A Compelling Greek Opportunity in Alapis SA

What do you think about Greece? With all the news about Greece and its debt problems, the Greek stock market has been rocked.

Can the Buffett rule of taking advantage of uncertainty and fear be applied to Greece?

The following post was brought up in the forum by Floris on Alapis SA (OTC: APSHF.PK), a Greek pharmaceutical company. I bring it up here because the investment idea offers compelling value in a devastated market, where opportunities are more abundant than the US. But you decide and share your comments.

Ratios

• Price/Book (Q3 2010): 0.075x 2009
• P/Op Cash Flow: 1.2x
• Price/Tangible Book (Q3 2010): 0.13x 2009
• P/E: 2.7x
• Debt/Equity Ratio (Q3 2010): 60%

Description

Alapis SA is the market leader in the Greek pharmaceutical industry.

It also has a leading position in a number of Balkan states as well as activities in Turkey and the UK. It produces and distributes both generic and brand name drugs to healthcare providers and hospitals in these target markets

It has long term license contracts with big pharma as well as production capabilities for generic drugs.

The firm is an amalgamation of different pharmaceutical companies in this region that have merged under the name Alapi in 2007.

Greece Situation

As is well known, the Greek government is facing a tremendous debt crisis, which many expect will result in either

• a) a default
• b) a major restructuring or
• c) leaving the euro zone.

I personally agree that the greek government will likely face either situation a) or b), I feel situation c) is politically unlikely.

Nonetheless this major debt crisis has caused a dramatic decrease in the stock prices in Greece as major institutional investors have fled to the exits.

This has led to a dramatic decline in the stock market of 30%. Moreover career-risk averse institutional investors are scared to death of being invested in any firm with even the slightest greek government exposure, and this is where Alapis enters in.

Why is it so cheap?

I believe Alapis has become the poster child for a ‘bad’ stock. I will now state all the reasons why I believe the stock has come down so dramatically this year.

• a) Both direct and indirect exposure to the greek government
• b) Relatively young record as a publicly traded firm
• c) 200-250m of hospital receivables outstanding
• d) 700m of debt that needs to be refinanced in 2012
• e) Major shareholder has liquidated its position
• f) Investors believe Greece will not ever do anything useful again
• g) Uncertainty about the prices of medicine

If you sum up all these reasons, one can run scared of this firm and never look back. I believe this is what has happened and what precipitated the fall of the stock over the past 3 months (from above 2euros in September to .48 cents in January). However..

Why should you want to own it?

Trading at an unbelievable 0.075x of invested equity capital, it is one of the, if not cheapest stock I have seen in years.

Furthermore, even in this environment it has remained profitable. The firm has booked profits of 18m euros from continuing operations in the first nine months of 2009 (to put this in perspective the firm earned 78m from continuing operations in 2008).

Considering the current government squeeze and lack of time to adjust to this new status quo, I believe this to be quite a feat.

The growth trends for this firm are also quite positive. As the Greek government cuts costs further, it will look for more generic medicine, which Alapis provides. As the leading player in the segment in south-eastern Europe it can use its scale to become the de-facto choice for the Greek government to buy generic medicine from.

While one may assume the Greeks will never pay for anything anymore (which the market assumes), I view this as somewhat unlikely. I expect 2010 to be a much better year as the Greek government adapts its pricing mechanism and the firm adjusts to the new reality. I believe it should start earning profits on par with 2008 (75m from continuing ops).

Furthermore a former large shareholder has recently reduced its stake from north of 20% to only 6%. From talking to various parties I believe this sale was due to a forced liquidation because of a lawsuit unrelated to Alapis requiring significant payment. This announcement has apparently caused further distress but this shareholder has been replaced by a private equity firm called Lambda partners which is run by a former head of Barclays Wealth in Eastern Europe. The fact that an experienced team is willing to buy at these depressed levels also gives me confidence.

Ridiculous valuation, but what are the risks?

A stock this cheap always has some hair on it.

A total failure of the Greek state and continued lack of payments would results in a bankruptcy.

Secondly the firm might not be able to refinance its debt in 2012 causing a large dilution (especially at these stock levels).

Thirdly the financials could be fraudulent (although audited by BDO).

Sure there are risks… but the risk/reward ratio is very appealing.

Trading at a 2009 P/E of 2.7x, Price/Operational Cash Flow of 1.2x and Price/book of 0.075, Mr. Market is exceptionally pessimistic about the state of affairs of the stock. Although there are some risks, I also believe the risk/reward is unparalleled. The stock could well return to January 2009 levels (roughly 4.5 a share).

Disclosure

The author (Floris) has a long position in ALAPIS.