Monnari Trade SA - A retailer with large non-core assets

The operational business for free after adjusting for cash / financial holdings and real estate

Monnari Trade (MON) is a Polish clothing chain established in 2000 (the brand in 1998) that designs its own collections primarily aimed at women over 30 years of age. The clothes are mainly manufactured in China (outsourced), Indonesia, and Bangladesh, and are then sold in Poland through its own stores (79%), online (16%), and wholesale/service (5%). According to preliminary figures for 2023, revenue was PLN 302 million (up from PLN 281 million), and the number of showrooms was 218 (down from 236). Except for 2020 (COVID), MON has been profitable every year since 2011. The MONNARI brand has 184 stores (+19 franchises), which are about 200-300 sqm, and FEMESTAGE has 15 stores of about 150 sqm. See more about history and shareholders below.

It's worth mentioning early on that in 2015, Monnari bought 10.5 hectares of land in Lodz with several dilapidated historical buildings (project: Geyer’s Gardens) for PLN 11 million. Approximately PLN 70 million has been invested in converting industrial buildings into shopping and office spaces, among other things. MON owns 70% of the project and KBM Invest 30%. In 2022, part of the undeveloped land (5.9 ha) was sold for PLN 85 million, and for the 70% share, MON received about PLN 60 million (booked profit PLN 44 million). At the same time, loans to KBM were settled, which provided an additional PLN 15 million in cash (total PLN 74 million). The remaining part (4.6 ha) is booked at about PLN 70 million and consists of developed buildings ready to be rented out or sold.

A simplified balance sheet (as of 2023-09) on the asset side includes: investment properties PLN 77 million, PPE PLN 41 million, NWC PLN 58 million, net-other PLN 3 million, and net cash PLN 95 million (including short-term placements of PLN 76 million; fund holdings and lending). This is financed with total liabilities of PLN 274 million. The market value is PLN 136 million, resulting in a P/TB of 0.50x.

The share price of PLN 5.2 can be compared with "net cash" of PLN 3.7 per share and investment properties (mainly Geyer's Garden) of PLN 3 per share – totaling "non-core assets" of PLN 6.7 per share. The operation is considered free and could be worth PLN 4-9 per share (SOTP PLN 11-16 per share) based on various scenarios.

• Low: Excluding "non-core" assets, the remaining PPE is PLN 41 million (we do not believe in overvalues), NWC about PLN 58 million, and other PLN 3 million, totaling net operating assets of just over PLN 100 million or PLN 4 per share. Curiosity: in 2017, the brand was valued at PLN 95 million in the ranking "Polish most valuable Brands".

• Medium: Run-rate NI%, about 6%, based on ttm-sales is EPS PLN 0.7 and at P/E 8 the operation has a value of PLN 5.6 per share (PLN 180 million, 0.6x sales).

• High: The management suggests that a 10% net profit margin is possible, which would result in EPS of about PLN 1.2 and at P/E 8x a value of PLN 9.4 per share.

RoU assets (PLN 18 million) and lease liabilities (PLN 13 million) are netted in "other". Lease contracts with turnover rent or shorter lease periods than one year are not included, implying there could be significant IFRS 16 off-BR (hidden risk if the business deteriorates).

MON is seen as a portfolio of various assets (real estate, lending, fund holdings, cash, and operating assets) available at half price (P/TB 0.50x). The risk/reward calculation is overall attractive, with the downside risk mainly being "minority mistreatment" (see more below).

Shareholders

The cash remains in Monnari, against "best practice" on the WSE, because the founder and chairman Miroslaw Misztal (51 years old) wants it that way. Since 2021, Misztal has increased his ownership from 8m shares to 10.4m shares, and since 2016, MON has repurchased just over 15% of the shares. The own shares (4.7m) are not cancelled, so we believe the major shareholder (Misztal) gets to vote for these. Additionally, we have reason to believe Misztal also owns Fair Sp.z.o.o. (even though it is not mentioned in the reports), meaning Misztal controls a total of 21.3m votes (including MON's own shares), or 60%. The adjusted NOSH is 25.7m after continued marginal repurchases during 2024.

In articles from 2022, it is mentioned that minority shareholder Robert Fijolek (we believe it's the same Fijolek who was President at Progress Investment Fund and BPH TFI) has pressed for dividends after the partial divestment of Geyers. The management insists that the capital should be retained. Lending, fund shares, or other investments (2023 LOI for the acquisition of a rental property for PLN 18 million in Wroclaw, which later fell through) are "temporary capital investments" aimed at increasing capital. This is then to be invested in real estate or core business (there was a 2023 LOI for the acquisition of two brands that also fell through).

History

To understand chairman/major shareholder Miroslaw Misztal, it should be mentioned that Monnari, founded in 2000, grew at a good pace and profitably until 2008. However, during the financial crisis, the bank withdrew financing while sales decreased and costs increased (rent and purchases). In May 2009, Monnari filed for bankruptcy, which later turned into a reconstruction after the management presented a strategy and negotiated with lenders. The creditors' meeting adopted the arrangement in the autumn of 2010.

In 1H11, a directed issue (including through debt conversion) of 12.5m shares (afterwards 31m NOSH and 37m votes) strengthened the equity by PLN 10 million. Some of the new shares had voting preferences, which lose privileges if the shares change hands, and as of 2024, it's Misztal and Fair Sp.z.o.o (also Misztal we believe) who own vote-strong shares. Monnari exited the reconstruction in 2011 with about 100 stores (14.9 thousand sqm) and PLN 100 million in annual sales (97% through stores). Today, Monnari has 218 stores (48.1 thousand sqm), turns over PLN 300 million (16% online). The equity per share since 2011 has increased from PLN 2.0 to PLN 10.7 (about 16% CAGR). Except for the COVID year 2020, the company has been profitable every year.

Misztal was likely scarred by the events around the financial crisis and does not want to be dependent on banks to execute his strategy. To an outsider, it also seems that after the turnaround and successful real estate investments (jury still partly out), with strengthened self-confidence, Misztal acts as a "businessman with several strings to his bow" (rather than just a clothing retailer), and minority shareholders simply have to fall in line. This behavior, or perceived behavior, partly explains the price of the share. The market (especially in Poland), likes dividends and “pure plays”. At a P/TB of 0.50x, we're essentially able to purchase these assets at a significant discount. This valuation reflects the market's skepticism towards Monnari's diversified approach and the management's reluctance to distribute dividends, contrasting with the general expectation for clear strategies and regular shareholder returns in the Polish market.

This skepticism is further compounded by the historical context in which Monnari has operated. The company's journey through the financial crisis, its subsequent restructuring, and the management's strategic choices have painted a picture of resilience and adaptation. However, the unconventional decisions made by Misztal, particularly in terms of investments and shareholder relations, have not always aligned with market preferences, leading to the current undervaluation.

Despite these challenges, Monnari's fundamentals appear strong, with a diverse asset portfolio that includes profitable real estate investments, a solid cash position, and a core business that continues to generate revenue. The company's ability to navigate through past difficulties, including a bankruptcy filing and a successful restructuring, speaks to its resilience and potential for future growth.

Moreover, the strategic investments made by Monnari, such as the acquisition of land for the Geyer’s Gardens project and the lending activities with Rank Progress, demonstrate an opportunistic approach to capital allocation. These moves, although unconventional, could yield significant returns in the long run, particularly in a favorable economic environment.

The key risk facing Monnari, as highlighted by the analysis, is the potential for minority shareholder mistreatment. The control exerted by Misztal over the company, coupled with his significant voting power and the historical reluctance to distribute dividends, raises concerns about governance and the alignment of interests between the majority and minority shareholders.

In conclusion, Monnari Trade presents an intriguing investment opportunity, characterized by a significant discount to its tangible book value and a diverse portfolio of assets. However, investors must weigh the potential for value realization against the fact that the majority owner likely prefer the status quo.

(Disclaimer: at the time of publication, the writer owns shares in the mentioned company)