Update on Saga Furs after 2023 earnings
Is it still cheap? A commentary on their latest results
Disclaimer: This is not investment advice and meant for entertainment purposes only, I hold a position in the discussed company and therefore may be biased in my opinion. Please be aware that this is an illiquid microcap, please only buy and sell with a limit-order.
Last year, in October, I wrote up Saga Furs. Since then, the company has filled its results for 2023 and gave an outlook for 2024 and beyond. Reason enough to re-profile the company. In case, you have not read the initial write-up, you can find it here:
To summarize the business of Saga Furs. They are a fur auction house. Their main source of revenue is a commission they charge to buyers and sellers. So the drivers of revenue are a) the price of fur and b) the volume of fur. They have a fixed cost base, which means that after a certain point, every dollar falls to the bottom line of the income statement. The auction house market for fur in Europe is a duopoly between Kopenhagen Fur and Saga Furs; historically, Kopenhagen Fur has been the market leader, but is set to liquidate its business in 2025. This is expected to increase the volume of fur that Saga receives from farmers.
2023 Earnings - better than expected
The results were better than I expected. 1.39€ in EPS puts the stock at a P/E of 8. They are also going to pay a dividend of €0.66 per share. What drove these results was a very high volume of pelts. They offered 15.5 million furs, the most Saga Furs has ever offered. However, prices remained quite low:
”Average prices for skins, at €23 for mink and €48 for foxes, were still well below production costs.” - Annual Report 2023 (translated to english by DeepL)1
Industry Dynamics
While Saga Furs sold the most pelts ever, the total number of pelts sold between the duopoly of Kopenhagen Furs and Saga Furs was at a higher level than the year before, but still lower than in 2020 and every year before that. It was also the second year in a row that Saga Furs sold more pelts than Kopenhagen Furs.
For 2024 it is expected that Saga Furs will offer 9.5 million mink pelts and around 1 million fox pelts, while Kopenhagen Fur will offer 6.8 million mink pelts and a significantly lower number of fox pelts (for their February auction they will only offer 7.135 fox pelts2). This means that the total offer of mink and fox pelts between the two biggest auction houses in Europe will only be around 17-18 million. This is basically the lowest it has ever been, only in 2022, after Covid, the overall pelt supply was equally low. In 2022, however, demand was also depressed due to travel restrictions. Especially their main market, China, saw a lockdown in 2022. In 2024, supply is almost at an all-time low, while demand is stable:
“Despite all the adversity, demand for fur has recovered and we are confident that the appeal of fur products will remain strong in the coming years.”
”Furthermore, we expect that as the unit supply of furs will decrease from previous years and if demand remains strong in our main markets of China, Korea and Turkey, price developments should be positive in the coming years.” - Annual Report 2023 (translated to englidh by DeepL)¹
Pelt prices
At those levels the fur production is at an at time low, because it is not profitable for the farmers.
Theoretically, the price of fur should rise in 2024. But let's see if this is the case or not. Unfortunately, the amount of pelts Saga Furs has to offer in 2024 is so low that pelt prices will have to rise significantly (by my calculation, at least 30% to keep the profitability of 2023). The good thing is that we can follow both companies' auctions to get a feel for the direction of fur prices.
Outlook for 2024 and beyond
Even if fur prices don't rise that drastically in 2024, we still have the big catalyst that will set Saga Furs up for a great 2025. The liquidation of Kopenhagen Furs. They will hold their last auctions in 2024. What is interesting is that management is targeting a much higher EBIT margin going forward than they had. The target used to be 5% (which they over-achieved in 2023). Now they are targeting 15%.
”In connection with the 2022 strategy update, the company set its financial targets for the strategic period 2025-2026, which are: Operating profit (EBIT) 2023-2026: 15 percent of turnover.” - Annual Report 2023 (translated to englidh by DeepL)¹
They mentioned the implementation of a new ERP system, along with the improvement of cost-effectiveness and the implementation of a multichannel auction model. If they are able to generate 15% EBIT margin, this could result in €9m in EBIT in 2025. Here is the simple calculation:
19 million pelts offered, 80% sold at a combined average price of 30€ would equal €456 million auction sales, which should result in ca. €60 million in Revenue and therefore €9 million in EBIT. Current market cap is around 40m.
Conclusion
While 2024 will probably see a decline in EPS compared to 2023, from 2025 onwards, I expect a boost in earnings. Despite being up around 30% since the initial write-up, the stock remains cheap on all metrics, trading at 0,78x NCAV, 8x earnings and offering a 5.8% dividend yield.
I remain long.
Disclaimer: I bought the stock at an average price of €8.50 per share and may be biased in my opinion. This is not investment advice and meant for entertainment purposes only
https://www.sagafurs.com/fi/yritys/sijoittajille/porssitiedotteet/porssitiedote/?encryptedId=CF6400CF13B38938
http://194.255.1.99/custreports/MainFrame.aspx
Great stuff, are you still invested in any special situations in Germany?
Love this write up, such an interesting company. Is there anyway to trade this in the U.S?