Finding opportunities that bring together several factors of investment outperformance is a great way to succeed. Semapa SA (XILS:SEM, Financial) is a small-cap Portuguese holding company that exhibits several of these characteristics.Â
The business
Semapa has exposure to the paper, pulp and cement sectors. Its two main positions are a 69.4% stake in one of the world’s leading paper and pulp players, The Navigator Co. (XLIS:NVG), and 100% of cement company Secil, which also has operations in Brazil, Tunisia and Lebanon. Semapa also owns a small bio-energy player, ETSA.
Paper and pulp represents 76% of sales and 81% of earnings before interest, taxes, depreciation and amortization. Secil represents 23% of sales and 18% of EBITDA.
Navigator
The Navigator Company is present in all stages of the paper life cycle. It has 276,758.027 acres of forest under management, produces 1.6 million tons of pulp, 1.6 million tons of paper, 130,000 tons of tissue reels and generates 2.5 terawatts per hour of electricity.Â
The company's competitive position makes it one of Europe’s most efficient paper producers, with cash cost per ton on the left side of the industry cost curve (EBITDA margins of 25% versus 17% for peers). The company's positioning in the premium segment confers pricing power in a commodity industry.
Source: Company Presentation, November 2018
While paper consumption is falling, capacity is adjusting. Tissue consumption is rising, but capacity is also increasing very fast. Navigator has short-term investments in two projects: a tissue plant in Cacia (120 million euros ($137.3 million)) and an increase in pulp capacity in Figueira da Foz (80 million euros). If pulp and paper prices remain at current levels in 2019, these additions should significantly contribute to an increase in EBITDA.Â
Source: FOEX
Navigator is publicly traded on the Euronext Lisbon stock exchange. Its current market cap is 2.520 million euros. This means Semapa’s stake is currently worth 1.748.9 million euros, which is considerably more than its current market cap of 1.021 million euros.
The company is valued at about 7.5 times enterprise value to EBITDA, which could be argued as a low valuation since competitors have much lower margins and returns but similar or higher multiples.
Secil
Secil is currently generating 89 million euros in EBITDA, still far from the 2008 high of 158 million euros. The company is having a hard time recovering its previous sales levels. If we conservatively value it at 5 times EBITDA versus an average of  7 to 8 times for European competitors, we get a fair value of 445 million euros.
| Company | EV / EBITDA |
| Heidelberg Cement | 7.89 |
| CRH plc | 7.45 |
| Buzzi Unicem SpA | 7.43 |
Net debt and dividends
Net Debt is expected to be 1.523 million euros at the end of 2018. It was 1.803 million in 2015. Currently, net debt to EBITDA stands at 3.2 times. In 2019, it should fall to 2 to 2.2 times due to strong cash flow generation.
Net debt at the holding level is 463 million euros.
The company is paying a dividend yield of 4% and has repurchased its own shares in the last two weeks.
Main shareholders
The company is controlled by the Queiroz Pereira family, which has a 71.4% stake. Bestinver (8.8%) and Santander (2.4%) also have positions.
Conclusion
Currently, Semapa is an undervalued company. It trades with a 40% discount to net asset value versus the historical discount of 20% over the last 10 years. In addition, it holds a compounder that will increase its NAV over time.
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