Michael, who already contributed on this blog (I strongly recommend his post on value investing available here), took a close look at the European Smaller Companies screen and has made some research on a stock he found appealing. Here it is.
Enjoy the read, don't hesitate to comment and share if you like it!
One company that caught my attention is Danieli, the Italian steel specialist.
Italy? Steel? No wonder the company is cheap. This must be a value trap, right?
Well, let’s check it out.
Danieli’s origins date back to 1914, when 2 Danieli brothers started a company in Brescia in Northern Italy to use Electric Arc Furnaces in steelmaking. In 1955 Luigi Danieli took over the family business (50 people) and started designing and manufacturing equipment for the steel industry, maximizing the use of automation. The first minimill was installed in Germany in 1964, and spread to Spain, the US and Asia. The company accelerated its growth under the leadership of Cecilia Danieli and her partner Gianpietro Benedetti (the current CEO). Following large investments in research, and M&A activity around the world, Danieli ranks today among the 3 largest suppliers of plants and equipment to the global metals industry (after Siemens VAE and SMS).
The company is still 63% controlled by the Danieli-Benedetti family and has 2 businesses:
These figures show that:
A closer look at valuation indicators confirms that the stock is cheap on all metrics. To illustrate the point, Danieli trades at only 3 times Enterprise Value (EV) on EBITDA (twice less than similar companies).
Enterprise Value calculation:
+ DAN voting shares €840m (40.9m shares @ €20.47 per share)
+ DANR savings shares €540m (40.4m shares @ €13.36 per share)
+ Net financial debt (€500m)
+ Other net liabilities €200m
The company’s savings shares pay a slightly higher dividend than the voting shares (35 cents vs. 33 cents). They currently trade at a 35% discount compared to the voting shares, in line with the historical discount.
The fundamental value of Danieli is significantly higher than its current market price. The share price has come off recent lows (the voting shares traded at €15 during the height of the European debt crisis; I wish I had looked at the company at that time) but still offers good value.
It seems that Mr. Market heavily penalizes the company because of its cyclicality, Italian roots, complex share structure.
Some analysts view the potential award of large contracts as a catalyst. At current valuations and with a long-term investment horizon, I believe there is a sufficient margin of safety even without major contract wins.
It is always comforting to invest along highly regarded investors (e.g., Bestinver, Alken, Pzena).
Disclaimer 1: I have just bought shares of Danieli. "Put your money where you mouth is", right?
Disclaimer 2: I am working for a Private Bank in Belgium. The views expressed here are mine and not those of my employer.