IMA S.p.A. : relative valuation (historical market multiples).

With regard to the valuation, it is interesting to consider also its historical market multiples.

However, it needs to mark the following considerations :

• Every time period has its own market multiples, due to the macroeconomics factors and to the economic cycle ; in this way, the comparison term loses its value ; 

• The market anticipates the events and prices the expectations ; for this reason, the past valuations had always incorporated the whole scenarios ; the valuations and future market multiples are more important ; 

• Thirdly, with regard to the litterature, the relative valuation is composed always with a peer analysis, with a focus on the expectations of the sector (see the link, https://michelecarollo.blogspot.com/2018/11/ima-spa-relative-valuation.html). 

Here, we have the historical market multiple P/S. I used this market multiple with the aim to reduce the bias : the results at the top of the income statement are less influenced by several factors. 

We can notice that the last multiples are higher than the past multiples but we must consider the previous paragraphs, of course.

Then, the market valuation tends to assign higher multiples to a growing company, over time, like IMA S.p.A.

In this way, it is advisable to consider also a median of the multiple or a weighted average (the past prices are less important than the current prices). 

The expected market multiples (the yellow columnes) are substancially lower than the mean, median and weighted average (black and dashed lines in the chart). The gap is not so wide (that confirms the previous valuation). 

IMA S.p.A. : relative valuation.

Here we have a relative valuation of IMA S.p.A. It operates in the industrial machinery and equipment, like the peers of the sample. In particular, its business is focused on the packaging industry, through the segment lines : tea, food and other ; pharmaceutical sector. 

In order to select the peers, I considered the following requirements : similar business and geographical area and similar size (revenues or market cap as the proxy of the size), having regard to the differences, like the profitability, the growth, the risk and the financial structure (in this way, I adjusted the market multiples, appropriately or I considered the difference as a discount or as a premium in the valuation ; about the financial position, the differences are very small).

I used a leading market multiple (expected results in the year 2018, 2019, 2020, data source : www.marketscreener.com). I also considered the management assumptions, expectations and business plans.

Let's look at the market multiples, in the following table.

It needs to consider that about the equity story and size GIMA TT ("recent history") seems to be a a distortion compared to the other firms. It can be interesting, regarding its similarity to IMA, however, it is more advisable to exclude it from the peers group.
Then, we can calculate the mean and the median, respectively :

EV/EBITDA (10.08 | 9.44) ; P/S (1.60 | 1,70) ; P/E (18,45 | 17)

At a glance, we can notice the discount of IMA S.p.A, apart price to earnings.

Secondly, it is more useful to link the market multiples to the fundamental variables (profitability and growth, above all). In this way, see the next table.

We can calulate the mean and median, excluding GIMA TT again and IMA, for obvious reasons.

EBITDA margin (15.72% | 18.12%) ; EBIT margin (12.55% | 15.03%) ; NI margin (8.71% | 10.40%)

CAGR EBITDA (8.94% | 7.58%) ; CAGR revenues (6.66% | 5.94%) ; CAGR NI (12,85% | 12.74%)

Substantially, IMA marginality is slighy lower compared to the sector profitability ; however, the growth is rather higher.

Finally, let's put the variables together, thanks to a regression line.

Market Multiples (Y) vs Profitability (X)

Market Multiples (Y) vs Growth (X)

In the two charts, the intercept is not considered because it is not important, in a statistical point of view (statistical significance). However, the angular coefficient is good. The R-squared is excellent, in the following order (from the lowest to the highest) : P/E regression, EV/EBITDA regression and P/S regression.

So, we can determine the fair value of IMA and its premium or discount. In other words, its intrinsic market multiple.

margins
FV (I) = P/E = 181,61*7,30% = 13,25                       
premium : +36,7%

FV (II) = EV/EBITDA = 60,513*15,65% = 9,47     
discount : -7,82%

FV (III) = P/S = 12,88*12,85% = 1,65
discount : -20,24%

growth
FV (IV) = P/E = 120,66*17,54% = 21,16                 
discount : -14,4%

FV (V) = EV/EBITDA = 100,75*12,15% = 12,24   
discount : -28,7%

FV (VI) = P/S = 23,794*7,14% = 1,7                       
discount : -22,3%

Finally, we can conclude than the discount is higher (as I said) with the growth. With the margins, the discount is smaller and we have a premium with the P/E regression. At a glance, IMA is traded at a slighty lower market price compared to its hypothetical fair value. Of course, it does not represent a safety margin, at the moment. The price still could go down for the reason that the trend is clearly bearish. However, the current market price is beginning to be interesting.

COVER 50 S.p.A. : a good firm with low visibility.

With regard to the FY 2016 results (consult the link http://www.cover50.it/wp-content/uploads/2017/04/cover-50-comunicato-stampa-130417.pdf), the business increases.

The profitability is strong (from 12% to 48%, from the net income to the contribution margin). 

The cash is high and the cash generation, too (see the cash flow statement) : we speak about a net financial position of about 11.9 EUR millions. The financial structure is excellent with low dependence on debt ("the company mostly finances itself with equity") and the EBIT interest coverage is very good (aka EBIT/net financial charges). 

However, the growth rates are really tight. The business increases at a rate of  2% / 3%. 

The main weakness is the low visibility explained by :

1. Low growth rates ;
2. Low volumes of the stock (COVER 50 is listed on AIM that is notoriously known for those features) ;
3. Free float 25.77% (http://www.cover50.it/azionisti/) with the significant shareholder Fhold S.p.A. with a share of 74.23% (this factor with the previous point could really represent an obstacle for the market liquidity) ; 
4. The mono-product (the company specializes in the designing, manufacturing and selling men's as well as women's trousers, under the PT Pantaloni Torino brand name) and  the high dependance on the domestic market (the revenues in italian market are still about 43% of the total revenues). 

To improve the business and the visibility (with positive effect on market prices), they should invest more (with a cash of 12 EUR millions, the growth throught M&A could be an opportunity).  At the same time, the development to the high-potential markets should be greater (in particular, with a product differentiation). The subsidiary PT Corp in USA is an example (http://www.cover50.it/wp-content/uploads/2015/04/COMUNICATO-STAMPA-23-SETTEMBRE-2015-rev-BIM.pdf).

As announced in the last press release, the yield is about 4.4% and the payout is about 71%. I would have preferred a reinvestment of the profits rather than a (good) shareholders remuneration, to finance the growth. In this sense, the higher growth attracts the visibility. 

Indeed, the market multiples could be cheaper compared to the peers (on average, fashion and luxury stocks have excessive valuations, due to the brand perception/visibility and due to the high profitability). 

At the current prices, the multiples of COVER 50 (FY 2016 results) are the following : 

• P/S = 2.28 
• EV/EBITDA = 8.12
• P/E = 18.52

The market probably discounts the lack of the visibility and of the liquidity, the lower size and the lower growth expectations (adjusted market multiples). 

About the chart and with regard to the last performance, we have a renewed interest of the investors : the volumes are increasing and the stock is out of the rectangle (accumulation area) with a stop in area 13.7 EUR. 

See the link https://twitter.com/michele_finance/status/773242796425768961/photo/1 and compare it with the current situation (the updated chart is below). 

Chart from Investing.com

Cement industry : Cementir Holding S.p.A. and the value map.

Here we have a classic value map that relates the market multiple P/S (price to sales) to its intrinsic profitability (EBIT/sales or EBIT margin or ROS) and then the mentioned multiple to the expected growth, from the year 2017 to the year 2019 (data source estimates : www.4-traders.com). 

The expected growth is the CAGR, aka cumulative average growth rate. 

The formula is the following : 

[(expected revenues fiscal year 2019/revenues fiscal year 2016)]^(1/3)-1

It is expressed as a percentage. 

The meaning of the relationships (P/S-ROS and P/S-CAGR) is that higher the multiple (P/S), higher the margin (ROS) and higher the multiple (P/S), higher the expected growth (CAGR) and viceversa. 

Obviously, the market generally rewards the firms with higher profitability and with higher growth, with a major market price. 

The relationships can be shown as a value map, particularly through a regression line. 

We have two equations : 

1) P/S = a + b*ROS

P/S = y ; ROS = x

2) P/S = a + b*CAGR

P/S = y ; CAGR = x

In both cases, the intercept (a) was removed for the reason of the low statistical relevance. 

The RSQ is high (0.9070 and 0.8488), which means the strenght of the model.

Graphically, we can note that the relations are clear, substantially : higher the market multiple, higher the profitability and the expected growth.

The stocks above the regression line (dashed line) are overvalued, the stocks below the regression line are undervalued. In this way, for Cementir Holding, we get a "value gap" that is equal to :

[P/S (effective)-P/S(calculated from the market model)] : [P/S(calculated from
the market model)]

The P/S (effective) is 0.72.
The P/S (calculated from the market model) is equal to (9.10%*12.54).

There are also some "outsiders" (Vulcan Materials, Eagle Materials). The profitability is very high compared to the peers. Indeed, we have a multiple P/S of about 4X.

Likewise, for the relationship P/S-CAGR : see the following chart.

The discount ("value gap") is much greater, 71.94% vs 36.91%. The "growth adjusted market multiple" is preferable to the "multiple adjusted for the profitability".

If we remove the two outsiders from the sample, the statistical models are stronger : RSQ is higher, the relations are more even significative. However, the discounts are lower : 10.36% vs 36.91% and 57.16% vs 71.94%.

Finally, Cementir Holding is cheaper than the peers. Secondly, in my opinion, the stock is much more attractive in the area 3.80-4.80 : we could benefit more so from the discount prices and from a possible graphic retracement (see the chart), event if the current prices and expectations are interesting.

Chart from Investing.com

For further information, consult the following links:
http://michelecarollo.blogspot.it/search?q=cementir ;
https://stocktwits.com/michele_finance/message/75068152 ;
https://stocktwits.com/michele_finance/message/79046330. 

Geox S.p.A. : business turnaround & BP, drivers of the (possible) upside for the next months.

With the presentation of the strategic business plan (2016-2018), at the current prices (about 2 eur/share), the stock seems to be interesting, about the valuation (2018E) : EV/EBITDA 5X, 

EV/SALES 0.5X. The market multiples are more generous in its sector (luxury sector and the like). 

Secondly, the ratios must be adjusted for the high expected growth (see the following image).
Indeed, the expected growth is greater compared to its peers. The handicap is the profitability : the margins are low ; however, with the progress of the business plan, we will see a likely improvement of the EBITDA margin  (from 7% to 10%) and of the NET INCOME margin (from 1% to 4%). 

Then, the margins are supporting the growth and the investments.

Analysis dated December 4, 2016 ;  revised data from www.4-traders.com

The management is implementing a saving costs policy and they are streamlining the stores.
There is a change in the business : investments and advertising & promotions. The product is changing, compared to the past years, the geographical focus, too (sales increasing with a major growth rate in "other countries"). The last agreement with Pou Sheng International  was signed with that purpose (the italian market is stationary or declining). 

The valuation is interesting if we compare it with M&A multiples, too. 

                              

There are some risks, of course. The business plan could be not achieved even if the credibility and communicability of the management are better versus the previous business plan.
The current BP is far less aggressive with lower risk of PWs, the guidance is a range without interim targets, the starting point is the full year 2015 (in fact, radical and positive changes over the years 

2013-2014-2015).

Data source (except the chart, Investing.com ) : Geox S.p.A. Investor Relations

Finally, at the current prices, it could be an opportunity (not free of risks) because there is a potential 

that is not discounted in market prices.
Secondly, the risk is smaller : one consideration is buying at 4 eur/share ("bubble prices") and another is buying at 2 eur/share (more so with the mentioned assumptions).