LONG WSE.MON

Iggy Nieuwenhuizen, @WarrantGG

Monnari Trade Long

Company name:          Monnari Trade S.A.

Ticker:                         WSE:MON

Price:                           3,50 PLN

Market Cap                 107 PLN million (21.72 USD million)

Thesis summary

Monnari Trade is a nano-cap polish company trading below the value of its current assets minus total liabilities, while also showing operating profits for the last 10 years(except for during the covid lockdowns). The stock trades at 40% of the stated book value and a PE of around 4, with a management that has shown to be willing to buy back shares (highly irregular in Poland). With multiple potential catalysts, the stock should be a multi-bagger within 2 to 3 years with minimal downside risk.

Company Overview

Monnari Trade is a clothing company with all its activities within Poland. Its target audience is women over 30 and all its locations are in Poland. It operates 161 of its own Monnari branded stores, 19 Monnari franchises and 24 Femestage stores for a total of 204 stores. The company is headed by CEO and founder Miroslaw Misztal who owns more than 30% of the company. The company reached an operating income high of 31,78 PLN million in 2014, revenues and gross profit have steadily kept growing from that point however operating margins have been under a lot of pressure falling from 16,7% in 2014 to a 4,7% in 2019. The stock price has reacted accordingly, however, Monnari trade has shown a sizeable profit all years since 2012. So where has all this money gone?

Capital Allocation

The answer is two-fold, one capital returns and two real-estate investments. Monnari Trade started capital returns in 2016 with a 6 PLN million dividend and a similar size buyback. The buybacks started at prices nearly 3 times the current prices and continued till 2020. From 2016 to 2020 Monnari Trade bought back 15% of its total shares. It should be noted that buybacks are an extremely rare occurrence in Poland even with its 19% dividend tax, this shows that Monnari’s management team are shrewd capital allocators and believe the company is highly undervalued.

More importantly for today's undervaluation is that the company retained a large part of its earnings and invested this into a real-estate project. The main investment is a 10.5 Ha piece of land filled with industrial buildings, purchased for PLN 11 million in 2015. The company has used excess cash to redevelop the industrial building on the lot into shopping and office space. Since 2015 (including the original purchasing price of the lot) Monnari has invested 68.58 PLN million into real estate.

The value of this real estate is starting to catalyse with Monnari selling the undeveloped 5,9 Ha of the Geyer Gardens for 85 PLN million net. Monnari received 70% of this as they sold some of the investment property to another firm called KBM Invest. So the company will net 59,5 PLN million from this sale in cash. Again it gets better because KBM invest owed Mannari Trade a decent chunk of change. This debt was also settled after the sale netting Monarri another 14,76 PLN million. So in total Monnari received 74,26 PLN million in cash from this deal or about 75% of the market cap. The company stated in their H1 2022 report the remaining part of the Geyer Garden is also finished and ready to be leased or sold. This remaining part is carried on the books for 74,5 PLN million, it is, however, likely worth much more as it is similar in area to the part already sold but contains already developed buildings.

Downside Protection

As of the end of H1 2022, Monnari has 217,8 PLN million of current assets (of which 130 PLN million in cash and financial instruments), not including the remaining par of the real estate which can also easily be sold. So the true amount of current asset is 292.4 PLN Million (if we assume book value correctly values the remaining real estate). The total liabilities are 109,8 PLN million, however, recently Monnari at 11 PLN million in government covid loans cancelled. So total liabilities are around 99 PLN Million.

Current assets (including real-estate):           292.4   PLN million

Total Liabilities:                                             99        PLN million

Current Assets - Total Libilities:                    193,4   PLN million (181 % of current market cap)

With current Assets - total liabilities representing 181% of the current market cap a permanent loss of capital seems highly unlikely. And once again this is not a bio-pharma micro-cap burning heaps of cash selling below the value of its cash, this is a profitable clothing business that has grown its book value almost every year since its inception. The current stated shareholder's equity of the company is 255,8 PLN million or 238% of the current market cap.

Valuation

To come to a proper valuation of the company I will do a quick sum of the part analysis. As stated above the clothing business has been somewhat troubled over the last few years with revenues and gross profits growing but operating margins strongly declining. This trend might, however, finally be reversed as a lot of cost-cutting in SGA was done during the corona pandemic. Much of this reduction is from reduced corporate overhead and some is from renegotiating renting agreements. In H1 2022 the operating segment of Monnari trade produced 12 PLN million in earnings or an operating Margin of near 10%. This is even more significant if you consider the operating margin tends to be much better for clothing stores in H2 given the better profitability of fall and winter clothing. If we assume the operating segment will be slightly more profitable in H2 then H1 25 PLN million in operating profit for the full year 2022 is easily achievable and even conservative. If we assume a similar gross profit to H2 2019 with the current cost structure the operating profit for H2 2022 could be as much as 30 PLN million for just the half year or 42 PLN million for the full year.

Monnari's target customers are woman above the age of 30, this makes the business much less susceptible to trends and hence more predictable. However, given its struggles with cost control, I do not believe a high valuation is warranted. Conservatively it might be worth about 8 times EBIT. But if the business manages to keep the cost down and expand its store base slightly it might warrant a more normal multiple of 13 times EBIT.

The rest of the business is slightly more straightforward to value the operating business seems to on average have 20 PLN million of cash on end this means that excess cash + financial instruments are about 110 PLN Million. The remaining part of the real estate is valued at book for 74,5 PLN million, however, as discussed previously it is likely worth more. If we say the land is worth the same amount as the land sold and we add in the amount of money invested in redeveloping the old buildings we arrive at a number closer to 100 PLN million.

Market Cap:                                                                            107 PLN million

Current Asset - total liabilities:                                              193,4 PLN million

Liquidation value:                                                                  255,8 PLN million

Conservative value:

Clothing buisiness at 6x EBIT            6x25                            150 PLN million

Excess cash and financials                 130-20                        110 PLN million

Remaing real estate                            Stated book                 74,5 PLN million

Total:                                                                                      334,5 PLN million

Bull value:

Clothing buisiness at 13 EBIT            13x42                          546 PLN million

Excess cash and financials                 130 - 20                       110 PLN million

Remaing real estate                            60 + 40                       100 PLN million

Total:                                                                                      756 PLN million

This investment can offer a very attractive return based even on liquidation value and a fairly extreme return of the Bull case plays out. Given the amount of downside protection inherent in the stock at current prices waiting to see how the operating business performs should not be to risky. One should further note that all these valuations are conservative in the sense that they do not factor in buybacks. The company currently has enough cash equivalents to buy back all the stock and has bought back shares in the recent past. If the company executes buybacks at attractive prices the laws of financial alchemy say this stock should go to the moon.