Thursday, June 14, 2012

Panama Petrochem : A value buy or value trap?

Panama Petrochem was incorporated in the year 1975. The company is in the business of manufacturing and exporting petroleum specialty products.

The company's average ROCE over the last ten years is 28.65%. The number had fallen to as low as 9% in FY03 and is hovering higher than 30% for the last three years. The company at the end of FY12 did not have any long term debt while net current assets amounted to INR 152.63 Crore most of which is held as cash. Out of this $13.99 million (around INR 62 Crore at exchange rate of INR 44/$) came from GDR issue in July 2011, when company issued 4,91,469 GDR at a price of $28.486 and each GDR amounted to 5 equity shares, i.e. at a share price of INR 253.68. The operating cash flow of the company over the last five years has increased sharply compared to the years 2003-2007 but has remained below the net profit of the company for most of the years and was even negative in FY08. The company's total income has risen from INR 31.66 Crore in FY02 to INR 583.65 Crore in FY12. The net profit of the company has risen from INR 1.33 Crore in FY02 to INR 30.63 Crore in FY12. The company's total income declined by 12.8% in FY10 and the net profit declined in FY03 by 68.5%, in FY09 BY 21.1% and in FY12 by 16.78%.

The promoters hold 43.9% in the company. The company was not paying any dividends till FY03. In the last ten years, the company has diluted its equity from INR 3.76 Crore to INR 8.6 Crore, i.e. by more than 128%, which is a big negative for me since a company generating good cash flow doesn't need to dilute any equity or take much debt.

Mutual Fund Holding
There is not a single mutual fund holding this share. This can be considered contrarion positive.

The book value of the company at the end of FY12 is INR 260.2. At the current market price of INR 148, the company is trading at just 57% of its book value. The latest results show that the company hasn't utilized anything from its GDR issue. The current market capitalization is INR 122 Crore and the cash and bank balance at the end of FY12 was INR 152.63 Crore. So if the company is liquidated today, you get more money per share than its stock price. This is compelling valuation except for the promoters.

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