value and opportunity

DISCLAIMER: The stock discussed in the following post is a very illiquid small cap. The author might have already bought some of it or might sell it at any time.
PLEASE DO YOUR OWN RESEARCH !!!

Gerard Perrier SA is a French company, which has nothing to do with the famous sparkling water but, according to Bloomberg does the following:

Gerard Perrier Electric designs, manufactures, installs and maintains electrical and electronic equipment for industrial machines and automated processes. The Company’s subsidiaries include Soteb and Geral.

“Traditional” valuation metrics look Ok,but not spectacular:

Market Cap: 68 mn EUR
P/E (2011 Trailing): 9
P/B 1.7
P/S 0.5
Div. yield 4.1%
EV/EBITDA 3.8

P/B is quite high, EV/EBITDA quite low, how comes ? Well, end of 2011, they had ~7 EUR net cash per share, so this drastically reduces EV/EBITDA to such a low level.

So far so good, but why might this be a “hidden champion” ? Well, a look at “standard” returns over the last few years shows a picture of a very very good business:

	EPS	FCF	Profit margin	ROE	Net debt per share
2002	1.55	1.80	5.6%	19.9%	-3.8273
2003	1.65	0.34	6.0%	19.1%	-3.5185
2004	1.80	1.87	5.9%	17.4%	-4.9838
2005	1.82	0.93	6.0%	15.8%	-5.027
2006	1.51	0.46	4.3%	12.7%	-2.938
2007	2.04	0.61	4.9%	16.6%	-1.349
2008	2.43	2.11	5.2%	18.1%	-1.1732
2009	2.29	3.37	5.0%	15.9%	-4.2205
2010	3.21	1.67	6.3%	20.0%	-5.2313
2011	3.55	4.23	5.8%	20.0%	-6.6423
	21.84	17.39

If we adjust ROE for Net cash, we can see ROEs (or ROIC) of 30% or higher for the last few years. Whenever I see such numbers, the question is of course: How are the doing it ?

Well, according to my understanding, Gerard Perrier to a large extent is rather an engineering /servicing company than a production company. Under the roof of Gerard Perrier, the operating business is run via 5 subsidiaries, which are the following:

Soteb
This entity had in 2011 ~48 mn of sales out of the 122 mn total sales. This is the largest entity and also the core entity which installs and mantains electrical installations at large industrial sites. This company is quite asset light, as the business model does not require large fixed assets etc.

Automation geral, Seirel automatism and SERA are the subsidiaries which are summarized under the segment “Fabrication” in their segment report. In 2011, the 3 companies together made around the same sales than Sotheb (47 mn EUR). The largest part of this segment seems to be equipment for automation of industrial production. Naturally, anything which is fabricated requires more capital. So compared to Soteb, they need twice as much fixed assets to generate the same amount of sales.

ARDATEM
This is the company which represents the “energy” segment. In my understanding, Ardatem with 2011 sales of around 29 mn EUR is specialised service company for electrical installations,etc. for nuclear power plants with the largest client being EDF. Again, very low fixed asset requirement

So all in all, 2/3 of the business seems to be “asset light” service businesses with (hopefully) a large amount of recurring revenues. The production segment seems to be more capital intensive, but as far as I understand this is a very specialized production process with specific orders and also relatively limited working capital requirements. So in 2011 for instance, Gerard Perrier in total had total inventory of only 3.6 mn EUR or around 11 days. So this looks like a good “Just in time” or “on demand” fabrication model.

Competitive advantages ?

I have to admit that I did not yet dig deep enough if there is any sustainable moat. However, from my practical experience I know that electrical installations are quite special. I recently moved into a new apartment in a newly built house. Of course there were some issues with the electrical installations. Maybe for cost saving reasons, the landlord called in a different electrician to fix those problems. Despite having all the original plans, the guy from other company was struggling hard with fixing the problem. When I started to talk to him he told me that yes, there are the plans where everything should be but in practice, they have to deviate for different reasons from the plan and often those plans are then not updated anymore. So the electrician who has installed the system has of course a “natural” moat regarding this installation and fix problems quicker than a third party electrician.

Just by coincidence I had a similar discussion with an electrician who was working for the City council where I am living. He said basically the same thing, that you cannot trust plans for electrical installations and you have to know how it is actually wired, otherwise you need a long time to find the problems.

So I am not sure if this applies here as well but I can imagine if you have already installed a very complex electrical installation in an industrial plant, the client wants problems fixed really fast in order not to delay production. So once you have the job, I guess chances are good that you get all the follow up work.

Regarding my checklist, the score is pretty good, some highlights:

– The company is family owned (61%), the son of the founder is co-CEO
– only one analyst is following the company (Gilbert Dupont)
– share count has decreased since 1998
– always free cash flow positive, earnings to FCF conversion high (80-90%)
– not too many acquisitions, good organic growth
– veryx capital efficient business modell, low fixed assets
– Beta ~0.6, do relatively independent from index
– 260D stock price volatility of 19%, relatively low
– other shareholders: Small stakes (~1%) of Natixis, Fidelity, Amundi. Due to low trading volume not interesting for most funds

Valuation

Simple Version:

Assuming a 2012 EPS of 3.75 EUR and 7 EUR net cash (not required for operating purposes) per share, Perrier trades at a P/E of ~9 (gross ) or 7 net. For such a high quality company, a “fair” P/E should be anywhere between 10-15 (net), so a fair price could by between 45-65 EUR per share.

More sophisticated version:

Gerard Perrier managed to convert ~80% of its earnings into free cash over the last 10 years while being able to grow sales and profits by 130% over the same time with only one small acquisition in 2011. So if we start at 3 EUR free cashflow (80% of my estimated 3.75 EUR 2012) we get the following “value” grid relative to discount rate and growth:

	Growth
Discount	1%	2%	3%	4%	5%
11%	30.00	33.33	37.50	42.86	50.00
10%	33.33	37.50	42.86	50.00	60.00
9%	37.50	42.86	50.00	60.00	75.00
8%	42.86	50.00	60.00	75.00	100.00
7%	50.00	60.00	75.00	100.00	150.00

Mean reversion potential

This is a very interesting point. Based on historical P/Es, margins etc., Perrier trades more or less exactly at historic levels. This is because the stock rarely traded at double digit P/Es. However if we look for instance the 15 year period we can clearly see that this still led to a great performance of ~13.4% p.a. against 3.8% for the Benchmark. The same applies for 10 years (16.3% p.a. vs. 5.1% p.a.) , 20 years (24.6% p.a. against 6.2% p.a.) and 5 years (25.9% p.a. vs. 9.6% p.a.).

It is almost unbelievable, that a stock which outperforms in such a consistent manner over such a long time still only trades at single P/Es. Efficient markets “French style”.

Stock chart

For a “hardcore” counter-cyclical investor, G. Perrier looks almost like a momentum stock:

I am not a chart analyst, so I leave it to my readers to interpret this.

Risks & Issues

Of course, there are always issues with any stocks so let’s look at some of them:

France / EUR crisis
This is clearly one of the main reasons why the stock is cheap. In the case of Italy, I clearly underestimated the extent of the decline in local economic activity. Clearly this is a risk for G. Perrier, as most of their business is domestic. However the actual number look relatively good. The had a string first quarter in 2012, then 2 slower quarters before in Q4, growth picked up again.

Interestingly, growth came mostly from the energy sector according to this news release, and the “core” SOTEB remained more or less flat. Nevertheless, 4% organic growth is quite an achievement in those times.

It seems to be that (so far) their business is relatively isolated from the general French economy. Although I am not sure if for instance their business is concentrated on certain industry plant where a close down might hurt business for Perrier.

Summary:

Gerrard Perrier for me is a very interesting stock. Although P/B is rather on the high end for my taste, the company looks like a very interesting “hidden French champion”, with a very cash generative, capital light business model, good management and resilient business.

Regarding the portfolio, I will assume that I could have purchased 9.000 shares since the beginning of 2013 at 33,60 EUR, the VWAP from 01.01. until 4.03. This translates into ~2% of the portfolio.

Together with Installux and Poujoulat, this will be my “French Micro Cap” basket with a weight of ~6%. My maximum weight for illiquid French “micro caps” would be 10%.