Category Archives: Quick Check

Quick check: Cairo Communication (ISIN IT0004329733) – 12% dividend “wonder” or liquidation ?

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A reader pointed out that Italian company Cairo Communciations might be an interesting investment.

Company description per Bloomberg:

Cairo Communication S.p.A. carries out its activities in the communication field as an advertising broker for a variety of media, such as commercial television, analog and digital pay television, press, and the Internet. The Company also publishes magazines and books and operates an Internet portal through its own search engine, Il Trovatore.

Cairo looks relatively cheap on an earnings basis (2011):

P/E 8.5
EV/EBITDA 4.5
P/S 0.7
P/B 3.13

The company doesn’t have any debt but significant net cash (0.70 EUR per share against a share price of 2.56 EUR).

ROCE and ROE are both above 30%, so is this a value investor’s wet dream ?

Cairo is listed since 2000, so let’s look at some figures from the past:

BV Sh EPS DPS NI Margin Sales pS ROIC
29.12.2000 1.62 0.09 0 5.6% 1.5348 3.03%
31.12.2001 1.70 0.08 0 4.8% 1.7509 2.84%
31.12.2002 1.73 0.07 0.04 4.7% 1.5929 1.93%
31.12.2003 1.72 0.07 0.24 3.8% 1.7299 2.74%
31.12.2004 1.65 0.09 0.16 3.6% 2.3745 3.54%
30.12.2005 1.58 0.08 0.16 3.5% 2.3161 3.81%
29.12.2006 1.19 0.15 0.30 0.0% 2.7983 7.74%
31.12.2007 1.11 0.15 0.25 5.4% 2.9956 11.34%
31.12.2008 0.91 0.17 0.40 5.6% 2.9527 14.22%
31.12.2009 0.86 0.16 0.20 5.3% 2.9259 15.12%
31.12.2010 0.90 0.27 0.20 8.3% 3.2273 27.67%
30.12.2011 0.82 0.30 0.40 8.3% 3.6192 31.81%
             
Total   1.67 2.35    

The numbers look really interesting. On the one side, it looks like a liquidation, with dividends being constantly higher than earnings. On the other hand, Cairo managed to more than double their sales with almost half of the equity and at the same time increase their margins to a healthy 8%.

Together, this of course leads to a dramaticv increase in ROE and ROIC.

Interestingly the stock price hovers only slightly above the post internet bubble prices:

Summary:

I think this really looks interesting and worth a deeper look into the drivers of the sales increase and profitability development. If this would be “sustainable” then Cairo might indeed be an attractive opportunity.

Quick check: Fabasoft AG (AT0000785407) – Cheap EV/EBITDA 2.4 stock or value trap ?

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From time to time, readers ask my about my opinion on certain stocks. First of all this is of course flattering, secondly it is also a good motivation to look at as many stocks as possible.

However, I am not an expert on all stocks in the universe, but nevertheless I want to share some of my thoughts from time to time on the blog.

Fabasoft

Fabasoft is a small Austrian software company which is active in Document management solutions, mostly for Government and Defence companies. Fabasoft was IPOed in the middle of the “Neuer Markt” boom in 1999.

According to Pat Dorsey, Software companies can be interesting “moat” business, also the business scales pretty well, meaning increasing sales incrrease profits over-proportionally.

For Fabasoft, this doesn’t really hold true. Although they managed a turn-around in 2011/2012 according to their annual report, they seem to swing from profit to loss like a pendulum from year to year. The loss in 2010/2011 was preceded by a profit in 2009/2010 and again a loss in 2008/2009. the same again for the preceeding 2 periods. Loss, profit, loss, profit.

Since 2000 this looks like this:

TRAIL_12M_EPS BOOK_VAL_PER_SH NI Margin
29.12.2000 -0.37 3.24 -21.35%
31.12.2001 -0.20 3.09 -12.11%
31.12.2002 -0.12 2.91 -6.14%
31.12.2003 0.41 3.31 12.90%
31.12.2004 0.53 3.80 13.21%
30.12.2005 0.34 3.92 7.57%
29.12.2006 -0.07 3.68 -1.98%
31.12.2007 0.09 3.80 2.36%
31.12.2008 -0.29 3.27 -7.35%
31.12.2009 0.45 3.45 10.02%
31.12.2010 -0.05 2.76 -2.03%
30.12.2011 0.15 2.91 3.35%

The stock chart shows that since 2005/2006 the stock is trading sideways:

Sales have remained more or less constant since at least 2006. What makes the stock attractive under EV metrics is the relatively large cash pile.

As of 31.03.2012, the company showed around 14 mn EUR in cash which, based on 5 mn shares, a shareprice of 3.75 EUR and roughly 2 mn EUR EBITDA results in an implied EV/EBITDA of around 2.4, which looks very cheap.

However, this is one of the cases where a simple EV/EBITDA calculation might be a bit misleading. On the liability side for instance, they show prepayments of around 7 mn EUR. One could discuss this now for some time if we have to deduct prepayments from EV, but the major point for me is the followng:

Fabasoft is not a Net-Net, the market cap is still higher (19 mn EUR) than net short term assets (13 mn EUR) as well as net equity (14 mn) and the business is not consistently profitable. We do not know what they do with the cash. They paid some dividends and bought back some shares in the past, but nothing regular.

So even if they pay out all the cash, one is still left with a business which over the cycle does not earn its cost of capital. At least for me that doesn’t sound very attractive. I would prefer companies like Installux, who have a profitable business AND low EV/EBITDAs, there are plenty of them out there.

Summary: Despite an optical low EV/EBITDA, I don’t think Fabasoft is a very attractive investment. Mainly because they couldn’t prove that their business is actally profitable ovewr a longer period of time. If one is sure about a lasting turn around, than it might be a good investment, but as I don’t really know the business, this would be too risky for me. Based on past performance, this could well be a typical value trap.

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