Friday, June 14, 2019

Eurocommercial Properties stock price, buy back and Graham value

Eurocommercial Properties just announced a EUR 20m share repurchase.

Bottom line earnings fluctuate more than the Direct Investment result. Last year's profit of around 4 Euros per share was not sustainable, income from rents minus expenses is between 2 and 3 Euros per share (or in this case Depositary Receipt of 10 shares) the estimate is EUR 2,36 for this year. The price seems very low, just like Wereldhave. It now pays 9% dividend. Too much debt for the Graham Defensive Investor.

I have adjusted the Graham Defensive Formula to Square Root of ( 15x EPS x 1,0x book ) instead of 1,5x book for real estate companies.

SECTOR: [PASS]  Eurocommercial Properties  is a real estate company. 

SALES: [FAIL] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. Eurocommercial Properties' sales of €230 million, based on 2018 sales, just fails this test.

CURRENT RATIO: [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. Eurocommercial Properties' current ratio €78,5m/€281m of 0,3 is too low.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [FAIL] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for Eurocommercial Properties is €1 996 million, while the net current assets are - €203 million. Eurocommercial Properties fails this test.

LONG-TERM EPS GROWTH: [FAIL] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. Eurocommercial Properties' earnings haven't increased and were negative in 2013. 

Earnings Yield: [PASS] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. Eurocommercial Properties' E/P of  10% (using Direct Investment Result per share) passes this test.

Graham Number value: [PASS] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. Eurocommercial Properties has a Graham number of (15 x €2,4 EPS x 1,5 x €40 Book Value) = €45 

Dividend: €2,2/€23,76 = 9% 

The buyback of EUR 20m at a stock price of EUR 24 per share, will buyback 833k shares. That saves EUR 1,8m a year in dividends and increases book value slightly by a little less than 2%. The savings in dividend is a direct 9% return on the the share repurchase, financing expenses are 2% per year. The buyback is logical but EUR 20m is a relatively small number compared to the 2 200m Net Equity (Book) value.

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