When a company trades below its net tangible asset value, let alone a profitable, dividend-paying one with a 90yr history, it feels too good to be true. And maybe it is? The market can do some dumb things at times, but it is not often that dumb. So while I think Capral is interesting in a lot of ways, it is something my spidey senses say I should approach carefully.
I am certainly not trying to frame it in a negative light. It really could be a great buy at current prices. I am just very curious as to what is so bad about it that the market does not like. Because if the market is being overly pessimistic, maybe there's an opportunity here.
In a lot of ways, the answer seems somewhat obvious. It is capital heavy, low margin, cyclical, and exposed to commodity and FX price fluctuations. It competes against players that benefit from much lower costs and carries negative ESG connotations given the carbon intensity of its sector. Oh, and as Tony said, the company very nearly went bankrupt 17 years ago thanks to some poor decisions.
But in a way, it is because those are all so obvious that you start to wonder not if the negatives are real, but if they have been accounted for too much.
The counter-argument could be that the board has learned its lesson, has built a fortress balance sheet, and is making productivity-enhancing investments that will strengthen its footing. This should allow it to ride out any near-term headwinds such that it can benefit from an inevitable, but hard to time, building boom to address the property shortfall. Because of tax losses, they also will not be paying any tax for another four to five years.
Also, the trailing PE is in the single digits and shares have a bit of a bid under them in a thinly traded market thanks to the buyback program.
It's a tough one. Keen to hear what otehrs think.
Transcript is here: Capral transcript.pdf