Where Value Hides in Plain Sight
A closer look at the net-net trading at 47% of NCAV from The Land of Pierogis and Profitable Cigar-Butts in which I decided to invest.
In my last article I covered 4 profitable net-nets that I found while going through some latest screens. I bought shares of the first two covered in the writeup and after doing some extra homework I decided to invest in another company from that list.
After adjusting my calculations carefully, it turned out that this company is a lot cheaper than I originally thought, and I just couldn’t resist buying.
Right now, it is trading at around 20% of book value, 47% of its adjusted tangible book value, and 47% of NCAV. As it is a family business, the management owns 56% of shares in total, which means that the incentives to improve the share price are there.
Why is it trading like this?
In 2020, the company was contacted by the IRS with some concerning news. They claimed that the company’s VAT-related costs for the years since 2014 were incorrectly calculated, in effect, overly reducing taxable income. The IRS wanted the company to pay additional tax, which in total was significantly higher than what it could afford. If the company decided to somehow pay it off, it would lose liquidity.
After digging deeper, the management said there was no real basis for such an outrageous claim. The sole existence of that claim (just or unjust) meant that, for the time being, a large cash reserve had to be put on the company’s books which, after all, still caused liquidity issues and pushed the company into an involuntary restructuring.
The company immediately started arguing that, in their view, everything was correct, and the IRS’s claim was unjustly calculated, and that there were many incorrect assumptions and logical errors. The company wanted to get a second look from the head of the IRS and shortly after was informed that, in his view, everything was correct. Fighting further, the company sued the IRS and in late-2022 won in court – something which was not unexpected by the management. The judge said that the IRS was indeed plainly wrong and agreed there were many incorrect assumptions.
After winning, the company could finally take those liabilities off of its balance sheet, thus booking some very large income due to this reversal (visible in the 2022 annual report). Unfortunately, the time it had to spend in restructuring caused the company quite a lot of trouble, but after discussing the situation with its creditors a deal was signed and the restructuring went away rather quickly.
It still has some related liabilities on its books, but after some deeper analysis I concluded that paying those off should not pose any problems.
Here is how the numbers look like today:
Update 16/07/2024 - I noticed I made an error in my excel formula - the correct P/NCAV was 47%, not 36.3%.
So, we have a profitable net-net that is trading for roughly half of its adjusted tangible book value, that successfully completed its restructuring, has a clear and undemanding path of paying off the creditors in the next few years, and with high insider ownership:
If you have read my previous article, by this point you should probably know that the name of this company is…