Mecanica Fină - a real estate company valued at half of the value of net assets

The shareholders of Mecanică Fină were summoned, at the beginning of November last year, to approve the change of the company's main object of activity from "Manufacturing of instruments and devices for measurement, verification, control, navigation" to "Activities of holding companies". The company is 92% owned by Mol Invest, a company that, in turn, is owned by Sergio Mollo, the president and general manager of Mecanică Fină.

The council reasons that the change in the field and main object of activity is necessary because the company no longer carries out activities of manufacturing measuring and control devices, its revenues coming, on the one hand, from the profits of the companies that make up the Fine Mechanical Group, and on the other hand from "property management" type activities, i.e. from renting the premises it owns.

The announcement led to a 13.9% increase in MECE's share price in the November 6 session, the highest volumes recorded since the outbreak of the Covid pandemic, which continued in the next trading session with an advance of 3.49% , up to 35.6 lei per title, after, during the day, the intra-day quote had reached the maximum of 37 lei.

• The appraiser sets a price to withdraw from the company equal to half the book value of the share

The company publishes the valuation report prepared by FairValue Consulting on November 8, in which the estimated value of Mecanică Fină was 93.9 million lei, just over half of the value of the company's net assets at the end of 2022, of 173.7 million lei.

The withdrawal price for shareholders exercising this right was 25.33 lei per share, below the market price at that time and the equivalent of 54% of the book value of the share, 46.87 lei. The publication of the report brought a strong negative reaction to the stock market, with the MECE share price falling 14.2% that day, which continued in the session on November 9, with a decline of around 5.3%.

One of the first things noted in the report and complained about by investors is that FairValue does not use an asset-based approach to valuation. According to the document, since the Fine Mechanic activity is viable and capable of generating income, the average of the market and income approaches was used for the evaluation, based on the financial statements from December 31, 2022.

"The income approach is the most appropriate in the case of going concern valuation because it fits into the buyer's perspective, including future discounted benefits and investment efforts required over a foreseeable period of time," the report states.

On the asset approach, FairValue argues that it has the disadvantage that it reflects a static view of net worth at the valuation date and that assets are valued individually, often using different methods. "This approach was not applied because it is not appropriate in the case of an enterprise that will continue its activity in a predictable manner in the next period," the report states.

But investors disagree.

Dan Segal, long-time investor at the Bucharest Stock Exchange and Mecanică Fină shareholder, told us: "In principle, a real estate company must be evaluated based on the asset approach. Real estate is not difficult to value, although there is always a margin of error. But the appraiser chose to ignore this method, and the justification for not using the asset approach seems very implausible to me."

At the end of 2022, 99% of the company's assets worth 224.8 million lei were fixed assets, of which almost 90% were real estate investments. Equity amounted to 173.7 million lei, according to the financial data presented in the report.

Marius Motogna, also an investor in Mecanică Fină, draws attention to another valuation report, drawn up by Darian for the withdrawal of shareholders from Contactoare Buzău, where the asset valuation method is used.

"Considering that the Contactoare company no longer carries out the operational activity of electrical apparatus production and that the main activity is represented by the rental of industrial/administrative premises in Buzău or the capitalization of assets through sale, the approach by assets is the only appropriate one for the evaluation of the company", it is stated in the report prepared by Darian for Contactors.

"This is exactly the case with Fine Mechanics!" says Marius Motogna.

For clarification, the BURSA newspaper asked ANEVAR in which situations it is appropriate to use the asset approach when valuing a company, but the Association has not yet responded to our request, which was sent two weeks ago.

• Dan Segal: "I think that the ASF should investigate the transactions with MECE shares, from the morning of November 8"

Other issues reported by investors refer, among others, to the valuation of some land, the transactions made by the majority shareholder at prices higher than those in the valuation report, or the long period of time that elapsed from the time the report was drawn up to the time of its publication.

"The way the lands were evaluated is very strange. Starting from the offer prices for similar plots of 717 euros/m2, 763 euros/m2, 750 euros/m2 and 540 euros/m2, after various adjustments, an evaluation of the land owned by the company was reached at 459 euros/m2" , says Dan Segal.

The report is dated July 27, long before the shareholders were convened for the change of business, but published on November 8. "In my opinion, it is a long enough period so that, probably, the conclusions of the report will not remain confidential," says Dan Segal.

The investor also draws attention to the transactions made with Mecanică Fină shares in the morning of November 8, 2023. According to the data on the BVB website, on that day, the share opened with a gap-down of 8.4%, at 32 .6 lei, in order to drop to the minimum of the day, 30.4 lei, even in the first half hour of trading. According to the investor, the valuation report indicating the price to be paid by the company to shareholders who exercise their right to withdraw was published on the issuer's website around 11:30.

"It seems quite likely to me that the report was known to some market participants, before its publication on the Mecanică Fină website. I think the ASF should investigate the MECE stock transactions from that morning," says Dan Segal.

Also, the purchases of the company's shares made by the majority Mol Invest, at significantly higher prices than the one resulting from the evaluation report, are worth noting. For example, in 2022, Mol Invest bought MECE securities at prices between 28 lei and 32 lei per unit, but mostly above the 30 lei threshold. Or, theoretically, a rational investor buys at prices that he believes are undervalued.

Last but not least, revenues consisting of fair value valuation gains were assumed to be nil in the forecast, as noted in the report.

• Dan Segal: "The FairValue company hides behind the inadequate application of some methodologies and the majority hides behind the FairValue company"

From the market approach, FairValue Consulting obtained an estimated value of Fine Mechanics of 103.4 million lei, and from the income approach (of discounted cash flows) a value of 84.4 million lei. Thus it reaches a valuation of 93.9 million lei of the company, respectively 25.33 lei per share.

"In my opinion, the price in the report is much lower than the fair value of the company, with the obvious aim of the majority paying less to the minorities who withdraw from the company. I think that ASF and ANEVAR should react when a valuation report leads to such a large difference from the intrinsic value of a company. The FairValue firm hides behind the inadequate application of some methodologies and the majority hides behind the FairValue firm," says Dan Segal.

In the meeting last December, the points regarding the change of Mecanică Fină's business object and the withdrawal price of 25.33 lei for the shareholders who exercise this right were approved, obviously by the majority vote. There is still no public data on withdrawals from the company.

In 2022, Mecanică Fină had operating revenues of almost 18.1 million lei and a net profit of about 10.1 million lei, 130% more than the previous year. For 2023, Mecanică Fină has forecast operating income of 12.8 million lei and a profit of almost 8.1 million lei, according to the data from the evaluation report and the reports from BVB. The company will present its preliminary results for last year on February 28.