Boss Score harvest Bouygues family – Colas SA (ISIN FR0000121634)

Following the first post about the Bouygues Group, I want to have a look at Colas SA, the major listed subsidiary of Bouygues.

Colas itself looks not really cheap based on traditional valueation metrics, only EV/EBITDA looks like a joke (according to Bloomberg)

Market Cap 3.5 bn EUR
P/E 11.0
P/B 1.4
P/S 0.27
EV/EBITDA 2.4

This leads of course to the question: Why is EV/EBITDA so low ? A small part of the answer is that Colas has no debt but even some net cash. The bigger “issue” is however that Colas produced around 42.6 EUR EBITDA (according to Bloomberg) per share but “only” 10.30 EUR per share earnings.

Historically, EBITDA to Profit has been around 2.8 times against ~4.1 times in 2011, so what happened ?

The first thing to check: Are the Bloomberg numbers correct ? According to Bloomberg, Colas reported 35.28 EUR EBITDA per share in 2008, resulting in 15.06 EUR EPS.

In the following table I tried to calculate myself EBITDA per share numbers for both years (2008 and 2011). Although I cannot really reconcile what Bloomberg calculates, but one thing is sure: EBITDA in 2011 was a lot lower than in 2008, so the 2011 EBITDA number in Bloomberg looks wrong.

2011 2008
Sales 12.412 12.789
Merchand -6.086 -6.321
Salaries -3.086 -2.918
ext. Serv. -2.576 -2.637
other tax -0.158 -0.167
Amortication -0.461 -0.466
Dpr./Prov -0.134 -0.153
changin in inv. 0.031 0.023
other income 0.651 0.648
Other expenses -0.133 -0.116
     
Operating income 0.460 0.682
add back depr 0.461 0.466
add back amort 0.134 0.153
EBITDA 1.055 1.301
per share 32.26 39.79

If we take the more realistic 32 EUR EBITDA per share that EV/EBITDA is still cheap at 3.3 but not as cheap as previously thought.

Back to Colas SA, the company.

Around 60% of the business is building roads in France. However this does not only include the construction work but this seems to be vertically integrated, starting by owning the quarries, producing the cement and asphalt etc.

Further 15% of the business is international road construction.

On top of that they run a couple of related specialist businesses like waterproofing, safety and signaling, Railways and an oil refinery. Last but not least they own around 0.6 bn EUR worth of concessions which they list under “associated” investments (extra assets anyone ?).

What makes Colas SA score so well in my model despite the relatively high P/B of 1.3 is the incredibly high level of ROE, ROA and ROIC in the past 10 years:

ROE ROC ROIC
31.12.2002 23.0% 18.4% 15.5%
31.12.2003 20.5% 17.3% 14.2%
31.12.2004 22.4% 19.7% 15.7%
30.12.2005 23.1% 20.2% 19.2%
29.12.2006 25.2% 22.6% 19.8%
31.12.2007 25.9% 23.2% 20.0%
31.12.2008 23.9% 21.4% 18.5%
31.12.2009 17.5% 16.3% 13.7%
31.12.2010 9.7% 9.2% 8.7%
30.12.2011 13.9% 12.9% 10.6%
 
Average 20.5% 18.1% 15.6%

Those numbers would look even better, if one would take out the “associated” companies, as ther ROIC is based on the dividend yield only. Clearly, returns have suffered to a certain extent in the last few years, but nevertheless this almost screams “moat”.

Business model road construction

This leads us to an important point, the business model for a road construction company. As with cement in general, road construction is primarily a local business. You can of course send construction workers anywhere, but if you look at Colas P&L you can clearly see where the “beef” comes from: 50% of Sales is the cost for material.

Material for road construction is relatively simply said gravel, sand and asphalt. Those are all high volume / weight but low price materials where transportation over a longer distance does not make sense. Of course, gravel is available in many palces but the problem is to get a license to actually “harvest” gravel and sand. So the big trick and “moat” for any serious road construction company is to own quarries and cement facilities close to current and potential road building sites. Onec this is in place, this is the best “natural” moat one could achieve.

Any competitor will have to pay a lot more for transporting the material to the building site. As Colas is a very old established company, I assume that they have lined up significant resources especially in their French home market.

Other considerations

Positive:

+ Colas SA itself has a relatively small free float (3.5% or 125 mn EUR) and is not covered by any analysts. That increases the chance of a liquidity premium
+ “hidden assets” in form of road concessions
+ ultra solid balance sheet
+ good free cashflow generatio, ~75% gets distributed as dividends

Negative

– ~60% of the clients are government related entities. If austerity goes further, it wil be difficult. At least on eshouldn’t expect a lot of growth going forward
– I have no idea why Colas SA is still listed and how “squeeze out” rules look like in France
– not really cheap on a P/x basis

Summary: Colas SA looks like one of the typical “boring companies” I am looking for. Behind relatively unspectacular valuation metrics, a “hidden champion” with a natural moat seems to be in hiding. However, before digging deeper into Colas, I will revert back to Bouygues to see if the holding company might even allow me to by Colas at a “discount”.

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