3 Bulgarian Net-Nets (Almost)

Mekom (MKX)

Mekom engages in meat and meat products manufacture and trade.  Most of its production is exported, but it also has a solid market share in Bulgaria, where it works with the major supermarkets.  Or this was the story up until 2010.

At the time of my market scan, it had net current asset value of $14.5m, based on investor.bg data.  The whole company was selling for $0.75m.  Before you get excited, the financial data on the website was from 2010Q3.  As of 2012Q3, NCAV is a negative $43m.  At this point, you can fast-forward to the next company or continue reading about a company gone wrong.

In 2012, Mekom blew up.  Big time.  Sales for the first nine months fell 80% YoY.  It booked a $40m net loss on $18m of impairments, $23m of provisions, and a $13m inventory write-off.  Out of six required filings with the exchange for the third quarter of 2012, the company actually filed just two – the financial statements and the declaration from the CEO.  No notes to the statements.  No discussion of the results.  No clue about that the hell happened.

As if this was not bad enough, there are patent irregularities in the financial statements.  While the income statement’s bottom line shows a loss of $40m, the balance sheet, which breaks out current year loss from retained earnings (loss), shows a $14m loss instead of $40m.  Yet, it balances.  There were huge twists in some accounts compared to yearend 2011:

  • $11m (+88%) increase in accounts receivable
  • $34m (0 last year) investments in other companies (not explained)
  • $16m (+290%) increase in accounts payable
  • $19m (+250%) increase in short-term bank loans.

This adds up to a $10m increase in assets.  Add the changes in other accounts and you get the $16m part of the net loss for the period not registered in retained earnings (loss).

Cash flow from operations is a negative $1.2m.  The cash flow statement doesn’t mention anything about that $34m “investment in other companies.”  Total investment cash outflows are $12.67m.  The $19m short-term bank loan is also not mentioned.  Instead, there is roughly $3m loaned and $3m repaid during the period.  The $40m accrual loss is presented as a $1m decrease in cash.  The final cash balance almost matches the amount stated on the balance sheet – $77,000 vs $88,000.

But wait, there is more.  After I went through the financial statements, I read the news.  Turns out the new majority owner of Mekom appointed a new CEO in August 2012, who declared the half-year statements, issued under the previous CEO, fraudulent.  The “accurate” statements were delayed as were the third quarter statements.  In October 2012, the food administration found 4.2 tons of “unsuitable” meat in the processing plant in Silistra.  Some of it had expired as far back as 2009.  The shares lost most of their value over the past year and are trading at a little above a cent.

Now, I don’t watch TV – just the evening news – but I believe I would have noticed if such a scandal was mentioned.  But I don’t recall anything.  On the internet, I read that the company has been sucked dry by the majority owner and management over the past two years.  Late in 2012, Mekom got its electricity cut off due to unpaid bills.  Its animals were starving, because there was no money for animal feed either.

I didn’t know the first “net-net” would turn out this way, but it’s good that it did.  This should serve as a reminder of the risks of investing in frontier markets.


Aroma (6AR)

Aroma, as the name suggests, deals in fragrances and is the largest Bulgarian cosmetics manufacturer.  It also manufactures the packaging for its products and, at the end of 2011, acquired a ground freight company to ship its products.  Aroma’s product portfolio includes toothpastes, toothbrushes, creams, shampoos, hair dyes, aerosols, perfumes, and soaps.  Its major markets are Bulgaria (35-40%) and the Balkan countries, but also CIS, the EU, and Africa and the Middle East.

At the close of 2011, Aroma had a net current asset value of $5.4m.  It is currently selling for $4m.  However, upon updating the my data with the latest financials, as of December 31, 2012, the situation changed.  Current assets, which consisted mostly of receivables and inventories, shrank by $4m while total liabilities increased by $2m, making NCAV negative.

Sales have declined by 8% on average over the past decade.  However, the company remained profitable every year.  Below you can see the 10-year financials.

For about a year the company traded at a 30% discount to NCAV.  Despite the volatile performance and declining sales, the company was not losing money.  This will often be enough for a net-net investor to pick it up.  And if qualitative analysis can sometimes be skipped in developed countries, this should never be the case for emerging, and especially frontier, markets.  Oftentimes, there is a plenty of geo-political and liquidity risk.

As in case of Mekom, when I went looking for news about the company, I didn’t come back empty-handed.  Turns out in mid-2008, shareholders lost their shareholder rights.  How come?  Apparently, the court in Sofia decided to prohibit shareholders from exercising their rights over what is essentially their property.  The reason – “to collateralize a future claim against the company.”  The future claim – to void Aroma’s purchase of Astera Cosmetics.  More digging showed that the case is a clash between the current majority owner and his former partner from the 90s.  Without going into details, trading in Aroma’s shares was suspended for 15 months until the court’s decision was overturned.  Inadvertently, I have stumbled upon another “buyer beware” sign.


FairPlay (6F3)

The third and last net-net that appeared in my pre-screen is a company I have already written-up here.  That’s FairPlay – the REIT dealing mostly in summer and winter resort properties, and specifically the Santa Marina holiday village in the Black Sea resort, Sozopol.  The company is trading at a 80% discount to NAV and 20% discount to NCAV.  However, NCAV is not a good measure for a REIT as it contains mostly of apartments for sale arbitrarily assigned to current assets.  Obviously, an inventory of apartments can’t be liquidated quickly even when offered at firesale prices.  In any case, you can take a look at the post about FairPlay here.


In conclusion

The first batch of net-nets that emerged from my quick scan of the Bulgarian stock exchange was rather disappointing.  In the coming weeks, I will gradually sift through the filings of 137 companies I identified as investable.  If I come across something interesting, you will find out here.