Vanguard - Half-yearly results of Mid-Caps - Sept 2007

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Midcaps Sept2007.pdf, 138 Kb

A number mid-size capitalization companies have published their financial results for the first half of the year, so we are updating the essential Information thereon. We will refer to 18 mid-cap stocks that are becoming more visible to investors as options for portfolio diversification.

Following the H1 results, several mid-cap stocks that remain amongst our toppicks distinguish themselves: TMK Artrom Slatina (ART), Artego Targu-Jiu (ARTE), Constructii Bihor (COBJ), Iproeb Bistrita (IPRU), Constructii Sibiu (CONR), Constructii Transilvania (COTR), which are trading at attractive valuation multiples and their market value can register significant upsides, at once with the growth in business.

Adversely, there are steeply-priced companies, the multiples of which can be justified on a long-term basis, either by dynamic business growth and/or profitability (Albalact – ALBZ, Ductil Buzau – DUCL), or the entry of some international portfolio investors into their shareholding structure, which suggest a solid potential of business growth (Prospectiuni – PRSN, Imotrust – ARCV, Santierul Naval Orsova – SNO).

Ticker	Sector	Price 28 Aug	market cap (RON mn)	Avg. turnover last 3 months (RON)	P/E 06	P/E 07e	P/S 06	P/S 07e	Comments
ALBZ	Dairy production	2.84	542	731,495	90.3	32.9	5.3	2.9	CAGR of sales of over 50% until 2010
DUCL	Welding products	1.85	340	61,553	21.5	17.3	2.5	2.2
PREH	Construction materials	20.7	511	180,607	64.7	38.4	5.4	4.5	sales growth: 20%/year
ARCV	Real-estate	3.77	402	456,130	95.7	20.1	134	134	P/B = 3.8; sales figure still irrelevant
INTE	Tourism	1.7	57.8	1,898	22.2	25.1	5.7	5.7	stagnation or slow growth of sales
COBJ	Constructions	58.5	59.7	6,268	28.4	23.9	1.9	1.6	sales growth can exceed 20% in the medium-term
PRSN	Geological prospecting	60.5	1303	1,586,869	33.4	34.0	6.3	6.3	optimistic P/E 07 is 23.4
CEON	Construction materials	28	82	96,649	117	25.6	3.3	2.2	2007-2008 sales CAGR of 40-50%
IPRU	Cables	9.45	385	724,315	27.9	15.4	2.6	1.9
PTRO	Pipe manufacturing	25.4	367	107,425	44.7	7.2	0.4	0.4	high volatility of profits
ART	Pipe manufacturing	69.5	841	154,339	13.5	14.1	2.6	1.6	2007-2010 sales CAGR of 40-50%
ARTE	Conveyor belts	12.8	128	55,146	27.5	10.5	0.7	0.6
CMF	Environmental equipment	6.6	154.5	50,814	42.9	29.7	1.5	1.4
PCL	Paints	3.94	280.7	63,177	33.0	30.2	2	1.7
PPL	Plastics	4.3	162.7	289,928	40.7	31.9	2.55	2.2	real-estate component is predominant
SNO	Shipbuilding	18.5	169.1	124,273	25.2	23.8	2.1	1.8
CONR	Constructions	34	24.3	2,578	13.5	12.8	1.0	0.9
COTR	Constructions	350	178	20,771	55.6	14.8	5.2	3.6

Albalact S.A. Alba-Iulia (ALBZ)
- dairy products -

Price 28.08.2007:	2.84 RON/share
Capitalization:	542 mn RON
sales H1’07	74.8 mn RON
Net Income H1’07	6.9 mn RON

- Following the successes achieved in 2006 by launching the Zuzu line of fresh products, which boosted sales by a third, this year, the company focused on carrying out the necessary capital expenditures in order to build a new factory in the vicinity of Alba-Iulia. The new factory will increase production capacity 2.5 times;
- Although the new factory is not yet finished and operative, the company’s activity grew solidly during the first half of the year. The company’s sales figure hiked 77% in H1 y/o/y, up to some 75 mn RON. The net profit made in the first half of the year is 6.85 mn RON, almost 11 times higher compared to the same period of last year. In H1’2007, the company’s operating expenses growth rate lagged some 16 percentage points behind that of operating revenues, leading to an EBIT figure 7.66 times higher than the one achieved in H1 of 2006;
- Expected to be open at the end of September, the new factory will bring add 200,000 liter/day to the overall production capacity, increasing it to 340,000 liters/day;
- The company’s representatives stated that this year, marketing expenses as percentage of sales will increase because of intensified promotional activities and the entry into the cheese market segment. We estimate that they will exceed 3% of sales this year.

							2007e
ALBZ (RON mn)	2003	2004	2005	H1' 06	H1' 07	2006	basic	prudent
sales	20.9	47.5	64.5	42.3	74.8	102.1	185.8	185.8
sales Growth (%)	-	127%	36%	46%	77%	65%	82%	82%
Operating exp.	18.8	43.5	60.2	42.4	73.0	100.9	180.0	180.0
EBIT	2.0	3.8	4.3	1.2	8.9	6.3	19.9	15.9
EBIT margin	9.6%	8.0%	6.7%	2.7%	11.8%	6.2%	10.7%	8.5%
Net Profit	1.3	2.7	3.1	0.6	6.9	6.0	16.5	12.4
Net Margin	6.2%	5.7%	4.8%	1.4%	9.2%	5.9%	9%	6.7%
						P/E 07=>	32.9	43.6

market valuation of the stock

a) Basic assumptions:
- marketing expenses of 4.2% of sales for the whole year (5% in Q3 and 4% in Q4)
- marketing expenses (%) + EBIT margin = ~ 13%;

Basic Assumptions (table)

b) Prudent assumptions:
- marketing expenses of 6.3% of sales for the whole year (10% in Q3 and 7% in Q4)
- marketing expenses (%) + EBIT margin = ~ 13%;

Prudent assumptions (table)

Ductil S.A. Buzau (DUCL)
- welding products and equipment -

Price 29.08.2007:	1.85 RON/share
Capitalization:	340 mn RON
sales H1’07	73.7 mn RON
Net Profit H1’07	11 mn RON

- H1 sales hiked 11%, up to RON 73.7 mn. For the whole year, we estimate a 12% increase in sales, up to RON 151.7 mn ;
- The EBIT margin improved slightly, with 1.4 percentage points compared to the same period of last year, up to 17.6%. For the end of the year, we are expecting an EBIT margin of 14.7%, corresponding to an EBIT figure of some RON 22 mn;
- Within a basic scenario, we estimate that the annual net margin will be in the vicinity of 12.6%, implying a net profit of slightly over RON 19 mn. At this profitability level and current market capitalization, the P/E ratio is 17.3, which is below the average valuation level of the most liquid stock in the market right now;

DUCL (RON mn)	2003	2004	2005	H1' 06	H1' 07	2006	2007e
sales	90.0	114.5	117.6	66.2	73.7	135.5	151.7
sales Growth (%)	-	27%	3%	11%	11%	15%	12%
EBIT	19.6	22.9	15.8	10.7	13.0	18.6	22.3
EBIT margin	21.7%	20.0%	13.5%	16.2%	17.6%	13.7%	14.7%
Net Profit	16.5	16.8	13.4	9.1	11.0	15.8	19.1
Net Margin	18.3%	14.7%	11.4%	13.8%	15.0%	11.6%	12.6%
						P/E 07=>	17.3

Prefab S.A. Bucuresti (PREH)
- construction materials -

Price 29.08.2007:	20.7 RON/share
Capitalization:	511 mn RON
sales H1’07	47.6 mn RON
Net Profit H1’07	4.7 mn RON

- The sales figure grew at a lower rate during the first half of this year compared to the corresponding period of lat year, respectively by 14%, up to RON 47.6 mn. For the whole year, we expect a 20% growth in sales, up to RON 114 mn;
- The EBIT margin almost doubled y/o/y in the first half of 2007, reaching 11.1%. The EBIT figure added up to RON 5.3 mn, double compared to the operating profit made in the first half of last year. We expect that the company will make RON 15 mn in operating profit for the whole year, which correspond to an EBIT margin of 13%;
- In the first six months of 2007, the company’s net margin increased more than twice y/o/y, the bottom line adding up to RON 4.7 mn, almost three times the profit made in the same period of last year. For the entire year, we are expecting a net margin of 11.6% and net profit of RON 13.3 mn. The estimated P/E ratio for 2007 is therefore 38, a high valuation level from a value investor’s standpoint, though from a “growth” perspective, this valuation premium reflects the high growth potential of the Romanian construction market in the upcoming years;

PREH (RON mn)	2003	2004	2005	H1' 06	H1' 07	2006	2007e
sales	33.8	52.0	74.3	41.6	47.6	95.3	114.3
sales Growth (%)	-	54%	43%	19%	14%	28%	20%
EBIT	3.0	5.7	9.5	2.6	5.3	8.8	14.9
EBIT margin	8.7%	11.0%	12.7%	6.2%	11.1%	9.2%	13.0%
Net Profit	1.4	4.4	9.8	1.7	4.7	7.9	13.3
Net Margin	4.3%	8.4%	13.2%	4.2%	9.8%	8.3%	11.6%
						P/E 07=>	38.5

Imotrust S.A. Arad (ARCV)
- real-estate development -

Price 29.08.2007:	3.77 RON/share
Capitalization:	402 mn RON
sales H1’07	1.3 mn RON
Net Profit H1’07	18 mn RON

- During H1’2007, the company’s sales figure increased 57% y/o/y, up to RON 1.3 mn. Shifted from canned food production to real-estate development last year, the company’s new core activity is still running at a low level, so far, the main source of operating revenues being the sale of land and buildings from the company’s fixed asset portfolio. For the whole year, we cautiously estimate a 40% increase in sales, up to RON 3 mn;
- The operating result is still negative, the losses being more than halved though, compared to the first half of last year.
- The company made RON 18 mn in net profit during the first half of the year, due to financial profit in excess of RON 23 mn, coming from the sale of its own shares and other financial transactions. This profit is of a nonrecurring nature, and it is unlikely that it will be registered in the second half of the year as well. Therefore we considered two sets of assumptions regarding the evolution of the company’s profitability for the entire year:

a) Basic assumptions:
- H2: operating loss of RON 2 mn and a +4 mn RON in financial profit from transactions - Net Profit of RON 20 mn for the whole year and P/E of 20;

 b) Prudent assumptions:
- H2: operating loss of RON 2 mn plus no financial profit - Net Profit of some RON 16 mn for the whole year and P/E of 25.2;

							2007e
ARCV (RON mn)	2003	2004	2005	H1' 06	H1' 07	2006	basic	prudent
sales	2.4	2.2	1.1	0.8	1.3	2.2	3.0	3.0
sales Growth (%)	-	-9%	-51%	-	57%	105%	40%	40%
EBIT	0.1	-0.1	-0.1	-0.5	-2.0	0.12	-4.0	-4.0
EBIT margin	3.9%	-	-	-	-	5.5%	-	-
Net Profit	0.02	0.01	0.04	3.2	18.0	4.2	20.0	16.0
Net Margin	0.8%	0.7%	4.1%	391.9%	1387.5%	194.9%	655.9%	524.8%
						P/E 07=>	20.1	25.2

International S.A. Sinaia (INTE)
- tourism -

Price 29.08.2007:	1.7 RON/share
Capitalization:	57.8 mn RON
sales H1’07	4.7 mn RON
Net Profit H1’07	1.1 mn RON

- In the first half of this year, the company’s sales hiked a mere 1%, up to RON 4.7 mn. We estimate that this year, the company’s sales figure will stagnate compared to last year;
- TheH1 operating margin was 5 percentage points higher than the one in H1’2006, this margin improvement taking place in the second half of last year and being maintained through the first part of this year. For the whole year we expect the company to achieve the same level of operating profitability, respectively an EBIT figure of RON 3.1 mn;
- In what concerns net income, we cautiously estimate that last year’s margin will be carried on, the net profit for this year reaching RON 2.3 mn, down by some 11.6%. In this case, the P/E ratio estimated for 2007 is 25. From a more optimistic standpoint, we could expect the net profit to be the same as last year’s, case in which P/E 07e is of 22.2.

INTE (RON mn)	2003	2004	2005	H1' 06	H1' 07	2006	2007e
sales	6.5	7.5	9.4	4.6	4.7	10.1	10.1
sales Growth (%)	-	17%	25%	7%	1%	6%	0%
EBIT	-0.3	0.8	3.8	1.2	1.5	3.1	3.1
EBIT margin	-	10.6%	40.0%	26.4%	31.5%	31.0%	31.0%
Net Profit	-0.03	0.8	3.4	1.1	1.1	2.6	2.3
Net Margin	-	10.5%	35.7%	23.2%	23.5%	25.8%	23.0%
						P/E 07=>	25.0

Constructii S.A. Bihor (COBJ)
- constructions -

Price 29.08.2007:	58.5 RON/share
Capitalization:	59.7 mn RON
sales H1’07	18.2 mn RON
Net Profit H1’07	2.4 mn RON

- sales more than doubled y/o/y in the first half of 2007, thoughg slightly below the budgeted level for this period. H1 sales amounted to RON 18.2 mn. Considering the budgeted figures for the second half of the year, we expect the company’s annual sales to be RON 38.5 mn, 20% higher y/o/y;
- The EBIT margin improved considerably, up to 15.4% from the 3.3% in the first half of 2006. For the whole year, the results achieved so far, added up with the budgeted figures for the rest of the year, led us to an operating profit of RON 3.1 mn, at an EBIT margin of 8%, comparable to that of last year;
- Interms of net income, we estimate that in 2007, the company will make RON 2.3 mn in profit, at a net margin of 6.5%. Based on this estimate and the company’s market capitalization at the date mentioned at the top of the page, the P/E ratio estimated for 2007 is of 23.9.

COBJ (RON mn)	2003	2004	2005	H1' 06	H1' 07	2006	2007e
sales	12.9	16.1	16.9	9.0	18.2	31.8	38.5
sales Growth (%)	-	25%	5%	73%	102%	88%	21%
EBIT	0.1	0.9	1.1	0.3	2.8	2.4	3.1
EBIT margin	1.0%	5.3%	6.7%	3.3%	15.4%	7.6%	8%
Net Profit	0.2	0.7	0.9	0.2	2.4	2.1	2.5
Net Margin	1.3%	4.2%	5.6%	2.6%	13.3%	6.7%	6.5%
						P/E 07=>	23.9

Prospectiuni S.A. Bucuresti (PRSN)
- oil prospecting services -

Price 29.08.2007:	58.5 RON/share
Capitalization:	59.7 mn RON
sales H1’07	18.2 mn RON
Net Profit H1’07	2.4 mn RON

- First half sales experienced a slight decrease of 3% y/o/y, down to RON 87.5 mn. In a base scenario we can expect a 7% fall in sales for the whole year, down to RON 192 mn. In a more optimistic perspective we could consider stagnation of the sales figure at RON 206.5 mn;
- The company’s operating profitability improved in the first part of this year, the operating margin adding 12 percentage point, up to 30.5%. The EBIT figure surged 60% up to RON 26.7 mn. In the base scenario, we expect this profitability level to be maintained over the entire year, operating profit reaching RON 57.6 mn. Given more optimistic assumptions, we could even estimate an improvement in EBIT margin, the annual EBIT figure adding up to RON 72 mn;
- In the base scenario, net profit margin could result in 20%, which equals a net income of slightly below last year’s level. In this case, P/E 07e is of 34, an above-average valuation level in the current market environment. The optimistic perspective is based on the annualization of the H1 net margin, leading to a profit of RON 55.7 mn and a P/E ratio of 23.4, an average market valuation level;

							2007e
PRSN (RON mn)	2003	2004	2005	H1' 06	H1' 07	2006	basic	optimistic
sales	46.9	101.3	139.1	90.6	87.5	206.5	192.0	206.5
sales Growth (%)	-	116%	37%	100%	-3%	48%	-7%	0%
EBIT	4.3	8.4	10.9	16.7	26.7	48.2	57.6	72.3
EBIT margin	9.2%	8.3%	7.8%	18.4%	30.5%	23.3%	30%	35%
Net Profit	2.1	5.5	7.9	13.7	23.3	39.0	38.4	55.7
Net Margin	4.6%	5.5%	5.6%	15.1%	26.6%	18.9%	20.0%	27.0%
						P/E 07=>	34.0	23.4

Cemacon S.A. Zalau (CEON)
- construction materials -

Price 30.08.2007:	28 RON/share
Capitalization:	82 mn RON
sales H1’07	14.7 mn RON
Net Profit H1’07	1.5 mn RON

- The company doubled its production capacity during this spring, fact which was reflected into the H1 sales figure, which grew 39% compared to the same period of last year, while operating revenues merely hiked 4%. For the end of the year, the company’s representatives stated in the media that they are expecting a 48% increase in sales this year, up to RON 36.25 mn;
- The EBIT figure increased more than twice y/o/y, up to RON 2 mn. The increase in operating revenues was supported by a 4.3% drop in operating expenses, which led to the doubling of the profit from operations and the improvement of the margin thereof;
- The first half’s net profit stood at RON 1.5 mn, up by 150% compared to the same period of last year. For the entire year, we assumed a basic scenario in line with the management’s guidance, case in which the annual net income would be 4.5 times higher than last year and P/E would be 25.4, and a prudent scenario, in which the annual net income is RON 3.2 mn, implying a P/E ratio of 34.7.

							2007e
CEON (RON mn)	2003	2004	2005	H1' 06	H1' 07	2006	basic	prudent
sales	16.0	23.6	23.9	10.6	14.7	24.5	36.3	36.3
sales Growth (%)	-	47%	1%	-7%	39%	2%	48%	48%
EBIT	1.6	6.3	3.0	0.9	2.0	0.5	4.0	3.0
EBIT margin	10.0%	26.8%	12.7%	9.0%	13.8%	2.0%	11%	8.3%
Net Profit	1.2	4.9	2.5	0.6	1.5	0.7	3.2	2.4
Net Margin	7.2%	20.8%	10.5%	5.8%	10.2%	2.9%	8.9%	6.5%
						P/E 07=>	25.4	34.7

Constructii S.A. Sibiu (CONR)
- constructions -

Price 28.08.2007:	34 RON/share
Capitalization:	24.3 mn RON
sales H1’07	12.1 mn RON
Net Profit H1’07	0.3 mn RON

- sales of the first six months hiked 17% y/o/y, up to RON 12.1 mn. During the first half of the year, the company carried out capital expenditures in amount of EUR 1.6 mn in technological upgrading, the scope of the operating license, purchases of land for ballast machine, and ecological reserves. The company will also carry out capital expenditures of EUR 0.5 – 1mn by the end of the year for the development of the prefabricated product line. For the whole year, we expect a 10% increase in sales, up to RON 27.1 mn;
- At the operational level, the EBIT margin improved very slightly, with only 0.4 percentage points, the operating profit standing at RON 0.43 mn, 31.6% above the H1’06 level. Considering the seasonality of the company’s operating activity, we expect an improvement in EBIT margin in the second half of the year, so that the resulting annual level is 8%, corresponding to an operating profit of RON 2.2 mn, similar to last year’s level;
- Assuming a basic scenario, we expect the annual net margin to stand at 7%, which equals a net income of Ron 1.9 mn and a P/E ratio of 12.8, an attractive valuation level in the current market conditions.

CONR (RON mn)	2003	2004	2005	H1' 06	H1' 07	2006	2007e
sales	12.7	15.7	22.5	10.3	12.1	24.7	27.1
sales Growth (%)	-	24%	43%	51%	17%	10%	10%
EBIT	0.5	0.3	0.7	0.3	0.4	2.1	2.2
EBIT margin	4.2%	1.8%	3.0%	3.2%	3.6%	8.7%	8.0%
Net Profit	0.3	0.2	0.7	0.2	0.3	1.8	1.9
Net Margin	2.4%	1.2%	3.0%	2.3%	2.4%	7.5%	7.0%
						P/E 07=>	12.8

Societatea de Constructii Transilvania S.A. Cluj-Napoca (COTR)
- real-estate and constructions -

Price 31.08.2007:	350 RON/share
Capitalization:	178 mn RON
sales H1’07	32.9 mn RON
Net Profit H1’07	7.5 mn RON

-The company’s sales figure hiked an impressive 131% y/o/y during the first six months of the year, up to RON 32.9 mn. For the end of the year, the company’s management is expecting sales of RON 50 mn, up by 52% from last year;
- The EBIT margin tripled in H1’2007 compared to H1’2006, up to 26.9%, the operating profit standing at RON 8.8 mn. Operating revenues doubled while operating expenses increased by 60%;
- The net profit estimated by company representatives for this year is of RON 12 mn, almost four-fold compared to last year’s. The P/E ratio computed on the management’s expectations is of 14.8, a below-market average value.

COTR (RON mn)	2003	2004	2005	H1' 06	H1' 07	2006	2007e
sales	4.0	14.0	27.6	14.3	32.9	34.4	50.0
sales Growth (%)	-	251%	97%	-	131%	25%	52%
EBIT	-0.9	0.5	3.3	1.3	8.8	3.2	12.5
EBIT margin	-	3.5%	12.0%	8.9%	26.9%	9.4%	25.0%
Net Profit	-0.6	0.5	2.6	0.5	7.5	3.2	12.0
Net Margin	-