Italian Net Net (2): ELEN GROUP

Nets Nets in Italy 2: ELEN GROUP

The second Net Net I found in Italy is ELEN Group. Elen was founded in 1981 in Florence, Italy, from a university professor and one of his students. In 1983 the firm created its first medical laser system and in 1989 the company Deka Mela was founded for distributing biomedical devices in Italy and abroad and the group began taking shape. In 2000 the Group’s shares were listed on the stock exchange and in 2002 the Group acquired Cynosure, one of the most important American producer of medical laser devices. I found on ELEN website (www.elengroup.com) this description of the firm:

El.En. is the parent company of a high-tech industrial group operating in the opto-electronics sector, that exploits its own technology and multidisciplinary know-how to produce laser sources (gas, semiconductor, solid and liquid state) and innovative laser systems for medical and industrial applications.

The El.En. Group, one of the leading operators in Europe and the world in the laser market, designs, manufactures and markets at international level:

medical laser devices used in dermatology, surgery, cosmetics, physiotherapy, dentistry and gynaecology;

industrial laser systems for applications that range from the cutting, marking and welding of metals, wood, plastic and glass to the decoration of leather and fabric, and through to the conservative restoration of works of art;

systems for scientific applications and research.

Elen Group has a market cap of 50,6 millions as of 13/06/2012 and an EV of around minus 2 millions. Sales as of 31/12/2011 were 213,6 millions, total assets were 269,3 millions and shareholders equity was 175 millions (giving a P/B of 0,29). From balance sheet standards the group is cheap but from income statement standards it is not because the firm at the moment is not very profitable. The distribution of revenue is quite diversified. In 2011, 12,5% of Revenues came form Italy, 24% from Europe and 63% from the rest of the world.

Moreover, 63% of Revenue came from Medical Laser Systems while 17% came from Industrial Laser Systems.

The firm grew constantly its sales through organic growth and acquisitions but its operating profits have been quite volatile. Elen was never that profitable but before the economic crisis it had positive ROA and ROE and positive margins. I am not going to evaluate the earning power of this firm and its value as an operating entity, even if the earning power could add value to the assets if the group can digest its acquisitions and become profitable again. I found this firm during my screening for possible Nets Nets and therefore I will analyze the asset value. First of all lets take a look to the Net Net worksheet:

	Input	Per Share	Multiple	Discounted Value	Pert Share
Cash & Equivalents	48.364,54	10,03	100,00%	48.364,54	10,03
Restricted Cash	-	-	100,00%	-	-
Marketable Securities	24.332,28	5,04	100,00%	24.332,28	5,04
Cash Total	72.696,82	15,07	100,00%	72.696,82	15,07
Accounts Receivable	50.530,01	10,47	75,00%	37.897,50	7,86
Other Receivable	7.056,23	1,46	75,00%	5.292,17	1,10
Receivables	57.586,23	11,94	75,00%	43.189,67	8,95
Inventories Total	69.344,15	14,37	50,00%	34.672,07	7,19
Total Liabilities	94.285,50	19,54	100,00%	94.285,50	19,54
Property, Plant, and Equipment	27.807,09	5,76	10,00%	2.780,71	0,58
Shares Outstanding	4.824,37
Net Current Asset Value	105.341,70	21,84		56.273,07	11,66
NCAV + Fixed Assets (PP&E)	133.148,79	27,60		59.053,78	12,24
Net Cash	-21.588,68	-4,47
Price Per Share	10,50	10,50
NCAV + Fixed Assets (PP&E)	12,24	11,66
Price / NCAV + Fixed Assets (PP&E)	85,78%	90,02%

Elen has a Market Cap of 50,6 millions and 48,3 millions in cash: 95% of Market Cap supported by Cash. In addition to 48 millions in cash, the group has 24,3 millions of marketable securities (held by the controlled Cynosure) and total liabilities are 94 millions. The Net Current Asset Value is 11,66 against a stock price of 10,5 therefore price is 90% of net current asset value. If we add 10% of Net PP&E, NCAV becomes 12,24 and price would become 86% of NCAV. Hence the firm trades below NCAV and can be considered cheap form the balance sheet point of view. Moreover, the firm is losing money but it was profitable a few years ago and could become profitable again when the economy recovers from one of the deepest crisis of the century. Below I put a quick translation of the balance sheet:

Balance Sheet	31/12/11	Common size
Intangible assets	23.958.312,00	9%
Tangible assets	27.807.086,00	10%
Investments	442.129,00	0%
Deferred tax assets	6.354.281,00	2%
Other non current asstes	5.217.436,00	2%
Total non current assets	63.779.244,00	24%
Inventories	69.344.148,00	26%
Receivables	50.530.006,00	19%
Current tax assets	5.989.431,00	2%
Other receivables	7.056.225,00	3%
Short term investments	24.332.276,00	9%
Cash and Equivalents	48.364.542,00	18%
Total current asstes	205.616.628,00	76%
Total assets	269.395.872,00	100%
Shareholders Equity	175.110.377,00	65%
Non current liabilities	10.616.945,00	4%
Non current financial liab.	6.684.237,00	2%
Total non current liabilities	17.301.182,00	6%
Current financial liabilities	12.997.172,00	5%
Payables	34.576.491,00	13%
Other current liabilities	29.410.650,00	11%
Total current liabilities	76.984.313,00	29%
Total liabilities	94.285.495,00	35%
Total Equity and Liabilities	269.395.872,00	100%

Elen is well capitalized, 65% of the total assets is financed by equity. Financial liabilities are 7% of total assets while cash and short-term investments are 27% of TA. Inventories and receivables are quite high (45% of TA) but their level has been stable in the last years. Intangible assets are most of all goodwill generated by acquisitions and are not at a preoccupant level: 9% of TA. So the balance sheet is solid.

Conclusion

From the asset side ELEN group is undervalued given that it trades below the NCAV. However some risks exist: in the past managers (of the parent and of the subsidiary cynosure) have been prone to acquisitions and this could lead to a decrease in asset value brought about by vale destroying investments. Another risk is that the most probable catalyst for an increase in the share price is the return to profitability of the group and this depends on the performance of last acquisitions and the economic crisis. However, when the economy recovers, the medical laser sector, especially in esthetic applications, could be a growing one and this could add value to the asset value. Elen has almost 20% of the 1,7 billions € medical laser market and therefore it is in a good position to profit from the laser market resurgence.

Disclosure: I do not hold a position in any issue mentioned in this post.