemand mit dem lettischen Recht zum Acting in Concert (verfahrensrechtlich) aus? Könnte dabei interessant sein.

  • Falls er seinen Anteil ohne eigenes Geld steigern wöllte, dann wäre ein Aktienrückkauf doch wesentlich einfacher.

  • mmi,

    thank you for this check.

    I wonder whether it would be legal in Latvia to omit from reports related party transactions and where the highest volume of Grindeks AS shares trades.


  • Hi. Very good research on their last “deal”. I am from Latvia and was owner of Grindeks for some time.
    I sold my shares after Russia invaded in Crimea. I already previously commented that I don’t see it
    just as “headline risk”. Russia is aggressor and I don’t want to pay taxes to government who uses that money to
    invade European country in 21st century. Unfortunately many people in Europe will realize that only after Russia will make
    next aggression. I am intelligent enough to earn money in countries which are not starting wars in Europe.

    Kirovs Lipmans is very tricky guy. In his public speeches he clearly demonstrated that he don’t care about minority shareholder interests and would like to take over majority in the company, but he can’t do it openly. Currently with his wife he controls 49.98%. If his ownership exceeds 50% then according to LV laws he needs to make mandatory offer to minority shareholders to repurchase their shares, but he don’t have enough money for that.

    Over last year or so AB.LV private equity fund 2010 accumulated 22.66% of Grindex shares. So I though that Lipman family agreed with AB.LV bank that they will buy company shares in open market on the behalf of Lipman. But before this year annual meeting, AB.LV equity fund submitted draft resolution proposals to: a) include their representative in the company council and b) pay out dividends: 0.52 euro per share. This proposal clearly was against Lipman interests, therefore it was rejected. So now go figure: are they acting in tandem with Lipman family or they are “activist investors”?

    It is clear in my opinion that Lipman needs money because he wants to buy more shares of Grindeks. He is greedy and don’t want to rise this money trough dividends because then he looses 10% dividend tax + he must pay 50% from dividends to minority shareholders. So this “deal” with HBM Pharma is very good way for Lipman how to get money without paying anything to minority shareholders.

    • PM,

      thank you for your insights. Do you have more info on those AB.LV guys ? Are they “activist” in other stocks ?


      • This is from AB.LV press announcement: “ABLV Private Equity Fund 2010, KS which is a part of ABLV Group, has increased its shareholding in the leading Latvian pharmaceutical company AS Grindeks to 22.66%. In addition to AS Grindeks shares previously owned, ABLV Private Equity Fund 2010, KS has purchased 1 081 593 shares from funds managed by fund manager East Capital.The additional share purchase was made to support AS Grindeks and its management in realizing the company’s significant potential for development of new products and increasing sales in export markets.”

        ABLV Private Equity Fund 2010, KS is a private equity fund with 100% local capital, and it invests in leading and promising companies, becoming a reliable long-term financial partner. The fund also holds capital shares in such companies as SIA Depo DIY, SIA Orto klīnika, and SIA Vaiņode Agro Holding.” So no investment in other listed company.

        I wouldn’t rule out scenario under which they together with Lipman take Grindeks private. Grindeks is doing clinical tests for their original product in China. Now It think they are in phase 3 testing. If it is approved there then business value will increase and they must take this company private before that.

  • Huitzilopochtli

    Nice work on Grindex! The link to your “home forum” is not working. (at least not with firefox or chrome),
    btw. do you have an “away forum” ?

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