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.
