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Buzzi revisited – time to SELL
Buzzi was part of our initial portfolio. In our initial investment thesis (German), the main reason was simple:
The stock, especially the Pref shares were significantly below book value, Buzzi had never made a loss in the past, “normalized” earnings and p/E ratios were low and it had a nice dividend yield.
We bought into the pref shares share at around 5,50 EUR
Additionally, the fact that Buzzi was only to a small extent an Italian company but rather a very international company due to the Dyckerhoff take over with large exposures in the US and Germany was maybe underappreciated.
Since then, a view things happened:
- Buzzi showed a loss twice, for 2010 and 2012 with only a mini profit in 2011
- when the price of the shares dropped in autumn 2011, I increased the position at 3.28 EUR per share
- the share price of the more expensive common shares performed a lot better than the cheap “Risparmo” shares. The difference since 01.01.2011 is a staggering 28% including dividends
- howver, both, the pref shares and the common shares outperformed the Italian stock index FTSEMIB by 17% resp. 45%
The more interesting question is: How did Buzzi perform against our initial expectations ?
In different posts I came up with different “reversion” to the mean approaches, among others
Reversion to the mean net income/PE
Initially: average P/E for the pref shares of 6. net margin of 9.6% (12 year average)
Now: After 15 years, average net margin decreased to 7.11%. Based on current sales of ~14 EUR per share results in 1 EUR per share normalized profit, so with an average PE of 6, the pref shares are fairly valued. I would argue to common shares are even overvalued.
Reversion to the mean EV/EBITDA
Initially: Assumption EV/EBITDA of 5.5 and EBITDA Margin of 26% (12 year average)
Now: 14 year EBITDA Margin is 24.8%. With current debt, the fair value of a Buzzi share would be around 13 EUR. This means the common shares are fairly valued, the upside in the pref shares without any other catalyst would be that the relative underperformance would be compensated at some point in time.
Free cash flow:
I had assumed free cash flow to equity of 200 mn EUR as “normal” level based on a 7 year history. “Adjusted” free cashflow both in 2011 and 2012 are more like 100 mn EUR, bringing down the average to 175 mn EUR. If I use this as a basis and the same discount rates I used back then (12-18% for a cyclical pref share), I end up with a fair value range of something like 4.75 EUR – 7.11 EUR per share. So the current share price would be rather in the higher part of the range.
Overall issues with mean reversion
Those three examples show a problem with “Mean” reversion plays: What is the mean ? In the Buzzi case, the mean now goes down every year, reducing the fair value for the mean reversion valuation.
Clearly, the current down cycle is a very severe one, but maybe the previous up cycles used for the mean were above the mean ?
What to do now ?
For me this is a typical situation where one should sell. Initial expectations have not been met, fair value has gone down and share price has gone up. Of course one could argue that the “mean” will go up and the sentiment is getting better with recent buy ratings among others from Deutsche bank.
In recent times, some US funds actually built up meaningful positions like Marketfield Asset Mgt. with ~2.9% of the common shares, and another, Mackay Shields with around 2.1%.
Nevertheless, I don’t think that at current levels and based on the current situation that there is a lot of “margin of safety” left in Buzzi. I will therefore sell the complete position at today’s VWAP. At the time of wirting, this would be a total gain of ~36%, mainly attributed to the second purchase at 3.28 EUR in late 2011.
IGE + XAO SA (ISIN FR0000030827) – another hidden French champion ?
DISCLAIMER: The stock discussed in the following post is a very illiquid French small cap. The author might own the stock. Please do your own research. Do not blindly follow recommendations neither on this blog nor anywhere else.
Sometimes investment ideas are created from quite random events. I was looking into my database for interesting French stocks (as always). Out of interest, I thought that I want to tackle a French software stock next.
Among the few software stocks I just picked randomly the company called “IGE + XAO SA” because of its strange name. And guess what ? This company is creating CAD software for electrical installations with Gerard Perrier, my last stock pick as one of the major clients.
So despite the rather expensive valuation numbers, I decided to dig a little bit deeper.
“Tradition” Valuation metrics:
P/E Trailing 14.2
P/B 2,9
P/S 2.6
EV/EBITDA 5.1
Dividend yield 1.8%
Market cap EUR 61 mn
Not so exciting at first. However, when I ran IGE through my checklist, it scored very high (20 out of 27), at par for instance with Vetropack and AS Creation mostly due to the following facts:
- great free cashflow generation (FCF on average 1.2x Earnings !!!)
- rock solid balance sheet with ~15 EUR net cash per share
- Management owns 20%+ of company, CEO & founder still on board
- company started to significantly repurchase shares again in 2012 (Sharecount decreased by 20% since 2008)
If I would take into account net cash and the share repurchases, IGE would even met my P/E and dividend criteria, scoring 22 out of 27, equal with Tonnelerie.
So the result from the checklist is clear: Dig deeper !!!!
Business model / “Scuttlebutt”:
The company is mainly a Software company which, according to their Webpage offers the following products:
The Electrical CAD Software Specialist and you….
For over 26 years, the IGE+XAO Group has been a software publisher designing, producing, selling and ensuring the maintenance of a range of Computer Aided Design software (called “CAD”). These CAD software products have been designed to help manufacturers in the design and maintenance of the electrical part of production processes. This type of CAD is called “Electrical CAD”. IGE+XAO has built a range of Electrical CAD software designed for all the manufacturers, which functions either with an independent computer or with a company network.
So this is a very specialized “niche”. If I search for the German “Elektro CAD” in Google, it is already clear that IGE is not the only one offering this kind of Software.
The first question I would ask myself: “General” CAD Software is used everywhere, so can’t just the general CAD packages take over this job ? Well, according to this site ( a competitor) , this doesn’t seem to be so easy.
There seems to be also some competing products, for instance I found this German discussion board where different E-CAD or CAE systems are discussed. One of their main products, CADdy seems to be based on a old German DOS program and has been developed further by IGE.
Overall, I think that with specialised software like this, one should see quite significant network effects, i.e. if one product gains dominance, than this will be self-sustaining as there is little incentive to use different programs of that complexity for instance when you switch firms. I browsed a little bit in CAD forums and this has been confirmed quite often, for instance here. So once a program in this area is used and people are educated on this program, they will want to use it further on. What I found interesting is the fact that in this forum, A German IGE +XAO employee actively moderates everything which has to do with their products.
I think this is also the reason why they have 70% market share in France according to their 2011/2012 investor presentation. Which, of course, makes gaining market shares in other countries quite difficult.
This 70% market share might also explain the nice margins the company is enjoying. 20.9% Operating margin and 18.4% net margin are clearly not something one finds easily, not even with software companies.
ROE looks OK with 20%, however we should not forget, that basically all the equity is basically net cash and only a small part of that is really needed.
Those margins are on par or even better as heavyweight software champions like SAP or Dassault or CAD expert Nemetschek. Teh only difference is that those companies are much more expensive
As it looks for now, their business isn’t subject to the overall slow down in the French economy. In their latest half year report from the beginning of April, they still show solid growth rates of 5%. Net income didn’t grow due to higher tax expenses, but that should be a one time effect.
Net profit margin development
One thing that puzzled me, was the development of net margins. We can see that with one exception (a jump in 2008), Net margins increased steadily from 7.4% in 2002 to a fantastic 18.4% in 2012.
| NI margin | |
|---|---|
| 31.12.2002 | 7.4% |
| 31.12.2003 | 7.6% |
| 31.12.2004 | 8.3% |
| 30.12.2005 | 8.5% |
| 29.12.2006 | 10.4% |
| 31.12.2007 | 11.8% |
| 31.12.2008 | 15.3% |
| 31.12.2009 | 12.6% |
| 31.12.2010 | 14.1% |
| 30.12.2011 | 16.2% |
| 31.12.2012 | 18.4% |
In my opinion, this creates a series of questions:
- how did they achieve this ?
- are those margins stable ?
- do we have to expect reversion to the mean at some point in time ?
- what would be the “Mean” for margins ?
In order to understand better the increase in margins, I compared 2002 with 2007 and 2012 in the following table:
| 2012 | in % of sales | 2007 | in % of sales | 2002 | in % of sales | |
|---|---|---|---|---|---|---|
| Total sales | 24.2 | 20.7 | 15.7 | |||
| external costs | -5.4 | -22.1% | -5.5 | -26.5% | -5.4 | -34.6% |
| salaries | -12.3 | -51.0% | -10.7 | -51.7% | -7.1 | -45.4% |
| other cost | -0.6 | -2.6% | -0.5 | -2.4% | -0.5 | -3.1% |
| Depr. | -0.5 | -2.1% | -0.7 | -3.5% | -0.8 | -5.1% |
| Operating result | 5.4 | 22.2% | 3.3 | 15.8% | 1.9 | 11.8% |
| Net interest reslt | 0.3 | 1.4% | 0.3 | 1.4% | 0.0 | 0.2% |
| EBT | 5.7 | 23.7% | 3.6 | 17.3% | 1.9 | 12.0% |
| Tax | -1.5 | -6.1% | -1.2 | -5.7% | -0.7 | -4.5% |
| Net result | 4.3 | 17.6% | 2.4 | 11.6% | 1.2 | 7.5% |
The interesting thing here is that the improvement in the margin can almost be fully attributed to the decrease in percentage points to the decrease of external purchases / services. To me this looks like the typical “economies of scale” at a software companies. Once you have written the code, selling additional licenses increases the margin.
Competition
I found an interesting interview in French from 2009 where the CEO has been asked the question. His answer was (my translation):
- in everything related to aerospace etc., there are only Japanese and American competitors which do not seem to cross borders
- for industrial installations, there seem to be local competitors in each country
- in everything which is related to buildings, Autodesk is considered the main competitor
I think there competitive position is quite good. Their current niche is still to small to really interest a large player to enter on a “green field approach”.
Stock price
Looking at the stock price alone makes me ask myself why I didn’t discover the stock already last year when it was really really cheap. On the other hand, the more important point will be: What is the intrinsic value now ? Is there still enough upside ?
Management
As a hobby investor, I do not have access to management, However i watched on Youtube some interviews with the CEO (for instance here. The general impression was quite good. The only thing that I noticed is that the CEO is also active as the head of the local commercial chamber as well as some function at the local airport. This might lead to additional business contacts on one side but maybe distract him from the companies at other times.
Picture of the CEO:
Renumeration for the CEO was 250 k in total for 2012, that is quite OK for such a succesful year. Compared to the value of his shares (~7 mn EUR), I think the interest is quite well aligned with shareholders.
Shareholder structure:
A few words here because for a small French company, the shareholder structure is rather unusual. There is no majority shareholder.
The 2 top shareholders
Irdi Midi Partners 14.1%
Odysee Ventures 12.3%
are French private equity companies which ahve reduced their stakes lately. On the other hand, Amiral, the well known French value investment firm has recently increased their stake from ~3% to 9%.
That means howver that in theory the company would be “available” for a competitor to buy. Maybe this explains the quite shareholder friendly policy of the company which is ussual for France.
Edit: Longer term shareholders seem have double votes, so the Management plus IRDI might still have the majority, but how long ?
Valuation
Comparables: Just for fun, lets look at some other Software companies. I picked out 5 others:
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| Name | Rev – 1 Yr Gr | OPM | EBITDA Mrgn | 3Yr Avg ROE | R&D/Net Sales:Y | EV/EBITDA T12M | EV/T12M EBIT |
|---|---|---|---|---|---|---|---|
| IGE + XAO | 4.8% | 22.9% | 23.9% | 18.2% | 25.0% | 6.8 | 7.1 |
| PSI AG | 6.7% | 6.3% | 8.6% | 11.4% | 9.6% | 14.0 | 18.7 |
| NEMETSCHEK AG | 6.8% | 16.8% | 23.0% | 20.2% | 25.1% | 10.0 | 14.3 |
| DASSAULT SYSTEMES SA | 13.8% | 24.7% | 29.3% | 14.6% | 18.1% | 16.8 | 20.0 |
| AUTODESK INC | 4.4% | 15.1% | 20.7% | 14.2% | 25.9% | 14.7 | 20.0 |
| SAP AG | 14.0% | 25.5% | 30.8% | 23.8% | 13.9% | 16.7 | 20.5 |
Although its maybe not really fair to compare them, people pay for the same kind of profitablity aroound twice or three time as much for the larger companies.
This could be clearly also a function of better growth prospects, on the other hand it could also indicate what a potential buyer could be willing to pay.
Risks
As a French company, IGE is clearly subject to a worsening of the situation in France. With 73% of sales in France, there will be clearly problems if France goes into a real deep depression.
Another risk as with all cash rich companies could be that they use their cash for expensive acquisitions. So far, they haven’t done it but one never knows.
Summary
Overall, I think IGE + XAO makes a compelling investment case:
+ high margins and return on capital, rock solid balance sheet
+ capital light software company with good local competitive postion
+ for a French company surprisingly share holder friendly
+ potential target for buy out or take over
The major risk is of course the overall developement of the French economy. Nevertheless this is also the reason why one can buy this excellent company at a very attractive price.
I will therefore add IGE & XAO to my portfolio. I assume that I could have purchaes ~300 k EUR of shares over the last 6 weeks since I follow the company at ~42.50 EUR per share, making it a 2% position in my virtual portfolio.
Final remark on sizing /portfolio risk
The 2% portfolio weight might look a little bit small compared to the enthusiasm of my review. On the other side, my total French exposure now has hit 20% gross (~18.5% net of hedge). This is of course a quite conncentrated bet on France not going down the drain. So I try to limit my exposure within this concentrated bet on France by having a kind of “basket” approach and spread to different companies. Let’s see how this one works out…
Quick updates: WMF AG
WMF, the succesful German manufacturer of Coffee machines and cutlery released 2012 earnings last week and the annual report today.
Additionally, two rather strange things happened:
1. Despite a good result and extremely strong Free cash flow, they cut the dividend from 1.40 EUR to 1 EUR per share citing the need to “strengthen the internal funding capacity” of the company.
2. Yesterday, the CEO who successfully turned around the company, resigned as of may 31st 2013.
Quick Recap: Last year, the former private equity owner Capvis sold out to KKR, the legendary P/E company.
The reduction of the Dividend and especially the reason given is of course a joke. WMF has net cash and could be leveraged quite a bit before you start cutting dividends.
To me this is a kind of “deja vu” with another German company i used to own (before i started the blog), ANZAG AG, a German pharmaceutical distribution company.
KKR indirectly bought the majority of ANZAG vie their Boots/Unichem purchase. Then in 2009, they started to cut the dividend and communicating bad outlooks before they then managed to buy out the remaining minority shareholders for 31 EUR. In my opinion, KKR is not unfair, but they make sure that the upside remains with them and not minority shareholders.
So I do not understand, why now the share price goes up so much. For me, the situation is very different to the Capvis situation. Capvis in my opinion always wanted to exit via a share sale, so the interest of minority shareholders and Capvis were more or less aligned.
KKR on the other hand, will most likely look for another solution (break up, leveraging up, mergers). So the firing of the CEO and cutting the dividend could be the first sign that they are changing the strategy and that the “ANZAG strategy” might be applied here as well. In my opinion, the interest of majority shareholder and minority shareholder are less well aligned as before and the resignation of a very succesful CEO is one “early warning” here.
Additionally, in my (non growth) valuation model, the ordinary shares already look overvalued, the pref share which are owned are fairly valued.
Also, the chart looks kind of “stretched”.
So as a result, I will start selling the WMF pref shares (~3.7% of the portfolio) from today on under the usual rules.
Quick updates: Installux, EMAK, SIAS & ATSM
As I am not doing this fulltime, I sometimes miss if companies publish their results. In principle, for my “Value companies” I don’t think that one time period makes a big change in the overall investment case. However it definitely makes sense to look at existing companies at least once a year.
Installux
As reader Caque commented, Installux reported prelimary earnings a few days ago.
With 6.67 mn EUR or around 22 EUR per share, earnings were surprisingly good. Net cash is now at 18.8 mn EUR or 62 EUR per share. So trailing EPS ex cash is around (100/22) ~4.9 times, quite low for a company which earns around 15-20% ROCE.
2013 will clearly be a challenge for them, according to the last sentence of the statement:
L’environnement général incite Installux à la prudence quant à ses perspectives 2013. Le groupe anticipe un repli d’environ -8%. “Cette tendance se confirme malheureusement en terme de volume d’activité sur le 1er trimestre (-13%),
-13% in sales in the 1 quarter is quite substantial. On the other side, this might open up some interesting entry points during the year. Nevertheless it should be clear that France in general is going through a quite difficult year. As ussual, the stock price doesn’t do much and volume remains low:
One remark from my side: France and the Netherlands are Germany’s major trading partners. I cannot understand how people can be so positive about German companies and negative about Netherlands and France in particular.
EMAK
EMAK came out with a investor relation presentation including preliminary annual figures already a few weeks ago.
Interestingly, the “old” EMAK business is doing quite poorly, profit is down 50% or so. The “new” businesses acquired from the main shareholder were holding up much better. So looking back, the dilution is not that big.
EPS was ~5 cent per share so we have a trailing P/E of around 10. If they really make good on their ambition level (38-40 mn EBITDA), the stock would be quite cheap. Let’s wait and see, no need to do something at the moment. This has 2-3 years more to play out.
The stock price at the moment seems to “lazily” trail the FTSE MIB to a certain extent:
SIAS SpA
SIAS came out with preliminary 2012 numbers already 4 weeks ago.
What was clearly an issue is the fact, that traffic declined significantly in 2012, much more than expected. So despite a overall tariff increase, revenues stayed flat.
The good news: On April 15th, they are expected to pay the special dividend of 90 cent per share , distributing what is left from the sale of the Chilean asset sale and the purchase of the concession.
Operationally, there seems to be additional preassure from the regulatory side, as agreed tarrif increases have been suspended by the regulator.
After the special dividend, a large part of the “special situation” aspect (extra asset) has now played out. Howver, the fundamental part looks not as good as I have though initially. I will need to decide if I hold on to SIAS as a “Normal” value investmetn or sell it at some point in the near future. Fundamentally, the company does a lot worse than I had exepected. Thankfully, the entry price was low enough and investors seem to liek special dividends.
The stock price has outperformed the FTSE MIB in the last 12 month by a margin of more than 30%. Quite significant for a purely domestic business:
Even more interesting:
Autostrada (“ATSM”) now caught up with SIAS ver 2 years as it turned out that the “Italian Job”, the Purchase of Impregilo,turned out to be a great special situation investment, netting Autostrada a nice profit.
Maybe time to switch back into the “Cheapie” ? Let’s wait and see. Definitely worth to check the Autostrada annual report this year.
Quick updates: Sol SpA, AS Creation, Vetropack
Sol SpA
Sol came out with a “preliminary annual” already end of March. The numbers were not really surprising.
Sales were up 4.9%, EBITDA was up +1.4%, however net result was down -6.8%. I find this surprisingly good especially considering the tough environment for the mostly Italien based industrial gas business.
Most interesting is this part of the statement:
In comparison to 2011, the sales increased slightly in Italy (+0.2%) but much more abroad (+10.8%), which represents 46.8% of the total turnover. The home-care business, in which the Group operates through VIVISOL, marked a growth of 10.9% (sales equal to € 264.9 ml), while the technical gases business increased of 1.3% (sales equal to € 344.9 ml).
I think this is also the reason why the share price is doing quite well at the moment, despite the overall EPS decrease.
AS Creation
Also last week, AS Creation came out with its annual report for 2012. Numbers were ok (EPS 2.67 EUR per share against 1.69 EUR last year. Dividend will be increased to 1.20 EUR.
This is all quite positive, however the shares are now not cheap anymore. With a trailing P/E of 16 and the German economy running on full steam, there seems to be quite a lot of positive expectations for the Russian JV priced in.
AS Creation is one of the stocks where I have to check in more detail if there is still a real “margin of safety” at this level. (Edit: Interestingly, in Bloomberg they show a wrong EPS number for 2012. Here the EPS is 3.22 EUR, this makes the stock look cheaper)
The stock price has great momentum and is on its way to challenge the ATH from 2007 at around 50 EUR:
Vetropack
Last but not least, Vetropack came out with their 2012 report some days ago. Although EPS wass up strongly at 197 CHF per share, operating profit was down. The reason for this was a sale of non used real estate. Vetropack invested significantly more in 2012 than 2011, the question will be if this results in more growth.
In 2012, positive developements in some countires were off set mainly through negative developements in Switzerland and high energy costs.
I still like Vetropack as a very boring, extremely defensive (indirect) consumer play, again one has to monitor if the capital is allocated efficiently. At the moment a solid “hold” position.
The stock price is stagnating clearly, also compared for instance vs. Italian competitor Zignano:
Vetropack is trading at a discount (EV/EBITDA) both to Zignano and Vidrala, the 2 European peers which, in my opnion should be theother way round.
Quick updates: G. Perrier, Maisons France Confort, April
Some quick updates on French stocks:
G. Perrier
Already some days ago, G. Perrier announced preliminary 2012 numbers.
Highlights:
- Sales up 7% (+4% without acquisitions)
- Profit up 13.2% to 7.94 mn or 4.02 EUR per share
In my opinion, this is an absolut outstanding result if one considers that G. Perrier is more or less a purely domestic French company and clearly shows the quality of the company and their business model. I am not sure when the annual report is out, but as discussed perviously, I will increase the position further, target is now a full position.
Maisons France Confort
Also already a few days ago, Maisons France Confort issued annual numbers including the annual report. As some readers might remeber, i had two posts about them (part 1 & part 2), but didn’t include them in the portfolio yet.
Looking at the stock price action, it seems to be that market participants had expected better numbers or a better outlooK:
Final numbers were 2.70 EUR EPS for 2012. With around 7 EUR net cash per share, this translates into a trailing P/E of ~5.9. Of course, 2013 will not be easy for them, i guess the late spring in Europe will not improve things and the business model of MFC has much more exposure to the weak French economy. Nevertheless it looks like a potentially interesting cyclical entry point into a real good business. I will have to follow up on that one.
April SA
Quite similar to MFC, April came out with its 2012 numbers and the stock got hammered quite significantly.
The company earned 1.31 EUR per share, additionally there were some positive effects in the other comprehensive income. April clearly has the same problem as any financial services company which is very low interest rates. Nevertheless it is not clear to me, why the share price has now decoupeled from peer company AXA.
I will clearly have to look at the annual report, but so far I don’t see any reasons to sell.
Gerard Perrier – Follow up (Acquisition history)
In my initial post, I was actually quite sloppy. As reader al sting pointed out in the comments, they actually made a couple of acquisitions over the last years:
- 2005: Ardatem
- 2007: Maditech (?)
- 2007: SEIREL AUTOMATISMES
- 2011: SERA
Let’s look for first at Ardatem,, the service comnpany specialised on nuclear facilities. In their 2005 annual report they mentioned the acquisition as follows:
24.- Evénements postérieurs à la clôture du bilan. Acquisition de la société Ardatem le 4 janvier 2006, par la SAS Soteb : cette société de prestations de services intervient dans le secteur du nucléaire et réalise un chiffre d’affaires de l’ordre de 5 millions d’euros pour une marge nette d’environ 4% en 2005.
So in beginning 0f 2006, when they bought it, Ardatem had sales of 5 mn EUR with a margin of 4%.
In 2007, they bought “Maditech” which complemented the Ardatem acquisition and seems to be now als part of the “Energy” segment. Maditech had sales of 3 mn EUR at the date of the acquisition.
In 2011 then for comparison, the “energy” segment had sales of 28 mn EUR and an operational result (before tax) of ~2 mn EUR. That is quite a good developement 4-6 years. So yes, G. Perrier did acquire companies, but most of the growth happened after the acquisition !
Seirel was acquired in 2007 as well, the following can be found in the 2007 report:
Le chiffre d’affaires de la SAS SEIREL AUTOMATISMES, contrôlée indirectement est de 3 887 367euros (exercice de 6 mois) contre 6 307 313 euros l’an passé (exercice de 12 mois) et le résultat de 134 426 euros contre 285 731 euros l’an passé.
In the 2011 report this looks like this:
Le chiffre d’affaires de la SAS SEIREL AUTOMATISMES, contrôlée indirectement est de 7 551 587 euros contre 6 471 226 euros et le résultat de 491 215 euros contre 229 896 euros l’an passé.
Again, within 4 years, the doubled sales and even managed to increase profit 4 times. Seirel looks like it was a “distressed buy”.
Overall, the recent acqusition startegy looks quite successful. They seem to buy opportunistic and are able to put those companies onto a growth path. This makes me worry less about their cash pile. I think having cash and then being able to move quickly can be a great advantage. Especially now that maybe more companies are struggling in France, G. Perrier could make very interesting deals.
I will use the current weakness of the stock to buy some more below 35 EUR.
Total Produce (IE00B1HDWM43) 2012 preliminary results – Disappointing
Total Produce is one of the core holdings since the beginnings of this blog. In the beginning, we analysed the stock mostly in German, nevertheless, we finally settled after some back and forth on a fair value range of 0.69-0.83 EUR per share based on a free cash flow analysis, assuming ~8 cent of “adjusted” free cash flow per share (adjusting esp. for minorities.
One of the issues with Total Produce were back then Balance sheet quality (lots of goodwill, leverage) and only average return on equity, which however was set off by a very cheap price, significantly below book value
In between 2 things happened:
1. The price of the stock increased nicely to around 0.61 EUR. resulting in an overall performance of +55% incl. Dividends.
2. The quality of earnings however deteriorated in my opinion.
I think I have to explain point 2 a little bit in more detail. If you read the 2012 premliminary results, everything looks great:
Revenue (1) up 11.2% to €2.8 billion
•
Adjusted EBITDA(1) up 17.8% to €70.4m
•
Adjusted EBITA (1) up 21.4% to €54.6m
•
Adjusted profit before tax (1) up 19.1% to €47.3m
•
Adjusted EPS (1) up 12.0% to 8.11 cent
•
Final dividend up 12.0% to 1.512 cent; total 2012 dividend up 10.0% to 2.079 cent
(1)
Key performance indicators are defined overleaf
So everything is up double digits, where is the problem ? Well, the problem could be the use of the word “adjusted” in most of the items presented.
If one flips to the next page of the report, we can already see that “unadjusted” EPS declined by -7.5% from 7.11 pence to 6.58 pence per share.
Where does that come from ?
The “explanation” reads as follows:
Adjusted earnings per share excludes acquisition related intangible asset amortization charges, acquisition related costs, exceptional items and related tax on such items.
On the one hand, one could say OK, acquisitions are not part of the operating business, let’s ignore that. However, Total produce does a lot of acquisitions, year after year. Most of their growth actually comes from acquisitions, organic growth seems to be quite limited.
Total Produce, year after year reports those “adjusted” earnings, whereas the “regular earnings” are always lower. Let’s look at the past 4 years:
| 2012 | 2011 | 2010 | 2009 | Avg | |
|---|---|---|---|---|---|
| “adjusted ” EPS | 8.11 | 7.24 | 6.84 | 6.47 | |
| EPS | 6.58 | 7.11 | 5.25 | 3.7 | |
| EPS/Adj. EPS | 81.1% | 98.2% | 76.8% | 57.2% | 78.3% |
So not surprisingly, we only see “upside” adjustments, on average the “real” EPS is only ~78% of the adjusted EPS.
But it gets worse. In my opinion, one of the most “underused” pieces of information about the quality of a companies’ accounts is the Comprehensive Income statment.
“Modern” IFRS accounting allows quite a lot of items to be booked directly into equity as those items are considered sort of non-operating as well. Usual suspects in this category are:
- pension revaluation
- fx effects of foreign subsidiaries
- revaluation of fixed assets
In my opinion, one has to look at all those items because all of them influence the value of the equity position. Let’s look again at the last 4 years:
| 2012 | 2011 | 2010 | 2009 | |
|---|---|---|---|---|
| EPS | 6.58 | 7.11 | 5.25 | 3.7 |
| EPS “Comprehensive” | 5.15 | 4.21 | 5.39 | 7.34 |
2009 looks better based on comprehensive income, however especially 2011 and 2012 look bad from that perspective. This is mostly the result of pension charges. interestingly, in 2009, they booked a 3 mn EUR pension gain into comprehensive income, since then, Total Produce however had to book in total 30 mn EUR negative charge through comprehensive income.^The discount rates used to discount the liabilities at the end of 2012 are still relatively high at ~4.2% both for EUR and UK. So there will be more charges coming.
Many analysts will tell you that comprehensive income doesn’t matter, because it is not operational, but I have a different view. With regard to pension for instance, an increase in pension liabilities means that you will have higher cash outflows in the future and the shareholder will get less.
Free Cashflow
For 2012, Total Produce reports ~41 mn EUR Free cashflow. That’s about 12.5 pence per share or ~50% higher than in our base case scenario. Again, this has to be taken with a “grain of salt”.
Again, as in the first post about Total Produce, I would eliminate the working capital movement, especially as the improvement only came from higher payables and not a reduction of inventory or receivables.
If we do a quick “proxy” calc I would calculate the following Free Cash flow:
+ 38 mn EUR OpCF
- 13.5 maintanance capex (depreciation)
- 1.1 “net minority dividends
= 23.4 mn EUR or ~7.8 cents per share.
This is only slightly below the initial assumption of 8 cents per share but does not include the various payments for the acquisitions.
The problem I do have is that most of the free cash flow is now used for acquisitions, where I am not sure how “value added” that part is.
Summary:
In my opinion, Total Produce’s earnings quality deteriorated significantly. The “adjusted” numbers should be ignored, based on comprehensive income the company only earned ~5.15 pence for the shareholder and this is based on quite optimistic assumptions for the pension liabilities.
The company is using the majority of its free cash flow for acquisitions, where due to all those special effects, it is not clear to me if they earn really enough return. The priority seems to be to increase the size of the company. In my initial thesis, I was giving them extra credit for buying back shares but this seems to be no priority any more. Total value creation suffers quite significantly because of all the related expenses etd.
So I do not see much upside from here as the stock is now already close to my (slightly reduced) value range.
As a result, I will in a first step reduce my Total Produce position by 50%. I assume to have executed this end of last week at an average price of 0.61 EUR per share.
The other 50% are “on probation” so to say, I will look at the annual report and maybe 6M numbers in order to decide finally (or something better comes up).
Gerard Perrier SA (ISIN FR0000061459) – French “Hidden Champion ” ?
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%.
Some thoughts on discounts for Holding structures (Porsche SE, Pargesa, Autostrade Torino)
In my post about Porsche SE, I concluded the following:
However on a relative basis I don’t think that there is a lot of upside in the Porsche shares, as I don’t see a quick “real” catalyst and a certain structural discount (20-30%) is justified due to holding structure and non-voting status of the traded shares.
Geoff Gannon used this summary to come up with his view on holding company discounts:
I do know something about holding companies that trade at a discount to their parts. And I don’t agree with that part of the post. If the underlying assets are compounding nicely – you shouldn’t assume a holding company discount is correct just because the market applies one to the stock.
So he is basically saying one should ignore the holding structure and look at the underlying only.
Interestingly, we had such a discussion on the blog about the same topic in the Bouygues post. Reader Martin commented that “one usually applies a 20-30% holding/conglomerate discount” which I didn’t apply in my sum-of-parts valuation.
So far this seems to be quite inconsistent from my side, isn’t it ?
I have to confess that especially for Porsche, I did not mention all my thoughts about why I applied a discount there. However maybe I can shed some light on how I look at “holding structures” and when and how to discount them.
For myself, I distinguish between 3 forms of holding companies:
A) Value adding HoldCos
B) Value neutral HoldCos
C) Value destroying HoldCos
A) Value adding HoldCos
This is in my opinion the rarest breed of HoldCos. Clearly, Berkshire Hathaway is an example or Leucadia. Those HoldCo’s add value through superior capital allocation capabilities of their management. In those cases I would not apply any discount on the underlying assets, however I would be hesitant to pay extra.
B) Value neutral HoldCos
Those are holding structures which exist for some reason, but most importantly are transparent and do nothing stupid or evil to hurt the shareholder. Ideally, they are passing returns from underlying assets to shareholders.
A typical example of such a company would be Pargesa, the Swiss HoldCo of Belgian Billionaire Albert Frère. They are quite transparent and even report their economic NAV on a weekly basisandpass most of the dividends received to the shareholders. Nevertheless, the share trades at significant discount to NAV as their own chart shows:
At the moment, we see a 30% discount for Pargessa. So one should ask oneself, why such a discount exists for such a transparent “fair” holding co ? I can think of maybe 3 reasons:
- The stock is less liquid than the underlying shares
- people do not really trust Albert Frere despite being treated Ok so far
- no one wants to invest into this specific basket of stocks
Nevertheless, one has to notice that even for such a transparent company like Pargesa, a 30% discount does not seem to be the exception.
C) Value destroying HoldCos
Here I have the privilege to have documented such a case in quite some detail, Autostrada Torina, the Italian Holding company for toll road operator SIAS SpA.
As I liked the underlying business, I thought buying at a discount, following Geoff Gannon thoughts that a nice compounding business at a discount is an ever nicer business.
However, I had then to find out the hard way that the discount of the holding company was clearly a risk premium. In this case, the controlling Gavio family “abused” the holding to buy an interest in another company (Imprgilo far above the market price. They couldn’t do this in the operating subsidiary, as the sub was subject to regulation. The Holding co stock recovered to a certain extent but in this case the underlying OpCo was clearly the better and safer investment
My lesson in this was the following: Stay away as far as possible from such “value destroying” HoldCos. They are totally unpredictable and doe not have any margin of safety.
So going back to our Porsche example, what kind of Holding company is Porsche ?
Well, it is definitely not a “value adding” holding. The question now would be if it is a “neutral” or potentially even “value destroying” hold co ?
In my opinion there are already some warning signs:
- Porsche SE already communicated that they will not distribute the cash, but build up an additional portfolio of “strategic participations”
- Porsche only issues detailed reports twice a year, accounting is rather “opaque”
- in my opinion, Volkswagen has a lot of incentives to achieve a weak Porsche SE share price in order to then acquire their own shares at a discount (and swap them into VW pref shares if possible) at a later stage. Common shareholders (Porsche & Piech family might get a better deal. Under German law it is possible to treat pref holders differently
Compared to Pargesa for example, I would definitely prefer Pargesa with a 30% discount to a Porsche pref share at 35% discount.
So to summarize the whole post:
- With holding companies, it is very important to determine the intention and risks of the holding structure
- neglecting or even “evil” holding management can quickly turn a “discount” into a real loss
- better err on the safe side in such situations
- in doubt, assume there is a reason for the discount if you cannot prove the opposite
- however for skilled activist investors, those situations might create potential. So maybe Chris Hohn has a different game plan.But don’t forget that a lot of famous Hedgefund managers (incl. David Einhorn lost a lot of money with Porsche/Volkswagen already in the past.
