Yuri Gagarin ($4PX:BU) Special Shareholders’ Meeting

Today, I attended my first shareholders’ meeting.  It was the special shareholders’ meeting of Yuri Gagarin ($4PX:BU) – the company I wrote up a month ago.  I bought just one share for the purpose of attending this meeting and more importantly, taking a tour of the company’s premises.  So, I will divide this post in two parts – one about the meeting itself and another one about the premises.

October 2012, Special Meeting of the Shareholders of Yuri Gagarin

The regularly scheduled date for this meeting was September 20, 2012.  However, it was rescheduled, due to a lack of quorum, for October 8, 2012.  The only resolution on the agenda was ‘Personnel Changes in the Board of Directors.’  Now, I found this strange because the proposition was made on a board meeting on August 2, 2012 – only 3 months after the AGM during which all 3 directors were reappointed for new 3-year terms.

The important event during these 3 months was a change in the Tobacco and Tobacco Products Law forbidding the manufacture and sale of cigarette tubes and thus, effectively killing the company’s fastest growing product line.  Rumor has it that Bulgartabac ($57B:BU), the tobacco monopoly and owner of Yuri Gagarin until 2006, lobbied for this law change to suppress the share price and buy the company on the cheap.  Interestingly, a month before the amendment, Yuri Gagarin’s management announced a plan to purchase a Hungarian company, allegedly to move the banned production there.  However, 2 months after the amendment was passed, the plan was scrapped, quoting changes in the business environment.  New rumor has it that the amendment may be reassessed in coming parliamentary discussions.  That’s plenty of rumor that may or may not bear on the changes in the board.

Surprisingly, there were no shareholders to propose any changes in the board even though there was a quorum this time and the meeting was conducted normally.  That was it for the meeting.  Rather short and uneventful.  Whatever was supposed to happen didn’t happen.

Tour of Yuri Gagarin’s Operations

After the uneventful meeting, the guy I was with (who first kindled my interest in this company and also had a more decent position than my one share) asked the Director of Investor Relations (IR) whether anybody would be so nice as to show us around the premises.  Turns the director was that nice person.

The tour of the company’s operations left me with a positive impression.  Everything, from the lawns and parking lots outside to the machines and work areas inside, was well maintained and clean.  Workers busy and machines churning, we walked through the cardboard and paper packaging operations where the boxes for cigarettes, chocolates, toothpaste and so on were being cut, colored, glued, stacked, packaged and ready to be shipped.

Then we took a look at the cigarette filters operation.  We had the pleasure of being accompanied by the amicable floor manager who shared a lot of technical details about the processes and the machines with us.  Again, long isles of well-maintained, old and new machines – this time churning out monoacetate (normal), carbon, and mixed filters.  We also visited the closed down cigarette tubes operation.  One machine, which had been working at full capacity before the law change, was now silent and covered in nylons.  The second one, which was bought to meet the increasing demand for cigarette tubes was never even taken out of the boxes.  Both were just standing there – €5 million worth of investments idling, not generating €3.6 million sales annually (or 14% of TTM sales of €26.4 million).  IR couldn’t give us any information about the company’s action plan in this regard.

From the back-and-forth about the machines, it became apparent that, with the latest additions, the company virtually has all the machines that it needs, meaning capital spending should drop off significantly.  Averaged over the past 5 years since the company was spun off from Bulgartabac, that’s around €3 million annually.  Assuming €0.5 million of maintenance capex, this will result in a free cash flow of €3-3.5 million.  That’s 20-24% yield on a market cap of €14.5 million.  Even assuming lost sales on tubes of €3.6 million (although they reached this number by mid-2012, thus not affecting to such an extent the 5-year average cash flow from operations) and a 20% net margin on them, free cash flow should come in at €2.3-2.8 for 16-19% yield.

This sounds great.  However, management has not been forthcoming about distributing dividends.  So far they have had a good excuse in funding capital expenditures.  Although the capital investment plan has mostly been carried out from what we learned today, at this year’s AGM shareholders declined a proposal by Ivaylo Penev of Elana High Yield Fund to distribute as little as 12.75% of last year’s profit as a dividend.  Actually, it was not even voted because first the proposition to retain all of the profit was voted and passed.  Only 15% of the represented shareholders voted against.  Of course, with a 67% control block and around 80% of the capital represented at the meeting, 12% dissent is as good as it gets.  Pretty much every minority shareholder wanted a dividend.  But, in such situations it’s the goodwill of the majority holders that counts.  It still remains to be seen how much of that there is.

Conclusion

Upon close inspection, the land, buildings, and machines are there – working and in perfect order – and, from this amateur boots-on-the-ground check, they are likely to be worth at least their value on the books.  The book value per share of the company is roughly €32 and the last trade was at around €14.5.

Below I am including two brochures depicting the machines and products of the company.

Yuri Gagarin – Filters and Tubes
Yuri Gagarin – Cardboard and Paper Packages

 

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