Duell: Colefax Plc vs. AS Creation AG – part 1

AS Creation is one of my core holdings. It is the clear market leader for wallpaper in Germany, however subject to an Anti Trust probe. Historically, AS Creation has produced rock solid returns. Currently there is some grwoth potential in the stock as they are building up a significant joint venture in Russia.

I was not aware that there is a UK listed company specialising in wallpaper as well. Interactive Investor Blog (highly recommended by the way) had a very nice summary post on Colefax Plc a few days ago.

So I thought it might make sense to compare the two companies “head to head”. I am not sure if Colefax and AS Creation are really competitors. Colefax sells most of its products in the US and the UK and only a relatively small part in Europe, whereas AS Craetion is more focused on Germany with some French wholesale activities.

Colefax has a market Cap of ~31 mn GBP, AS Creation around 62 mn GBP.

Let’s have a quick look at “traditional” valuation metrics

Colefax AS Creation
P/B 1.19 0.77
P/B tang 1.19 0.86
P/S 0.41 0.36
P/E 7.7 11.1
EV/EBITDA 3.31 4.75
EV/EBIT 4.6 9.1
Debt/Capital 0% 27%

Apart from Price/Book and Price sales, Colefax looks a lot cheaper than AS Creation. AS Creation has some debt on its balance sheet vs. Colefax which actually shows net cash. AS Creation used to have little debt or net cash as well, however the investments in the Russian JV have been funded with debt.

Let’s look at historical profit margins next:

Net margin  
  ACW CFX
1999 5.66% 4.67%
2000 5.75% 5.61%
2001 5.38% 3.77%
2002 5.23% 2.78%
2003 3.94% 3.05%
2004 5.00% 3.43%
2005 5.33% 4.13%
2006 6.68% 5.49%
2007 5.95% 5.20%
2008 5.06% 2.51%
2009 4.14% 3.43%
2010 4.55% 5.88%
avg 5.22% 4.16%

From 1999 to 2010, AS Creation managed to earn 1% more margins on average with a lower volatility than Colefax. So one could conclude that AS Creation at least historically had better pricing power than Colefax.

However if we look at ROE and ROIC, the picture changes completely:

AS Creation   Colefax  
  ROE ROIC ROE ROIC
1999 12.98% 6.90% 26.01% 17.82%
2000 14.87% 8.19% 30.92% 20.42%
2001 13.52% 10.39% 17.72% 13.15%
2002 12.42% 9.83% 12.83% 10.37%
2003 8.79% 7.74% 14.83% 12.81%
2004 11.53% 9.63% 17.55% 19.24%
2005 12.41% 11.05% 20.22% 18.01%
2006 14.93% 12.54% 25.34% 22.55%
2007 13.45% 10.42% 23.57% 26.94%
2008 11.36% 7.86% 9.07% 22.37%
2009 9.14% 7.97% 10.75% 16.55%
2010 9.73% 8.00% 18.85% 21.06%
avg 12.10% 9.21% 18.97% 18.44%

Colefax shows almost twice the returns on equity and invested capital compared to AS Creation. The absolute amount achieved by Colefax is remarkable as well, even if some of the difference could be explained by differences in UK and EUR interest rates.

Before jumping to the conclusion that Colefax is the cheaper and more capital efficient company, we should chekc 2 major items which may distort return on capital numbers and Enterprise Value (EV) multiples:

– pension liabilities
– operating leases

Pension liabilities:

Interestingly enough, Colefax seems to be a very untypical UK company. They have only a tiny defined benefit plan (DBO) with liabilites of 1 mn GBP. AS Creation’s DBO liablities are higher at around 7 mn EUR. So no big impact in both cases (remark: to be on the safe side, DBO should always be added to finanical debt)

Operating leases

This is more interesting. AS Creation only records 600 tsd EUR of Operating leasing liabilities whereas Colefax has around 25 mn GBP gross liabilites. If we look at the different components of assets required to run the busines we see some intersting numbers:

Colefax AS Creation
Sales 77,722 184,603
Non-Current Assets 7,282 50,770
Net WC 11,881 66,424
Operating Leases 25,258 600
 
NCA/ Sales 9.4% 27.5%
NCA+OL/Sales 41.9% 27.8%
Net WC/Sales 15.3% 36.0%
 
NCA + NWC+OL 44,421 117,794
in % of Sales 57.2% 63.8%
 
EV/EBITDA 3.31 4.75
EV/EBITDA OL 7.20 4.80
 
Net Debt+OL+pension/total Assets 47% 14.4%

Non Current Assets (ex Goodwill) at Colefax in percentage of sales is only a fraction of AS Creations non -current assets. However taking into account the (gross) operating leases, the picture suddenly shifts dramatically.

Both, EV/EBITDA and leverage ratios suddenly shift to AS Creations favour if one accounts for the operating leases.

Colefax still uses less capital in percentage of sales, but this is “only” due to much lower working capital requirements.

I don’t really understand why Colefax needs to rent such a large amount of land and buildings if they are not producing the stuff. Do they have a warehouse in Central London ?

Business models

One thing I forgot to mention is that the two companies have very different business models, despite both selling mostly wallpaper. Colefax only designs and distributes their products, whereas AS Creation creation really produces all the wallpaper themselves.

“Producing” wallpaper is basically only a specialised version of printing, with the big advantage that at least so far the internet has failed to come up with a paperless alternative in contrast to many other printing products.

Despite having outsourced production, Colefax employs 305 persons (fy 2011) for 77 mn GBP in sales whereas AS creation generates 172 mn EUR sales with 706 employees (2010).

The differences in the business model can be easily seen if we look at the major cost blocks compared to sales:

Colefax AS Creation
Staff cost 14,933 39,336
– in % of sales 19.2% 21.3%
Marketing, distribution & admin 36,345 27,166
– in % of sales 46.8% 14.7%
COGS 34,929 96,064
-in % of saless 44.9% 52.0%

Colefax needs to spend a lot more on advertising and administrative expenses than AS Creation. I am somehow surprised that Colefax seems to buy their merchandise cheaper in relation to sales than AS Creation has to pay for the raw material.

Staff costs are relatively comparable, which is interesting as well.

First results:

– Colefax “design and distribute” model is less capital intensive than AS Creation’s “full production” operations
– taking into account operating leases, the major advantage seems to be a lower amount of required working capital
– surprisingly, Colefax seems to require a lot of fixed investments if one includes operating leases
– however return on invested capital is still higher for Colefax despite slightly lower profit margins
– the higher voltality in Colefax profit margins ist most likely due to higher leverage through off balance sheet operating leases
so far I can see no clear “winner” between the two companies. Both copmpanies have problems but also opportunities.
– Colefax might be a good diversification in order to gain exposure to UK and US housing recovery while AS Creation has growth opportunities in Russia and benefits from a still strong domestic market

In the second part I will try to come up with a valuation for Colefax Plc to see if it is an interesting investment for the portfolio.

5 comments

  • Hi, interesting comparison! However one should not rely on the earnings figures published by AS Creation since there were one-offs in every single year from 2006 on. Especially in the last two years stated earnings are below the “underlying profit” whereas before those years earnings were positively impacted by tax effects. (2008-2011 include one offs related to PPA and the russia investment, which is structured in a special way).

    Therefore the return comparison as well as the P/E comparision has no real meaning. However I liked the rest of your analysis. As a “trading” company, Colefax might be an aquisition target for ASC in the years 2014+ (but ASC still owns an UK based company).

    • Hi Stairway,

      yes, correct, earnings only show part of the picture. I used it as a starting point.

      The idea that ACW might be interested at some point is not unrealistic in my opinion. Could be a good fit.

      mmi

  • Hi mmi,

    thanks a lot for your analysis.

    Two questions:

    – What discount rate did you use to calculate the PV of the leases?

    – What was the annual leasing payment Colefax- might have missed the calulation where you added them to EBITDA.

    Couple of comments:

    – “I am somehow surprised that Colefax seems to buy their merchandise cheaper in relation to sales than AS Creation has to pay for the raw material.”
    ->Under IFRS, I would argue that ASC has to include “expenses directly linked to production” in the their CoGS, it is not only the cost of material. Power for the printing press would therefore be a CoGS not G&A. In an ideal accounting world, both comps would have the same CoGS / sales, unless one company actually has a sourcing advantage (which I doubt).

    – NWC / sales makes perfect sense as both companies have to keep inventory in their distribution chain but only ASC needs to keep WC in the production as well.

    – ASC could possibly have been underdepreciating assets. In plain words: they use machinery that stands at BV < replacement value on the balance sheet.The datapoint that Colefax has much higher (NCA+OL)/sales despite having no production assets utterly supports the argument that ASC's assets are somewhat understated. A reason could be that Colefax assets are just newer.

    • Jan,

      Re questions: No Discount rate, I just took gross amounts which EV/EBITDA: Good point, forgot to add them to EBITDA ;-)overstates the amount. 4 mn GBP p.a.

      Thanks for the comments, very good points for further analysis. All three points are very interesting.

      mmi

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