Contrarianism Gone Mad!

Published in Investing on 20 August 2010

We look for investment opportunities in the most unlikely of places.

If you think small caps are risky and small caps listed on the AIM market are super risky, then how about AIM-listed small caps that also have their businesses in one of the Mediterranean economic pariahs of Greece, Italy, Spain or Portugal!

How have these companies fared in the last few years and is there anything that might now catch the eye of an incorrigible contrarian?

Only when the tide goes out …

… do you discover who's been swimming naked. Warren Buffett's famous saying, which may be literally true on some Mediterranean beaches, is an apt metaphor for how the credit crunch and subsequent recession exposed sovereign-debt excesses in the region.

At the corporate level, a number of AIM-listed Euro-earners also foundered in the receding tide.

Portuguese real estate company Black Raven Properties was put into administration in November 2008, amidst allegations of the presence of a 'shadow director' and a misappropriation of cash. Its shares had been suspended at 0.325p, having fallen 93% in 12 months.

Telecom services provider Teleunit delisted from AIM in March 2009. It had been the first Italian company to complete a primary listing in London (in May 2004) but, having made huge losses, its market capitalisation slumped from over £37m to under £2m.

Sports betting and poker group Leisure & Gaming (LSE: LNG) was suspended from AIM three months ago, pending clarification of its financial position. Shares in the company, which has operations in Italy, Greece and Cyprus, had more than halved in value since the start of the year.


Most of the companies I've rooted out that are still trading on AIM are geared into the global economy, rather than their domestic economies.

Several Greek firms are engaged in the international shipping business, Globus Maritime (LSE: GLBS) being one example. Velti (LSE: VEL), an Athens-headquartered mobile phone marketing group is similarly international, running 2,000 campaigns across 35 countries in 2009. Meanwhile, in Italy, Acta (LSE: ACTA), a developer of clean-energy products, also operates in a global market place.

Resort developers Minoan (LSE: MIN), which has a single project on the Greek island of Crete, and Dolphin Capital Investors (LSE: DCI), which has a portfolio of projects across Greece, Crete and Cyprus, both target the high end of the residential holiday market.

All of these companies may or may not have attractive investment credentials, but none of them are particularly linked to their domestic economies.

In fact, I've found only two companies whose businesses can properly be said to be dependent on individual, corporate or public spending in their home countries; and are thus, potentially, contrarian plays in extremis.

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Helesi (LSE: HLS) is a waste management products manufacturer and services supplier. It has production facilities in Greece and Italy, and generates over 60% of its revenue from Greece.

At this point I have to grit my teeth and tell you that Helesi was one of three illiquid small caps that I decided to hang on to when the credit crunch struck. All three investments are still underwater, but Helesi is in real Jules Verne territory -- in plain English, down 90%.

The share price currently languishes at an all-time low of 13.5p, giving it a market cap of just over £5m. Extrapolating from a trading update earlier this month, we might expect full-year revenue of around €50m (£40m) and EBITDA of €6m (£5m).

Don't get excited -- net debt stands at a whopping €73m (£60m), the legacy of a massive capital investment programme. The timing couldn't have been more unfortunate, culminating just as the recession hit.

Despite the directors' confidence that debt will start to fall in the second half of this year, I'm not tempted to 'average down'. The position of the company looks far too precarious to me.


Globo (LSE: GBO) is a provider of e-business and telecom software products and related services in Greece. Its shares are currently trading at 10.25p and it has a market cap of a shade over £15m.

Like Helesi, it has suffered delays in the settlement of public sector invoices, but, according to a recent trading update, operating cash flow has still been healthy.

Unlike Helesi, Globo has seen top- and bottom-line growth through the last two tough years, and net debt of €11m (£9m) isn't such a weight as Helesi's millstone.

Earnings-per-share forecasts for Globo range from a bit less to a bit more than 3p per share for 2010, and for 2011 similarly straddle 7p. The prospective price/earnings ratio for 2010 is less than 4, falling to less than 2 for 2011.

Globo seems to be suffering from investor aversion to all things Greek, but looks cheap on fundamentals and has just begun to penetrate the international mobile market.

It's a company that brave contrarians may want to take a closer look at.

More from G A Chester:

> G A Chester owns shares in Helesi.

> For two weeks in September we will be opening the doors of our Champion Shares PRO newsletter service. In order to keep our exclusivity, only a select number of our readership will be able to join us. This is your chance to guarantee your place! Click here to join the priority waiting list.

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Corvid 20 Aug 2010 , 3:20pm
Basia02 23 Aug 2010 , 12:33pm

I keep having Minoan promoted to me on the basis that the resort development they plan on undertaking will dramatically increase the value of their land... but they seem to have been appealing against a refusal of planning permission for years. Now they are looking at generating solar energy, as though to do something with investors money. Always suspscious of companies which go off at a tangent. I just cannot see any appeal myself.

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