Earlier this year I reviewed contemporary Italian furniture producer, Natuzzi, S.p.A (ADR) (NYSE:NTZ). Natuzzi appeared to offer value but the company was facing strict opposition against its planned restructuring and cost cutting plans within Italy, where labor laws are notoriously strict.

Natuzzi logo

Natuzzi, S.p.A (ADR) (NYSE:NTZ) designs and produces traditional leather and fabric-upholstered furniture such as loveseats and sofas. The company has 430 galleries worldwide, six production facilities and three warehouses. At its current stock price, the company has a market capitalization of $118 million and average daily volume is just under 38,000.

Natuzzi valuation

When I first took a look at Natuzzi, S.p.A (ADR) (NYSE:NTZ), the company appeared to be a deep value opportunity and after reporting its fiscal second quarter results at the end of September, it would appear that the company is still a hidden gem. Indeed, at the end of the company’s fiscal second quarter, total current assets amounted to $298 million but total liabilities only amounted to $198 million. What’s more, if we include long-term assets into the equation, Natuzzi has shareholder equity of $264 million, indicating that at its current market capitalization of $118 million, the market is placing almost no value on the company’s long-term assets.

However, as I reported the first time round Natuzzi, S.p.A (ADR) (NYSE:NTZ) has been loss making on both an income and cash basis for the past six years. Unfortunately, management only realized earlier this year that a serious company overall was required before Natuzzi could return to profit. As I have already mentioned, Natuzzi’s head office and the majority of its production facilities are based in Italy, which is well known for its complicated labor laws and restrictions on hiring and employment (as well as serious taxation issues).  This mean that as soon as Natuzzi’s management announced the plan to layoff 1,726 staff as part of its reorganization program, the Italian government vetoed the decision, putting Natuzzi in a precarious position.

Natuzzi negotiations with trade union organizations

Nonetheless, Natuzzi, S.p.A (ADR) (NYSE:NTZ) continued negotiations, and on the 11th of October, the Italian Ministry of Labour and Social Policy with agreements from trade union organizations, under the supervision of the Minister of Economic Development and the Minister of Labour signed into effect agreement to launch the restructuring plan for the group’s industrial structure in Italy. Unfortunately, as part of the deal the number of employees that Natuzzi can layoff has been reduced to 1,506. That said, these employs are still required to be given one year’s notice, (until October 2014), however, the Italian government will fund the majority of these workers’ salaries until the grace period ends.

Still, this approval removes a huge obstacle from Natuzzi, S.p.A (ADR) (NYSE:NTZ)’s turnaround plan and increases the likelihood that the company will be able to return to profit before its cash runs out. Indeed, with the majority of the redundant workers’ salaries covered by the government until October 2014, Natuzzi should see an immediate reduction in costs.

With a book value per share of approximately $4.81, 124% away from current levels and a cash balance of $67 million at the end of the fiscal second quarter, Natuzzi now looks like a great value play with recovery prospects.