Tuesday, June 13, 2017

Groothandelsgebouwen after 54 Euro per share bid


Groothandelsgebouwen N.V. is a public company which owns the building in Rotterdam near Central Station shown below. The had a temporary staircase to the roof this year. In 2014 they wrote off some of the value on the building. With sales (rent) of only €15 million a year it is a too small company for the defensive investor. 


Another company offered to buy it for €54 a share, 13% above the stock price today. The company turned down the offer. The earnings have been adjusted to not include increased or decreased real estate value (which is reflected in the Graham Number through Book Value).

SECTOR: [PASS]  Groothandelsgebouwen  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. Groothandelsgebouwen's rental income of €16 million, based on 2016 sales, passes 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. Groothandelsgebouwen's current ratio €7m/€7m of 1,0 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 Groothandelsgebouwen is €63 million, while the net current assets are €0 million. Groothandelsgebouwen 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. Groothandelsgebouwen's earnings were negative in 2014 (due to impairments?).

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. Groothandelsgebouwen's E/P of 7% (using this years estimated adjusted Earnings) 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. Groothandelsgebouwen has a Graham number of (15 x €3,2 adjusted EPS x 1,5 x €55 Book Value) = €62 

Dividend: €1,55/€48 = 3% 


Conclusion: Groothandelsgebouwen has a lot of debt (which is normal for real estate companies) and an increasing dividend and increasing earnings from rent.  This might be a buy under €50,-.

Comments, questions or E-mails welcome: ajbrenninkmeijer@gmail.com

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