Natuzzi S.P.A.: This Italian Microcap Is A Bargain Right Now
Summary
- Natuzzi S.p.A. designs, manufactures and markets leather and upholstered furniture worldwide.
- Its owner and CEO, Pasquale Natuzzi, is a self-made entrepreneur, who was able to build a business from scratch, which was worth over one billion dollars by the early 2000s.
- Natuzzi’s strategy for long-term profitability is well thought-out and already proving successful.
- The recent Joint Venture with Kuka (Jason Furniture) discloses a massive value that is equivalent, alone, to the actual capitalization of the company.
Towards the end of the last century, Natuzzi S.p.A. (NYSE:NTZ) was traded on the New York Stock Exchange at close to $30 per share. However, those golden times are now a thing of the past.
China’s low labor costs and lack of monitoring over illegal working conditions, introduced by Chinese immigrants living in Italy, contributed to the demise of a considerable number of Italian manufacturing companies.
What has changed now for Natuzzi
For many years, Natuzzi stayed true to its business model, refused to break the rules and continued to manufacture its products in Italian factories. This structure turned out to be unprofitable, since its Italian competitors mostly relied on local Chinese suppliers.
However, in recent years, the firm introduced a new strategy devoted to increasing profitability. It was based on the strength of the Natuzzi brand, one of the most renowned in the luxury furniture & upholstery sector. Even though Natuzzi has always been a wholesaler, it is now focusing on boosting its sales by opening franchised or directly-operated stores instead.
In fact, the directly-operated stores (DOS) have a median gross margin of around 65%, while the average gross margin for the whole company is 35%. The General gross margin has been increasing every quarter, with the opening of new DOS and the closing of the old selling channels. New directly-operated stores are introduced in popular tourist areas, like Palm Beach, FL (one of the latest openings), and are set to provide the highest rewards.
This strategy will eventually decrease Natuzzi’s vulnerability in the current worldwide retail crisis by shortening the sales chain. In Fact, in-store sales have been increasing at a percentage of around 40% for DOS and the firm is bound to break-even.
A fair valuation of Natuzzi S.p.A.
The total capitalization of the company is currently around $90M, with an equity value of around $160M. Therefore, the price to book value is in the range of 0.55-0.6.
The working capital is around $95M and the debt to equity ratio is not high, standing at 1.71. So, even if it is not yet profitable, the company appears to be in good financial shape.
Due to the last bad quarter, during which the company reported a decrease in sales because of a one-time coordination problem between procurement and production, the market overreacted by pushing down the stock, which is highly illiquid.
If we don’t consider the last quarter, all the previous ones reported a positive EBITDA with a peak of financial profitability at the end of 2016.
At these price levels, I can’t see any substantial downside risk. The company is actually traded at a liquidation price base and I would be confident that its value is at least equal to its book value right now.
All this is before taking into account the upcoming Chinese deal.
Joint Venture with Kuka (Jason Furniture)
Last January, the company announced it entered a preliminary agreement with Kuka (SS:603816), previously known as Jason Furniture (Hangzhou) Co. Ltd, the Chinese home furnishing industry giant, to form a joint venture in order to boost Natuzzi’s business and retail network in Greater China.
The preliminary handshake was confirmed with the signing of a joint venture agreement a few days ago, according to which Kuka will buy into Natuzzi Trading (Shanghai) Co. Ltd, a company previously fully owned by Natuzzi S.p.A., and will acquire 51% of the company’s shares, for a total cost of €65M.
The terms of the agreement are pretty good for Natuzzi, as it will receive €30M cash and will still hold 49% of Natuzzi Trading (Shanghai) Co. Ltd. Given the terms of the agreement, a rough value estimation of this partnership could be around €62M.
In exchange, Natuzzi will assign to the new Chinese corporate entity its existing Chinese stores (10 DOS), together with commercial organization in China and its exclusive trademarks to be perpetually used in Greater China.
In any case, it will retain the right to use the Natuzzi trademarks for all manufacturing activities, which means that Natuzzi S.p.A. will be the only supplier of the new Chinese corporate entity, applying a certain discount to the products supplied.
This agreement is a real game changer for a company that is traded at less than $100M and it is the best evidence that the firm’s new strategy is working. In fact, it clearly looks like Kuka decided to seek a partnership after looking at the sales numbers of Natuzzi’s retail network in China, recently boosted by the ten directly-operated stores that are part of the agreement itself, as previously mentioned.
Conclusions
Natuzzi has a great opportunity in its hands: Directly-Operated Stores (DOS). These stores are increasing their sales at a fast pace and will contribute, with their terrific 65-70% gross margin, to inflate the company’s whole gross margin quarter after quarter.
The company’s initial plan was to open new DOS at a pace of 10-13 per year, but now this number can be expected to go up, thanks to the potential of the new Chinese joint venture with Kuka.
Moreover, the book value of the company will considerably increase after this agreement, because, for Natuzzi, this is worth as much as €90M, more than its actual capitalization!
Nevertheless, the joint venture could mean that Kuka is interested in buying the whole Natuzzi S.p.A., a purchase that may allow it to expand its business outside China, with a worldwide well-established brand.
I will not put my price target for Natuzzi here, but I consider the actual price of the Italian company’s ordinary shares to be senseless, in light of the recent developments. Also, given its substantial illiquidity, I don’t think Natuzzi’s stocks will be traded at such a low price for long.
This article was written by
Analyst’s Disclosure: I am/we are long NTZ. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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Comments (11)
I've owned Natuzzi for a long time, and now am much more interested in the position, now that we have you following it. Hopefully you will stay on it going forward.
Thank you!
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No surprise, the exchange rate was deeply negative in the last two quarters.Full year revenues did not decrease in US dollar base.China JV will first jumpstart NTZ's balance sheet that is the most important thing now. Then we will see...