Description

There haven't been many Greek names presented, but there are a number of interesting names in the country.  I believe one such idea is Thrace Plastics.

Thesis Summary

Thrace Plastics Co. S.A. is a Greek domiciled, small-cap, multi-national company.  It operates in primarily two segments: technical plastic fabrics and plastic packaging.  Tainted by the developments in Greece over the last several years, enterprising investors will find a materially undervalued security trading at a 35% discount to tangible book value and a mid-single digit multiple of underlying earnings.  Thrace appears cheap on an absolute and relative basis - relative to comparable businesses and a broad sample of Greek companies.  Furthermore, substantial incremental capital expansion over the last 18 months has yet to produce any business.  The tailwinds on revenue and margins from this investment will soon become apparent.  Comfort in such a Greek investment ought to be found in the fact that Thrace Plastics is barely Greek!  In fact, 83% of revenue is derived outside of Greece, while 53% of production is inside the country.  And finally, the company understands the shares are cheap, and has been repurchasing shares to the maximum extent permissible.

Recent Greek Overview

• Syriza comes to power in January 2015 - later re-elected
• PM Tsipras took country to precipice of banking and economic crisis in standoff with EU
• Greek referendum in July 2015 - populace elected to say NO to EU
• Tspras government later relented and approved bailout agreement in August in the midst of severe capital controls and banking problems
• Support seems to have waned considerably for Syriza with New Democracy becoming much more favored in polls

I view this sequence of events as a significant, though by no means final, test of the Greek / EU relationship.  However:

• Greece remains in multi-year depression brought about the mismanagement of the country's finances
• Greece remains in a vulnerable position with regard to its finances and will likely require additional debt restructuring
• Greek politics remain challening and unpredictable (Syriza, New Democracy, Golden Dawn)
• Creditor mandated reforms to the economy continue and are significant
• Capital controls remain to various degrees across the economy

There is very likely to be periodic skirmishes over a long period that challenge investor resolve.

Thrace Plastics Overview 

3 Primary Businesses

1) Technical Fabrics - geosynthetics, construction, agriculture, landscaping, automotive, packaging, flooring

2) Packaging - filling solutions, bags, packaging, liners, thermoforming cups, garbage bags

3) Agriculture - greenhouse vegetable production (very small, not at all core to thesis)

Management and Ownership

• Konstatinos Chalioris - CEO (52 years old)
• Dimitrios Malamos - CFO (39 years old)
• Chalioris family owns approximately 62% of the company
• Team is fluent in English and open to speaking with investors
• Late 2010 - control family began significantly upgrading managment talent

How Greek is Thrace?

• Sales Profile - 83% Outside Greece, 17% Greece
• Production Profile - 47% Outside Greece, 53% Greece

Thrace is an exporter with substantial productive capacity inside Greece.  The packaging business is slightly higher margin (8.1% operating margin vs. 7.1% operating margin) and is more Greek dependent (38% vs. 5%) and likely makes the Greek contribution to operating profit a bit higher than sales.  With the investment program detailed below, it is expected the proportion of sales outside Greece will expand.  While cognizant of the short-term potential impact ont he share price of any future Grexit, this profile should mitigate the longer-term consequences to the business of a future Grexit.  This was a key feature of my interest in the company.

Financial Overview

• I've used "adjusting operating profit, pre-BD provisions & grants"... I don't usually like to adjust earnings too much, but in the case of Thrace this figure strips out imbedded gains/losses on asset sales and employee restructuring costs (mostly through 2010) typically highlighted and adjusted for in most US public companies. There were also a few years of large bad debt provisions through and just after the GFC. Finally, Thrace was entitled to several state subsidies on labor which have ended and were previously included in operating income. It should be noted that in the recent couple years, the company has been making below the operating income line provisions against such accrued receivables from the state. These provisions will likely continue and should be monitored, as there is now a mis-match between no accrual for state grants, but provision against prior accrued grants to reflect current value. There is a chance the company recovers these amounts from the government, but that is a big unknown. While important to track, this is not material to the thesis.
• Modest top-line growth of 6.8% over the last 6 years following the GFC.
• Improving gross margin has been the key focus - management has repositioned the product mix toward higher value-added products
• Improving operating margin - in addition to product mix focus, a much more concerted effort on scaling the administrative cost base

Below are the figures for the TTM. State grants have been excluded (1.2 million). There are two important adjustments that I have not made: 1) There was a sizable Q4 2015 executive departure package at the company's UK subsidiary. I don't know the exact figure, but it could be mid 6 figures or more; and 2) admin costs have begun to ramp in anticipation of the investment program (described below) which has yet to produce revenue.

• 58.8 million net debt
• .47x net debt to equity
• 1.9x net debt to EBITDA (pre-impact of recent investment program
• 16.6 million pension deficity (UK business)
• Significant cash holdings outside Greece and debt liabilities in Greece

Investment Program

• Thrace commenced a major 3-stage investment program in 2015
• Stage 1 build-out concluded at end of H1 2016 - 32 million (vs. net PP&E of 75 million at end 2014)
• Business from Stage 1 begins to deliver in H2 2016, but costs began in Q4 2015
• Company expects to deliver 50 million incremental revenue from Stage 1 (on 295 million ttm) at better than average margins
• 14% incremental EBITDA margin would add 7 million to a base of 31 million (23%)
• Expect to see a large portion of this benefit in 2017
• 23 million was invested in Greece and 9 million abroad
• Majority of total investment targeted toward technical fabrics
• Stage 2 and 3 are likely to commence in 2017 - undetermined size (but cap ex well above D&A)
• Stage 2 directed toward UK operations
• Stage 3 directed towawrd US operations

Valuation

Metrics:

• P/TBV - .7x
• P/E - 6.4x
• EV / EBIT - 7.0x

On a P/TBV basis the shares have been below TBV for a number of years now. No doubt this was due to poor returns on equity through this period. From 2008 to 2014 the average ROE was 3.6%. This has begun to change and we expect it to continue to improve as this investment program bears fruit. On a ttm basis ROE is over 10%.

Greek Cheap

I would agrue the company is Greek cheap.  The screen which produced the results in the table above consisted of 65 EBIT profitable public companies above 20 million in market cap (out of approximately 185 total listed companies).  I also excluded the banks and shipping companies, which each have their own set of unique problems.  While there is a substantial range of metrics, I think Thrace looks Greek cheap especially when considering it is primarily an exporter and seems to now produce a comparable ROE with comparable revenue growth.

Comparably Cheap

It would appear that the company is comparably cheap when looking at a number of global peers.  I should note the distinction of packaging versus technical fabrics above can be blurry.  

Comarable Transactions

• Sample of 42 transactions in both of the two Trace businesses around the globe
• EV / REV - 1.0x (Thrace 0.5x)
• EV / EBITDA - 8.1x (Thrace 4.3x)
• EV / EBIT - 16.6x (Thrace 6.5x)
• There are a number of serial acquirors in the space

Return Potential

• Might be approaching 14 million net earnings in 2017 (assuming lower revenue and margin contribution than the company thinks)
• 10x earnings would be near double over 18 months
• Closer multiple to global comps or other Greek companies would suggest a better multiple
• Believe a better multiple to TBV is warranted by now better ROE profile
• It sould be noted that company aspirations on revenue are higher by about 10% than revenue I used here - and include higher incremental margins

Capital Allocation

The company has prudently been repurchasing shares.  The label on the chart above are the yearly average P/TBV for the shares.  I'd note:

• This is against the current share count of 43.9 million
• Effectively repurchasing the maximum permissable by Greek law
• Company skipped final dividend last year, but have continued with share repurchase
• Worth noting significant insider buying in 2014 - 719,333 shares at .97 each
• Capital controls instituted in 2015 prevented repurchases for a period (remains a future risk)

Risks

• Financial and political environment in Greece - potential Grexit, capital controls
• Grexit ushers in return of Drachma - currency devaluation
• Commodity costs - resin
• Currency - Euro and Pound exchange rates
• Soft and potentially stressed EU macro environment
• UK pension plan - discount rates, significant equity exposure
• Investment program fails to deliver
• Additional non-core investments made (agriculture)
• ERP system implemenation issues
• Take-under by controlling family

Catalyst

• Resumptions of dividends
• Delivering on investment program Stage 1
• Ongoing share repurchase
• Commencing and delivering on Stage 2 and 3 of investment program