Mayr-Melnhof Karton AG (VIE:MMK)

Intro
Mayr-Melnhof Karton (MMK) is a leading global manufacturer of cartonboard and folding cartons active in 33 countries with around 15,000 employees. MMK operates in three divisions: Pharma & Healthcare Packaging, Food & Premium Packaging and Board & Paper. The company promotes sustainable development through innovative, recyclable packaging and paper products.

MMK has been listed on the Vienna Stock Exchange since 1994 and is still controlled by core shareholder families, who own roughly 58% of the share capital. The remaining 42% is free float.

Valuation
Especially in 2021 to 2023, Mayr-Melnhof has been very active in buying other companies (for example Essentra Packaging) or incurring large investment programs (for instance currently at its paper mill in Kwidzyn in Poland). Through these activities, net debt has increased from around €200 million in 2019/2020 to more than €1.2 billion in 2023. 

Leverage ratios have also increased and ought to be reduced in the coming years again.
Historically, MMK has earned a bit less than €10 per share, which would translate into a normalized P/E ratio of around 8x under the assumption that they will return to at least the same profit levels as in the past. The P/B ratio sits also at a rather low value of 0.83x.

What’s next?
The business model of Mayr-Melnhof can be quite cyclical and due to some overcapacities currently prevailing, earnings seem to be distressed, and the firm also lowered its dividend. 

The recently done acquisitions will need to be digested but there is little doubt that the company won’t make it through the current downturn, as there have been many since the founding year in 1888.
Although MMK is already a market leader, there is still a lot of room to grow organically but also through further acquisitions.

Now seems to be a good time to step up to the plate.

Current Price
€84.10 per share

Disclosure
The author is currently neither long nor short Mayr-Melnhof.

Cash in?

In mid-2022, Agios Pharmaceuticals (NASDAQ:AGIO) was mentioned on this blog as kind of a special situation. It was explained that the company was roughly available at its cash value. Some of the value described seems to have materialized now and the stock increased from $17.60 to around $33.00. Because of many other excellent opportunities, this might be a good moment to cash in and realize the profit of almost 90% - congratulations!

Bayer AG (ETR:BAYN)

Intro

When is enough enough? Since Bayer closed the acquisition of Monsanto in 2018, the company hasn’t been the same. Bayer incurred huge litigation costs associated with the takeover, a lot of trust and reputation has been lost and the share price fell from more than €100 per share to below €30 currently. A debacle.

Bayer generates around €50bn in revenues, of which 50% is from crop science, 38% from pharma and the remaining 12% from consumer health.

 

Valuation

The big elephant in the room are the litigation costs and hence free cash flow is impacted by litigation pay-outs and also one-time costs for transformation to reorganize the business.

Bayer currently trades below book value, showing a P/B of 0.85. Just recently, the company basically suspended its dividend (they still pay out a small minimum dividend which is marginal) for the next three years.

Adjusted for the litigation effect, Bayer is still expected to generate an EPS of around €5-6, which translates into an adjusted P/E of roughly 5x.

In sum, if the litigation effect is taken out, rather cheap valuation metrics.

 

What’s next?

Is now enough? Of course, this is impossible to answer. However, it seems like that everybody has left this ship who wants to be out: results have been bad, litigation takes longer than expected and the dividend has basically been suspended. After this last bad news, the stock has held steady might indicating that the worst for the stock is over.

Although it needs a lot of phantasy currently, if we fast forward 3-5 years, the company will presumably have reduced its debt load by approximately €4-6bn, hopefully solved the crop science issues and invested into its crop science as well as pharmaceutical pipeline. And then, we may see a resumption of the dividend payments once again. Time will tell.

 

Current Price

€28.82 per share

 

Disclosure

The author is currently not long Bayer; however, his close relatives have some exposure.

 

Hong Kong Ferry Holdings (HKG:0050)

Intro

Hong Kong Ferry Holdings is mainly engaged in property development and investment. As the name says, they also operate a ferry business and has expanded into the medical field.

Major sources of income are currently rental income from properties and interest income on the cash reserves.

Due to the large cash reserves, the company paid out a special dividend for its 100^th anniversary in 2023 of HK$1 per share besides its ordinary dividend.

Warning: this is – again – a very illiquid stock and hence not suited for everybody.

 

Valuation

The balance sheet as of mid-2023 can be summarized as follows:

• HK$3.5bn of non-current assets (mainly investment properties)

• HK$1.8bn of inventories (mainly properties in development)

• HK$1.8bn of cash

With no financial debt, this leaves equity of HK$6.9bn. Compared to the market cap of HK$1.6bn, the P/B ratio stands at 0.23.

 

What’s next?

At the current stock price, it is possible to buy this 100-year-old company at just the cash in the bank value and all real estate and other business is given on top of that for free.

All in all, although there might be macro risks, this seems to be a solid risk-reward situation.

 

Current Price

HK$4.50 per share

 

Disclosure

As with most shares discussed on here, the author is long Hong Kong Ferry.

Canadian Net Real Estate (TSXV: NET.UN)

Intro
Sounds like real estate, doesn’t it? Yes, it actually does. You believe real estate is a sound investment in this interest rate environment? It depends. 

Before we get into Canadian Net Real Estate, a big disclaimer: this is once again a tiny cap with very low liquidity. So, if you need or want a lot of trading liquidity, this is certainly not something for you.

Canadian Net acquires and retains commercial real estate leases in around 100 properties in Eastern Canada (focus on Quebec and Ontario) with a 100% occupancy rate as of Q3 2023. Some of the largest single tenant include Loblaws, Walmart or Sobeys. The contracts are on a triple net basis, meaning that the tenant pays all the expenses of the property, including real estate taxes, building insurance and maintenance. These expenses are in addition of the costs of rent and utilities. This is the major difference of triple net leases vs. normal commercial contracts where more costs are typically the landlord’s responsibility. Triple net leases ensure stable recurring cash flows.

Due to a solid real estate market in Canada, NET has been able to increase its funds from operations and dividend in the last ten years significantly.

Insiders of the company own ~15% and hence have skin in the game.

Valuation
NET shows a market cap of around C$100 million at a price of C$4.85 per share. Due to the rental contract structure, there is low CAPEX need. The average lease term remaining is more than 6 years and as indicated above consists mainly of AAA tenants. 

Slightly more than half of the funds from operations generated are distributed in form of a dividend. The dividend is paid monthly and amounts to roughly 7% p.a. at the moment.

What’s next?
Canadian Net has a very simple strategy and finds itself in an attractive market niche which should allow for further growth. Interest rates have already normalized to a certain degree which should be positive for NET. The low-risk business model coupled with additions to its portfolio as demonstrated in the past should result in a good operational performance also going forward. Boring, but steady – exactly as I like it.

Current Price
C$4.85 per share

Disclosure
As with most shares discussed on here, the author is long NET.