The Portuguese Jewel

There is not much going on in Portugal right now, except maybe the fact that the country does not have money, and one FMI team has been around for one a whole year counting pennies and cutting flesh (by flesh I mean tax payers). So lots of companies are closing doors as the banks keep cutting credit, and economic conditions keep getting worse.

In the middle of this apocalyptic scenario, for some, a miracle happened, the exports of goods and services have outsized the imports. May I remind you that it is the first time since the 2nd World War that this happens, and at the time Portugal was exporting wolfram which was needed for war purposes. I don’t think that this is a miracle at all, if Portugal didn’t have the Euro as its currency, they could have devalued it already and this phenomena would have happened a long time ago, just like Adam Smith suggested almost 200 years ago.

But let’s look at the opportunities in this environment. In reality the Portuguese stock market is depressed beyond any measure. Some companies reflect some credit risk that it is real and therefore justified. Companies like Portugal Telecom (PT) have too much debt and the market correctly sees this. The Portuguese banks were over confident in the south European sovereign debt, which made them prone to subscribe Portuguese and Greek debt and use it as collateral in the ECB therefore leveraging even more its balance sheet with low perceived risk. So they are also in bad shape and therefore justify the negative market performance.

So what is left? The most obvious is the exporting companies. Usually in Portugal there are three kinds of companies: State companies where everything is possible and losses are not an issue, until the day that they get privatized and then turn out to be money machines, the usual  small medium company which in most cases relies in local administration connections to get fat contracts, and finally there are really competitive companies, full of top class engineers with good strategic vision. One of those companies have just released its Q2 results revealing 8% growth in profits year over year. That company is Portucel.

Portucel is a paper producer, that happens to own the most efficient paper factory in Europe, the Setubal unit started operating in 2010 and has had a big positive impact in the company results. The future prospects are good since the paper industry is not making big investment s in capacity right now, which means that the cost advantage possessed by Portucel will hold for some more years. The company does not rely on the Portuguese market since more than 80% of its sales come from the outside. In terms of value I believe that Portucel is devalued by any metric. With a PER of 7 and with low debt I would say that this company could easily be valued at the 3 – 3.6 EUR range.

I will not nominate Portucel for my European Jewels collection because I have already seen other opportunities that I believe could have better returns. Nevertheless, I believe that it might be a good investment if the market recognizes its value in the following 3 years we might be looking at annual returns of 17%, which are not that small. 


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