You are Carmen Aldecoa-Iturralde, senior buy-side analyst at Bestinver Asset Management in Madrid. It is November 2012. Pescanova S.A. — Galician fishing and frozen-seafood group, family-controlled, listed on the Madrid stock exchange — has just published a Q3 release that looks fine on the surface: revenue up 15%, EBITDA "healthy," expansion in Latin America. The fund's portfolio manager has asked you a simple question by Friday. Double the position to €15M, exit completely at €17, or do something in between. The audited 2012 numbers are on your screen. So is everything else you need.
The situation
Pescanova S.A. is a 52-year-old Galician group headquartered in Chapela (Pontevedra): integrated fishing fleet, aquaculture, frozen-seafood processing, with operations in Spain, Portugal, France, Chile, Ecuador, Namibia, and Mozambique. Founded 1960 by Manuel Fernández de Sousa-Faro, who remains both Chairman and CEO and — together with the family — controls 14% of the share register. The company is listed on the Madrid stock exchange (PVA.MC). In Q3 2012 it has just reported revenue of €1.69bn (TTM), EBITDA €120M, and a Latin-American expansion narrative built around shrimp aquaculture in Ecuador and salmon in Chile. The share trades at €17 against an analyst consensus target of €22.
You are Carmen Aldecoa-Iturralde, 32, CFA, senior buy-side analyst at Bestinver Asset Management, the Acciona-owned value fund on Calle José Ortega y Gasset where Francisco García Paramés built his reputation over two decades. You joined in 2007, cover consumer staples and food & beverage across Iberia, and have a reputation inside the firm for slow, paper-based work: you read every footnote in every annual report you cover, and you keep a private spreadsheet of every Iberian listed company's gap between reported net income and free cash flow. Your portfolio manager, Beltrán Parages, asked you the Pescanova question on Tuesday morning over a coffee at the corner of Diego de León. You owe him an answer by Friday.
The position history is uncomfortable. Bestinver initiated Pescanova in 2011 at €19 — a small, conviction-tilt position of €8M (roughly 0.4% of the Iberia fund) on the value-investor thesis: family-controlled, hard-asset-heavy, undervalued versus peers on book and EV/EBITDA. The stock has drifted sideways since. Beltrán's question is the right one: "Either we are wrong and we should size out, or this is the bottom and we should size up. ¿Qué pasa con Pescanova, Carmen? Tienes hasta el viernes."
The reported numbers are clean. Revenue €1,690M (+15% YoY). EBITDA €120M (margin 7.1%). Net income €50M. Reported total debt €1,527M. Cash €145M. Equity €530M. P/E on reported EPS of €1.75: 9.7×. The market cap at €17 is €486M against a book value of €530M — discount to book. On the surface, this is exactly the kind of stock a Bestinver analyst is supposed to buy more of: cheap, with a family-controlled hard-asset story.
You have one nagging thing. In your private gap-spreadsheet, Pescanova is the most extreme name on the Iberia list. Reported net income +€50M; reported free cash flow (operating cash flow minus capex from the 2011 audited statements and the H1 2012 release) is negative €180M. The gap is too big to be working-capital noise. A company that reports earnings while burning cash, year after year, is the textbook signal that revenue or capitalisation is being managed. That is the loose thread you have until Friday to pull.