Bottom Feeding - FNM.BIT, TET.LSE, and DAC.NYSE

FNM S.p.A (FNM.BIT)

FNM manages railway and motorway infrastructure in the Lombardy region of Italy. The company is state-controlled, with around 57.6% of shares being held by Regione Lombardia (Lombardy Region), and another 14.7% by the Ferrovie dello Stato Italiane S.p.A (State Railway).

In the year ended 31 Dec 2024, the company generated total revenues and other income of EUR 949,874k (FY23: EUR 776,006k), operating profit of EUR 74,270k (FY23: EUR 104,682k), and net profit of EUR 59,603k (FY23: EUR 81,998k).

Total equity at 31 Dec 2024 was EUR 374,314k (FY23: EUR 355,334k), of which EUR 15,852k was tangible (FY23: EUR 47,630k). Net debt including lease liabilities at this date was EUR 615,111k (FY23: EUR 549,811k).

FNM generated net cash flows from operations of EUR 195,998k in FY24 (FY23: EUR 182,693k), and invested EUR 86,692k in PP&E purchases (FY23: EUR 42,938k). Free cash flow was EUR 106,306k (FY23: EUR 139,755k), which it used to pay EUR 10,000k in dividends (FY23: EUR 10,003k).

Market capitalisation: EUR 178.31m

Valuation: Using the FY24 figures, the shares currently offer a 33.4% earnings yield, 59.6% free cash flow yield, and 5.6% dividend yield.

Reason: Higher interest rates are probably a factor given the amount of leverage the company uses; but that said, its interest is well covered by earnings. The shares have been relatively flat since mid-2022, which is when inflation and interest rates started to pickup.

Interest level: Moderate - Language and lack of local familiarity are definitely obstacles for me; I don’t know what limitations state control creates regarding shareholder distributions; the current payout ratio is very low.

Treatt (TET.LSE)

TET manufactures and supplies various natural extracts and ingredients to the flavour, fragrance, beverage, and consumer product industries in the UK, Germany, Ireland, USA, China, and elsewhere.

In the year ended 30 Sep 2024, the company generated total revenue of £153,066k (FY23: £147,397k), gross profit of £44,486k (FY23: £44,824k), operating profit of £19,239k (FY23: £14,521k), and net profit of £14,401k (FY23: £10,942k).

Total equity at 30 Sep 2024 was £142,014k (FY23: £137,246k), and it had net debt including lease liabilities of £739k (FY23: £10,382k).

TET generated net cash flows from operations of £21,068k (FY23: £21,491k), and invested £5,668k in capital expenditure (FY23: £5,714k). Free cash flow in FY24 was £14,232k (FY23: £14,536k), which it used to pay dividends of £4,924k (FY23: £4,802k), alongside net debt repayments totalling £8,393k (FY23: £7,095k).

Market capitalisation: £129.19m.

Valuation: Using the FY24 figures, the shares currently offer an 11.1% earnings yield, 11.0% free cash flow yield, 3.8% dividend yield, and trade at 0.9x book value.

The company has also announced a £5m share buyback programme commencing 10 Apr 2025, equating to a 3.9% buyback yield.

Reason: Weak consumer sentiment in the USA - its largest market, accounting for £58m of revenue in FY24 - has led the company to issue a profit warning for FY25.

Interest level: High - This seems like a great example of a high quality company facing some short-term headwinds. Direct tariff exposure should be somewhat mitigated by the fact it manufactures its products in both the UK and USA.

Danaos Corporation (DAC.NYSE)

DAC is a Greek shipping company that owns and operates a fleet of containerships in Australia, Asia, Europe, and the USA.

In the year ended 31 Dec 2024, the company generated total revenue of $1,014,110k (FY23: $973,583k), operating profit of $540,884k (FY23: $580,661k), and net profit of $505,073k (FY23: $576,299k).

Total equity at 31 Dec 2024 was $3,424,800k (FY23: $3,016,317k), and it had net debt of $281,399k (FY23: $132,365k).

DAC generated net cash flows from operations of $621,750k (FY23: $576,292k), and invested $659,343k in capital expenditure (FY23: $268,035k). Free cash flow in FY24 was $466,129k (FY23: $445,113k), which it used to pay dividends totalling $62,807k (FY23: $60,696k), in addition to spending $53,332k on share repurchases (FY23: $70,610k). Note: I’ve used depreciation to calculate FCF since capex is running well above a maintenance level.

Market capitalisation: $1.34bn

Valuation: Using the FY24 figures, the shares currently offer a 37.7% earnings yield, 34.8% free cash flow yield, 8.7% shareholder yield (dividends + share buybacks), and trade at 0.4x book value.

Reason: Charter rates and profit margins are near their cyclical peak and markets are evidently expecting them to fall.

Interest level: Moderate - Undoubtedly cheap, but the return shareholders will enjoy is going to depend on management’s capital allocation - new vessel acquisitions are currently being prioritised over returning capital to shareholders.

While the current charter rates are largely locked in for several more years, if we start to see trade slow down (as seems likely), margins could shrink quite rapidly in the medium-term, along with vessel values, closing the gap between the market valuation and book value. Investors may be looking through the market cycle here.

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