Monnari Trade Update
Polish gem with my catalysts
Company name: Monnari Trade S.A.
Ticker: WSE:MON
Price: 5.44 PLN
Market cap 140 PLN million (35 USD million)
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Summary
In this post, I will provide an update on my first write-up posted on this Substack about 5 months ago. I believe enough has happened with the stock that warrants a short update. Since my write-up on the 26th of February, the following events have happened with the stock:
The stock is up 12% in the local currency and 25% in USD.
The Zloty has strengthened significantly, which helps the core business.
Cash on the balance sheet being deployed to protect it from inflation.
The CEO bought another 1% of shares in the market personally.
A new buy-back program was approved at the AGM, with the first shares already being purchased this week.
Questions during the AGM were answered, providing further insight into future capital allocation.
First analyst coverage was initiated.
These factors further underscore my belief that management is set on realizing a more appropriate value for the stock that still trades at roughly 50% of book and below (current assets + non-core real estate) - all liabilities, making it a true net-net. Also trading at between 5.5-7 marketcap to operating earnings. Let shortly discuss al developments above.
1 & 2 Stock and Zloty Performance
My write-up was posted on Sunday, February 26th. If you had bought the stock at the high price of 4.77 PLN, you would be up 12% in PLN and actually 25% in dollars due to the appreciation of the Zloty against most other currencies like the dollar. This appreciation occurred as the fear of the Ukraine war effecting Poland waned. This means that the stock is less of an opportunity than when I first wrote about it.
However, the stock still possesses significant upside, which is actually boosted by the strengthening of the Zloty (up 25% from lows late last year). Monnari is not an export-dependent business, but as a clothing retailer, it is clearly influenced by currency rates. The majority of clothes Monnari sells are produced in Southeast Asia and bought in dollar-denominated contracts. So, the Zloty's strengthening will greatly help them decrease the cost of inventory in the coming year(s).
Although the stock has risen, it is still remarkably cheap, trading at 50% of book value and still below net current assets value, especially if we include the real estate in Geyer’s Gardens that is not needed for normal business considerations.
As of the end of Q1 2023 Monnari had the following liquide assets:
Item | Amount | Percentage of Market cap
Inventory: 66.5m PLN 47%
Receivables: 19.5m PLN 13%
Real-estate (Geyer’s Gardens): 75.0m PLN 53%
Financial assets: 67.7m PLN 48%
Cash equivalents: 26.9m PLN 19%
Total current assets: 255.6m PLN 181%
Total liabilities: 63m PLN 45%
Net current assets value: 192.4m PLN 136%
Looking at the table above, we see quickly that the real estate investment and financial assets together cover the full market cap, which in my opinion greatly de-risks the stock. The net current asset value is 36% above the market cap, still making Monnari a prime net-net (below net current asset value and consistently profitable).
3 Deployment of cash
From the table above, it is also clear that Miztal, the CEO of Monnari, cares about protecting the company's assets from inflation by keeping a minimal amount in cash. Most of the cash has been moved to financial assets at the end of Q1 2023. Not all of these financial assets are just short-term government notes. By far, the largest single financial asset the company owns is a 6 million euro (28 million PLN) loan to another publicly listed company in Poland called Rank Progresiv. The euro loan is for two years and yields 8% annually. Given that 2-year eurozone bonds are at roughly 3.5%, this represents a decent spread in my opinion and, at the very least, protects the cash from inflation, which seems to be the stated goal of this transaction.
The second significant transaction is that Monnari has signed a letter of intent to buy a piece of real estate valued at 18 million PLN from Orbis. Little is currently public about the exact nature of the property, except that it is located in Wrocław. Orbis is Poland's largest travel agency/hotel operator, so it is highly likely that Monnari purchased one of their hotels. Once again, the President has commented that this move was a way to hedge cash, they are not venturing into starting a hotel chain.
4 & 5 CEO buying and new buyback program
One person who clearly enjoyed my write-up and agreed with the undervaluation of the shares was the CEO, Mr. Miztal. As on the 28th of March, he bought a big block of shares, 300,000 in total. This amount is more than 1% of the company at a price of 4.80 PLN. The total value of this transaction was 1.44m PLN. This compares to Miztal's total remuneration of 0.635m PLN, so it's two times his total salary. Miztal is very well aligned, owning roughly 50% of the stock valued at around 70 million PLN, or roughly 100 times his annual salary.
A second interesting development is that another way Miztal is taking advantage of the cheapness of the stock is through a new share-buyback program that was approved at the last AGM. This further underscores that Miztal thinks the shares are cheap and wants to accumulate them in any way he can. However, the program does have some problems. Firstly, it is relatively small, with only 10 million PLN allocated to buy back shares, and the program lasts all the way until 2028. Additionally, the company has already started buying back shares directly, making purchases on both last Thursday and Friday.
Another issue with the program is that the company currently holds around 15% of the free float as treasury shares, a result of the previous buyback. In Poland, there is a limit of 20% for treasury shares, and once that limit is reached, the program will be done. Ideally, this would finally force the company to cancel the treasury shares, which would help the company's financials screen better, as many public source have a wrong share count/marketcap (I am looking at you Google Finance).
6 & 7 Analyst Coverage and AGM Questions
The first analyst coverage of Monnari Trade has also started, although I tend to agree mostly with Buffett that analyst coverage tends to be a good substitute for the funny papers, it is nice to see the stock is getting some more attention. The latest analyst report values Monnari at 7.3 PLN. This is low in my opinion, and their valuation methods are very flawed. As they use a 25% weighting of a comparison of multiples with competitors (this is useless as Monnari is very different due to the RE on the balance sheet), the other 75% of the valuation is made up of a DCF that seems overly conservative and gives no credit to the financials and real estate on the balance sheet.
Furthermore, we had the AGM where the management board (a.k.a. Mr. Miztal) answered some questions regarding capital allocation. The basic message was that there will be no dividends unless we reach an operating margin of 10% or more. If he returns capital for now, it will be by using a buyback. Furthermore, he is strongly hinting at wanting to buy a competitor so he can realize some cost efficiencies. Although we do not have a long and strong track record of business acquisition from Miztal, I do think such a transaction should create value for the stock, even if it is subpar. As currently much of the financial/cash on the balance sheet seems not properly reflected in the stock price, this will hopefully be unlocked once the cash is deployed productively (you cannot ignore cash flow from a new company in your DCF). Furthermore, I agree with Miztal that some cost synergies are likely as Monnari owns its distribution warehouse, and other elements of the business like IT can probably share some costs.
Concluding Remarks
I hope this update gave some clarity for casual followers about what has been going on with Monnari Trade and underscores its cheapness. Furthermore, I think many of the events of the past half-year demonstrate that there are plenty of catalysts helping the stock reach full value. Mainly:
Increased attention (Analyst coverage)
Core business being helped by a much stronger Zloty
Buyback
Acquisition deploying cash, unlocking current discount
Potential sale of the remaining part of Geyer’s Gardens