With a difficult macro situation in Brazil, it may seem as if there are no good Brazilian companies to invest in. But I've got one for you. If you agree with the strategy of “buying on the sound of cannons and sell on the sound of trumpets”, then I recommend you take a look at Romi.
Romi (BVMF:ROMI3) is a Global player of manufacturing machine tools, plastic processing machines and vermicular casting. The brand is synonymous with quality, technology and reliable products and services, this is why the company can have higher prices than its competitors. Customers recognize more value in their equipment also because their reselling prices are higher, due to a minor devaluation.
Source: Romi
Even though Romi has been suffering because of the reduction in the size of Brazilian market, important measures from the management have brought credibility to the company. Unlike the Brazilian culture (to complain and to ask for government favors), the hands-on management team transformed the structure of the company to be more efficient and profitable even during hard times. Even though last year was a difficult year due to several events that impacted directly the company - like the World Cup and elections, for example - the company was profitable in 2014 and paid reasonable dividends and interest on own capital. They also completed a buyback of 5% of the shares.
The shares of the company are at the cheapest price in 10 years. Due to the
Source: Bloomberg
low liquidity of Romi (BVMF:ROMI3) shares, a big sale from a major investor caused huge impacts in the stock price. Added sellers from investors that decided to take their capital outside Brazil put more pressure and drove the prices down. Currently, the market value of the company represents 0.24x book value and 5x EBITDA. That makes Romi a buying opportunity.
Individuals can invest in the company facing less competition from the professional investors, in addition to having more attention from the department of investor relations.
More disclosure from Romi has increased credibility and confidence in the future of the company. Some measures that brought value to the company and increased the credibility of the management:
- New administrative structure: reducing the number of directors and wisely retiring the president in a smooth transition. A possible reduction in the number of board members of major shareholders is also a possibility. In case it happens, it will be an excellent signal of responsibility and respect with minority shareholders
- More efficient production: Changes in the production process reduced the lead-time, which permitted lower level of inventories and gain of working capital. As a high cyclical market, when the economy recovers, the company will be able to react faster.
- Sales of non-strategic assets: The company has three properties available for sale, in Brazil and Italy, valuated at BRL 75 Million. This amount of Cash represents almost half of the market value of the company. The company clearly stated that is not hurrying to sell and is waiting for the best offer to maximize the long-term value.
- Accountability and transparent communication: The company has a straightforward dialogue with investors. The management promptly denied recent rumors of the company´s full buyback of shares.
After local currency devaluation, foreign competitors left the country and Romi is even more competitive to dispute new markets. Moreover, a more efficient production structure gave more conditions to a fast reaction to attend the market when the new expansion cycle come back.
Looking back to the Hardinge deal
In 2010, Romi tried a business partnership with Hardinge (NASDAQ: HDNG) and offered a premium of 46% of share price in cash. At that moment, if the deal were successful, it would have created a strong global platform for Machine Tools business. But, Hardinge considered the deal “grossly inadequate” and “opportunistic”. Even though Romi made its offer public and tried an open dialogue, the management reacted with resistance.
Today, after several years of Hardinge underperformance management, a minority shareholder - Privet Fund LP – delivered a letter to the CEO accusing the management of a history of underperformance, unfriendly governance, lack of insider ownership and poor track record of capital allocation. Looking back, the decision of Romi not to boost the offer seemed right. The conservative approach avoided that the company had a problematic merge, which could have destroyed value to shareholders.
Foolish bottom line
Currently, Romi´s stock price is a bargain, which seems a case of market insanity and overreaction. There is a huge hidden value inside the company, which brings a very interesting margin of safety to investors in the long term. When the market comes back at full throttle, this company will certainly be able to provide an awesome value to investors.