Companies that trade at a large discount to their net asset value can be interesting investment propositions. This situation often occurs with property firms. Yet a property is only worth what someone else will pay for it, hence why shares can trade at massive discounts. One such company dealing with the reality of a depressed market is Clear Leisure (CLP:AIM), a microcap which looks to have greater problems than simply the price of its land.

Clear Leisure was created out of the cash shell of Brainspark, a failed technology incubator. It has invested in various leisure assets (a water park, hotels, restaurants) in Italy. One of its big attractions is a large plot of land that the company says is fully permitted for building a new theme park. The land was acquired for €12.5 million and was put on the market last year as Clear Leisure doesn't want to build the theme park itself. A €25 million offer was made by an investment fund and subsequently rejected because it was in shares and not (the desired) cash.

And this is the company's big problem: cash is scarce in Italy and the mooted theme park will cost an estimated €400 million. It is not a good time to build a leisure business in Italy – neither the theme park nor Clear Leisure's own operations – as the country's economy is struggling.

Clear Leisure has today announced the reduced value of its land asset from €47 million to €35 million. This land is owned by Mediapolis, which in turn is 69.45% owned by Clear Leisure. While its share of land is still worth more than the firm's market cap (the latter being £7.5 million or €8.8 million), today's reduced valuation is not going to help the small cap's quest to get a higher share price rating. Indeed, the latest announcement has sent its share price down 3.2% to 3.75p.

The company announced plans in late 2012 to split the land into four as this could be an easier way to attract buyers. It reckons the areas could be separated into a smaller theme park, a shopping centre, a hotel and a power plant to generate energy to run the neighbouring attractions.

With no sign of improvement in Italy's economy, we cannot see Clear Leisure selling that land any time soon. But the story obviously changes once the economy turns. Until then, investors should focus on the revenue-generating assets of Clear Leisure. These are likely to be the main share price drivers.

The small cap owns 51% of Sipiem, the majority owner (67%) of the Ondaland Water Park. Clear Leisure's investor presentation says the park expects 400,000 visitors between April and September this year; and 450,000 visitors in this period for 2014. Yet chief executive officer Alfredo Villa revealed to Shares that the park only gets visitors three months a year. Addressing this problem, Sipiem is now building an indoor attraction to get year-round custom. Remarkably, this attraction doesn't even include an indoor swimming pool; there's no water-related activities at all which has to be a major oversight when that is the core reason for consumers to travel to the site in the first place.

The indoor attraction will have 'games and rides', restaurants and shops. It was meant to open this summer but Villa admits it won't be ready until December. That means Clear Leisure has lost the chance to introduce the new indoor site to people visiting the outdoor water park during the 2013 summer season.

The water park is actually Clear Leisure's biggest earner with €2.7 million EBITDA (earnings before interest, depreciation and amortisation) in the year to 30 June 2012 on sales of €6.5 million. In contrast, the ORH hotel chain and tour operator business made €1.8 million EBITDA on sales of €50 million. The restaurant arm made €0.2 million EBITDA on €2 million revenue in the same period.

Clear Leisure owns 51% of You Can Group – the owner of the So Sushi chain which has 22 franchised restaurants. Villa reveals that Clear Leisure has struggled to get cash payments from certain franchisees, citing the lack of cash in Italy. The group plans to buy back the five best-performing restaurants to become corporate-owned entities and the basis for future growth.

One of the benefits of having a master franchise is low capital expenditure (capex). Once you become the owner of a restaurant, there will be extra costs for regular refurbishment and capex for new sites.

Clear Leisure has, until recently, only been the minority investor in its leisure operations. Therefore it has suffered from different reporting rules in Italy where accounts needed to be submitted by September for the previous calendar year's business, versus June for Aim stocks. This has led to the shares previously being suspended as the accounts weren't ready for the Aim deadline.

The small cap now argues that this won't happen again because it now has controlling stakes in each leisure operation and can dictate when the accounts must be completed. It also hopes this means it can drive the future business strategy. For example, it wants to streamline the hotels business to have fewer outlets but focusing on the more profitable sites.

Plans are underway to list the business in Italy as Villa claims there is greater brand recognition for its subsidiaries in the domestic market. Yet Clear Leisure won't delist from Aim because it says this gives the business more credibility and it is a more liquid market.

It seems the board has a considerable amount of work to do in reshaping the various leisure assets, in addition to selling the large plot of land. While the business may look like it is turning a corner in having majority control of the subsidiaries, achieving its growth plans looks a hard task in the current market. Until Italy's consumers are ready – or even have the financial capability – to start spending like the old days, it looks a hard slog ahead for Clear Leisure.

Issue Date: 15 Apr 2013