Boyles_Fund_I_Letter_to_Partners_2016_Q2(1)We’ve been following the drama in Greece closely for the better part of three years, and during that period we’ve examined a number of businesses there. Recently, on a European diligence trip, Matt visited the country and a number of local companies. As you are no doubt aware, it has been a difficult period for the country and for the average citizen. As you might also expect in such an environment, share prices have been significantly impacted. We believe prices provide an opportunity for folks like us, despite the ongoing risks.

In the first quarter and throughout the second, we’ve added one name to the portfolio: Thrace Plastics Co S.A. The company has several characteristics we’ve been looking for when it comes to deploying capital in Greece. First, it was not a bank! Second, the valuation was completely abnormal. Third, it was well managed by a highly interested family shareholder. And fourth, and perhaps most importantly, it had significant non-Greek business operations and revenue streams. Thrace Plastics is among the least Greek companies listed on the Athens exchange! This fact is a near-necessity for us, given our ongoing worries about the Greek economy, financial position and, longer-term, participation in the European Union.

Boyles_Fund_I_Letter_to_Partners_2016_Q2(2)Thrace Plastics has two core businesses: technical fabrics and plastic packaging. Technical fabrics produces a variety of plastic fabrics including geosynthetics and construction products for a variety of end markets. Plastic packaging involves the production of containers, bags, cups, and other products for both consumer goods end markets and industrial users. To our prior comment on non-Greek business, when last disclosed, revenues outside Greece represented approximately 83% of the total, while 53% of production capacity was located in the country. We expect, with the most recent round of investment (discussed later), that each of those figures will rise. We like to see that such a large percentage of sales is not reliant on the Greek economy and we like that, in the still possible scenario where Greece leaves the E.U., a large portion of production may be located in what would likely become a depreciated currency. This gives us a partial hedge against this negative outcome.

We have been buying the shares at 50% of tangible book value and just more than 5x our estimate of 2015 underlying earnings. We believe there is scope for earnings to increase 50% during the next 3 years. Thrace Plastics is cheap on an absolute basis, and on a relative basis compared to its global peers and other Greek-listed names. In fact, on recent look, Thrace Plastics had superior growth and return on equity with a better balance sheet and more business outside Greece than the market, which trades at a premium to tangible book (we excluded banks and shipping companies in this comparison)! The company’s management and board believe the shares are cheap and have been repurchasing shares on a daily basis to the extent allowed by Greek law.

During the last few years, the company has worked hard to streamline the business and drive production toward higher-value-added products with superior margins. Importantly, about 18 months ago, Thrace Plastics embarked on a significant investment in the business. It invested €32 million in capital expenditures in 2015. This investment has come online this year and should begin to fully contribute to the group as 2017 unfolds. To put the scope of investment into perspective, at the start of 2015 the company had €75 million of net property, plant and equipment. We believe the substantial, though targeted, investments will produce a meaningful increase in revenue and margins during the next three years. Further projects targeted in 2016 and 2017 should do likewise, though on a smaller scale. We believe the market has all but ignored this multi-year effort.

With modest multiple expansion, we expect very attractive rates of return on the investment with substantial downside protection. Our base case suggests more than a double in two to three years. We believe the shares are worth well more than tangible book value right now; thus we’ve been purchasing shares at a good deal below 50% of intrinsic value.

It appears to us that such an opportunity exists simply because Thrace Plastics is a small company with a Greek headquarters. We see a decent (though not great) business with attractive growth potential at an irrationally cheap price. While we believe there remain significant risks to the country, we believe those risks are substantially mitigated by the makeup of the Thrace Plastics operation and the valuation ascribed to the shares. We look forward to the next several years as owners of the business.

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This post has been excerpted from the Boyles Asset Management Q2 2016 Letter to Partners.

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