Value Investing Forum

Post edited 2:10 am – January 19, 2011 by Floris

Hey Guys,

Thanks for investigating this further. I don't

deny that this play is not risky (bought at 55cent now at 40), but then again

it would be not be trading at 0.05 of book value if it was a clear cut case. If

the market does somewhat recover, the firm (with new shareholders and

management) is able to stabilize cash flows it should be able to refinance a

large proportion of the oustanding debt.  Looking at cash flow, the number

is identical to 2009, so this could just be due to seasonality in cash payments

by health care providers and certaintly does not contribute to a trend. There

is the issue of government receivables, but they also get paid by other

healthcare providers in Greece. Furthermore the government will not need to

finance health care providers at some point otherwise greece runs out out

medicine. I could imagine the government not paying other sectors such as

non-critical consultancy firms etc, but medicine is a life neccesity so it is

relatively high on the scale of what will be paid first. You have to remember

that governments in southern europe (italy spain greece) have always been

notorious with their payment schedules. 

Taking one step back and  looking at a liquidation scenario I think we

can be pretty certain that there will at least a considerable amount left after

all liabilities are paid. This is shown below:

Cash can be taken at a 100% of

nominal value. Medicines can be easily used up and sold off, plus it has a long

shelf life so this should also be sold at near par. I have taken on 60% of

receivables due to the receivables problem. For PPE I have taken 70%. The

reason why I take 70% (and not a lower number) is because the firm merged in

2007 which under ifrs (correct me If I am wrong) implies that PPE needs to be

revalued at the time of a merger. This means marking it to market. Taking a 30%

to the assets therefore does not seem totally unrealistic. So unless I go below

50% of nominal value does the equity value equal the current market cap of

roughly 90m.

Let me know what you think.

Floris

Am I reading this incorrectly? According to the interim financial statements, they have (consolidated) negative cashflows from operations of $120mm. They may have earnings; but the large increase in receivables ($138mm) makes me wonder if they are prematurely booking their income; or they may have a collection problem. It's also clear from the cash flow statement that weakness in the euro is proving to be a drag on cash flow with cash flow from exchange differences turning from a positive $2mm to a negative $400K. I think they have a major cash flow problem. Even with inflows from the discontinued operations ($142.5mm), they still were cash flow negative for the first 9 months of 2010 (consolidated), going from $214mm in cash at 1/1/10 to $84mm in cash at 9/30/10.

Hi, this looks very interesting, but might need to consider this on an enterprise value and not just market cap basis as it is carrying a pretty nice amount of debt (735 million Euros- I am going to be quoting numbers in Euros). 735 mm is easily sustainable if their normalized EBITDA is 300 mm. It becomes dicier at their current 120 mm run rate. The EV looks to be about 835 mm (735 in debt and 100 in equity) which still might be cheap to normalized earnings, but the market appears to be pricing the company with significant bankruptcy risk. In BK the equity will likely get wiped out. So I'll ask 2 questions:

1. Do you think the 120 mm EBITDA is the low point in terms of earnings? 

2. Do you have any more color on their solvency? You hint that they might do another secondary offering to raise cash. 

This will clearly be a home run if the company stays solvent, but we would have to handicap the odds on that. Thanks. 

Post edited 9:03 am – January 11, 2011 by Floris

Yeah sure post it, no worries.

Hey guys,

Been a while since I posted here. Just wanted to share an idea which I bought a week ago. It might be a bit riskier than a standard net net (my strategy of choice) but the risk/reward ratio is much better imho.

Ratios:                                 
Price/Book (Q3 2010): 0.075x            2009 P/Op Cash Flow:  1.2x
Price/Tangible Book (Q3 2010): 0.13x    2009 P/E: 2.7x
 Debt/Equity Ratio:  (Q3 2010) 60%

Description:

Alapis
SA is the market leader in the Greek pharmaceutical industry. It also
has a leading position in a number of Balkan states as well as
activities in Turkey and the UK. It produces and distributes both
generic and brand name drugs to healthcare providers and hospitals in
these target markets.  It has long term license contracts with big
pharma as well as production capabilities for generic drugs.  The firm
is an amalgamation of different pharmaceutical companies in this region
that have merged under the name Alapi in 2007.

Situation:

As
is well known the Greek government is facing a tremendous debt crisis,
which many expect will result in either a) a default,  b) a major
restructuring or c) leaving the euro zone. I personally agree that the
greek government will likely face either situation a) or b), I feel
situation c) is politically unlikely. Nonetheless this major debt crisis
has caused a dramatic decrease in the stock prices in Greece as major
institutional investors have fled to the exits. This has led to a
dramatic decline in the stock market of 30%. Moreover career-risk averse
institutional investors are scared to death of being invested in any
firm with even the slightest greek government exposure, and this is
where Alapis enters in.

Why is it so cheap?

I
believe Alapis has become the poster child for a ‘bad’ stock. I will now
state all the reasons why I believe  the stock has come down so
dramatically this year.
a)      Both direct and indirect exposure to the greek government
b)      Relatively young record as a publicly traded firm
c)      200-250m of hospital receivables outstanding
d)      700m of debt that needs to be refinanced in 2012
e)      Major shareholder has liquidated its position
f)      Investors believe Greece will not ever do anything useful again.
g)      Uncertainty about the prices of medicine
If
you sum up all these reasons, one can run scared of this firm and never
look back.  I believe this is what has happened and what precipitated
the fall of the stock over the past 3 months (from above 2euros in
September to .48 cents in January).  However..  

Why should you want to own it?

Trading
at an unbelievable 0.075x of invested equity capital, it is one of the,
if not cheapest stock I have seen in years. Furthermore even in this
environment it has remained profitable. The firm has booked profits of
18m euros from continuing operations in the first nine months of 2009
(to put this in perspective the firm earned 78m from continuing
operations in 2008). Considering the current government squeeze and lack
of time to adjust to this new status quo, I believe this to be quite a
feat.  

The growth trends for this firm are also quite positive.
As the greek government cuts costs further, it will look for more
generic medicine, which Alapis provides. As the leading player in the
segment in south-eastern Europe it can use its scale to become the
de-facto choice for the greek government to buy generic medicine from.
While one may assume the Greeks will never pay for anything anymore
(which the market assumes), I view this as somewhat unlikely.  I expect
2010 to be a much better year as the greek government adapts its pricing
mechanism and the firm adjusts to the new reality.  I believe it should
start earning profits on par with 2008 (75m from continuing ops).  

Furthermore
a former large shareholder has recently reduced its stake from north of
20% to only 6%.  From talking to various parties I believe this sale
was due to a forced liquidation because of a lawsuit unrelated to Alapis
requiring significant payment. This announcement has apparently caused
further distress but this shareholder has been replaced by a private
equity firm called Lambda partners which is run by a former head of
Barclays Wealth in Eastern Europe. The fact that an experienced team is
willing to buy at these depressed levels also gives me confidence.  

Ridiculous valuation, but what are the risks?

A
stock this cheap always has some hair on it. A total failure of the
greek state and continued lack of payments would results in a
bankruptcy.  Secondly the firm might not be able to refinance its debt
in 2012 causing a large dilution (especially at these stock levels).
Thirdly the financials could be fraudulent (although audited by BDO).

Sure there are risks… but the risk/reward ratio is very appealing

Trading
at a 2009 P/E of 2.7x, Price/Operational Cash Flow of 1.2x and
Price/book of 0.075, Mr. Market is exceptionally pessimistic about the
state of affairs of the stock. Although there are some risks, I also
believe the risk/reward is unparalleled.  The stock could well return to
January 2009 levels (roughly 4.5 a share).  BUY

•       The author has a long position in ALAPIS