Bouygues again: How deep does one have to dig into Telco, sell side analysts & comparable Eiffage SA

So to conclude my “Bouygues week”, a final post about the company.

In my recent post about Bouygues, a commentator said if I can’t correctly project future profitability levels for the French mobile phone market, then investing into Bouygues is not a good idea.

As I call myself a fundamental investor, I have to admit that I do not have any extra knowledge about the french mobile market at the moment.

The idea behind the Bouygues investment clearly is a relatively simple “sum of parts” analysis, where I didn’t go as much into details as I did for example for my Asian Bamboo short.

However this is not only laziness, but also part of my investment experience and philosophy.

If I look at Bloomberg, I can see that 25 full time sell side analysts are covering Bouygues. Those 25 full time professionals who produce detailed 50 pages or more research reports including estimated margins for many future years. Interestingly, those 25 professionals produce 7 buy ratings, 10 holds and 8 sells, with price targets from 16 EUR to 30 EUR, all issued within 4 weeks of time.

Just for fun, look at the ratings in the past 4 weeks:

Firm Name Analyst Action Recommendation Tgt Px Period(Months) Date
AlphaValue JEAN-MICHEL SALVADOR M buy 29.2 6 10/11/12
Societe Generale THIERRY COTA M hold 19 12 10/10/12
Kepler Capital Markets JOSEP PUJAL M buy 30   10/10/12
Barclays SAN DHILLON M equalweight 23   10/10/12
JPMorgan TORSTEN ACHTMANN D neutral 26 12 10/04/12
Deutsche Bank CHARLES VERLE M hold 24.1 12 10/03/12
Goldman Sachs HUGH I MCCAFFREY M Buy/Neutral 30.1 24 09/28/12
Oddo & Cie VINCENT MAULAY M reduce 19   09/28/12
Exane BNP Paribas ANTOINE PRADAYROL M neutral 22   09/28/12
Jefferies JEREMY A DELLIS D underperform 17 12 09/25/12
HSBC NICOLAS COTE-COLISSON D neutral 23   09/19/12
Makor Capital ALBERT SAPORTA M buy 30   09/19/12
Credit Suisse JAKOB BLUESTONE M underperform 19   09/13/12
CM – CIC Securities(ESN) JEAN-MICHEL KOSTER M sell 16 12 09/10/12
Raymond James STEPHANE BEYAZIAN M underperform 23 12 09/07/12
Nomura FREDERIC BOULAN M neutral 24.5 12 09/07/12

Add to this another 50 or 100 buy side analysts who closely follow the stock as well as all French corporate raiders, than one might wonder: How much value can I add with my own detailed analysis ?

It is also interesting to see, that from the buyside, almost all analysts are specialised TelCo guys, only 2 or 3 are infrastructure analysts.

The specialised sell side analysts might do a deep dive into Bouygues Telecom might not understand the “beauty” of the other businesses. The result of this is that typical sell side guys are then applying a conglomerate discount because they only understand part of the company. Interestingly the few infrastructure guys have higher price targets on average than the TelCo guys.

Someone with a broader horizon might add value here because the value of the conglomerate might be only partly effected by the troubled subsectors.

I think for Bouygues, the paradox at the moment is the following:

The price of the share is driven completely by the developement in the telco subsidiary, however the intrinsic value of the company depends to more than 50% on the construction/road sector.

One additional thought: As a value investor, I only invest when a company is cheap at current sales, margins etc.I do explicitly not pay for future sales or margin increases. However one has to make sure that the current level is sustainable.

In order to assess the sustainability of the current level, I usually check three aspects:

– is the balance sheet solid ?
– are earnings at or below historic avergaes ?
– is the business subject to terminal decline risk ?

For Bouygues, the answers are YES, YES, NO which is is my “margin of safety”. I would be more concerned for instance with a fixed line TelCo carrier or a traditional coal fired utility.

Comparable Eiffage SA (ISIN FR0000130452)

Interestingly, Bouygues itself lists Eiffage SA as a competitor especially in the road building business (Colas SA). Eiffage looks like a smaller version of the “core” Bouygues business, construction and road building plus concessions, 90% of the business is done in France.

Eiffage shows OK ROEs (high single digits in the last few years), however they are highly leveraged and returns on Assets are quite low. Nevertheless the market values this company at around 8 x EV/EBITDA, most likely because it is a “pure play”. Compared to this, my valuation of around 4 x EV/EBITDA for Colas and 7 for Bouygues construction looks quite conservative,

If we would value those 2 businesses at the Eiffage Ev/EBITDA, the fair value of the Bouygues share would jump from ~32 EUR to 39 EUR per share.

20 comments

  • I wrote: :
    Bouygues Q3 (the results of which will be published on Nov 16th IIRC)

    Being able to read would help – it says at the bottom of the publication that the Q3 results will be published on Nov 14 at 17:45 CET.

  • Alstom published yesterday what it is contributing to Bouygues’ 3rd and 4th quarter results: https://europeanequities.nyx.com/sites/europeanequities.nyx.com/files/cpr03_lesechos_16165_209345_cp_contribution_alstom_H2_2012_eng.pdf
    I don’t understand how they can already say what they are going to contribute to the 4th quarter results unless there is a time delay (i.e. the result that Alstom reports for the July-September period is affecting the Bouygues results from October-December). If that is true, we have a positive yty effect of Alstom for Bouygues Q3 (the results of which will be published on Nov 16th IIRC) and a more or less neutral effect for Bouygues Q4.

  • Does Bouygues have a plan for future dividends? Can one expect that the last dividend will be retained?

    • quote from last year’s tender buyback

      “Implementation of the Offer will not affect the Company’s dividend policy, which will continue to be pragmatic, based on the Group’s results, prospects and environment.”

      so no “Guarantees” here. as a pure dividend play, Colas would be safer.

  • #robert,

    I am not sure. However if you read the Q&A with the CEO which i have linked to, the cEO says “it is not the right time to spin off telco”. He doesn’t say it is a bad idea in general.

    In my opinion, French companies are slowly opening up to things like share buy backs and spin offs and Bouygues (as well as Vivendi) are prime candidates.

    MMI

  • Do you hope for restructuring? I don’t have experience with such thinks, but I don’t think restructuring is likely as long there is no change of control.Do you hope for restructuring?

  • Is ROA at colas that bad or why don’t the leverage up in order to increase ROE?

    I don’t understand why they don’t have debt, if their concessions are very stable and predictable. This makes me sceptical.

    • their ROAs are good and very stable. Why don’t they leverage up ? Good question, but I think this is not the style of a French family owned business.

      Bouygues leverages up a little bit at Group level, but a UK style PE group would definitely be able to put a couple of billions more debt onto the balance sheet.

      However this is part of the value case….

  • #Feuerball,

    Colas does have concessions (~0.6 bn EUR) and no debt.

    MMI

  • Eiffage has a significant business running concessions for Highways etc. this concession generates stable and growing cash flow and can support fairly high leverage. I don’t know if Cola has a similar business model (from the looks of the balance sheet, it does not look that way)but I think that Eiffage high leverage is balanced by a considerable amount of coming from stable annuity liken concessions.

  • one more:I don’t think the future for mobile operators is to run app stores. i think the future is to charge the sites with heavy traffic…..

    • I don’t think that running app stores is their future either. Could charging third parties for traffic be?

      The ability to charge sites with heavy traffic entails that telcos “own” that traffic. That’s a highly dubious claim because there is no value add by the telco. As a consumer I choose where I want to go because of the quality of the content, not because I’m nudged by my telco. They might pre-install vaporwear on a phone that comes with their plan, but that’s about all the leverage they have.

      Another way telcos might pull it off is by blackmailing high traffic sites. Either the third parties pay up, or else the connection speed of their consumers to their sites is lowered. This would be an effective business model, but only in a world with no regulatory oversight. Even if the telcos could get regulators and present law makers on their side, the issue would be so hot that it will change people’s votes during the next election.

      This issue is a major hole in the bag of the telcos. Until new business models are innovated the guessing game of when mean reversion will occur is a level playing field.

  • Ferdinand :

    My thesis is that telco’s will run their business indefinately with below cost of capital returns. Call it Marx’s theory of Verelendung applied to the profitability of a corporate sector.

    The only potential for improvement that I see, is the innovation of new, high margin services. Services like mobile payments, Youtube like content delivery and app stores might be succesfully introduced.

    The problem is that those services already exist. Perhaps the public sector will allow the telcos to monopolize the delivery of such services over their own networks. (Yeah right!) If not, well then the telcos stand a snowball’s chance in hell of succesfully competing with the likes of Paypal, Google and Apple.

    Ferdinand, this waits to be seen. In germany, the business seems to be Ok, even with 4 operators. I

  • Let me rephrase. If you think of value investing as being about investing in controversy you have to ask yourself what the controversy is and can I figure out what that means. In the case of Bouygues, that controversy (IMO) is the Mobile Telephony business. Can you figure out what pricing for that would be in a truly competitive non-oligopolistic market? If so, maybe its cheap enough to make a punt. I have no idea. My conclusion is that it is too hard to answer that question. If I thought I could figure it out I would give it a shot.

    But if you think the controversy you want to bet on is the sustainability of profitability in the road business, then just buy Colas or Eiffage or Vinci. I actually think the “European Infrastructure Spending” Controversy is a great investment idea right now. (Though probably prefer other names to the construction guys – they aren’t as cheap as some of the product suppliers and you inevitably have % of completion accounting risks)

    • ?

      to keep it simple:

      My investment case is that Bouygues is considered and valued as a struggling TelCo with conglomerate discount. I believe the current value does not reflect the infrastructure part.

      I think Bouygues is interesting because there might be some catalysts (share repurchase, Bollore etc.).

      In my case, a mean reverting Telco sub is a nice add on, but not necessary.

      It is also a “special French situation” which reduces correlation to the overall market.

      All in all relatively attractive at least for me. As you have noticed I only go in with a hlaf position.

      mmi

  • Let me preface this by saying – my view on Bouygues is not that it is a bad idea, but that rather it is just too difficult to figure out what the earnings power of the Telco business is going to be over the foreseeable future. I’d rather spend my time elsewhere.

    “Will Mobile operators run their business indefinitely with below cost of capital returns ? I don’t think so and Carlos slim neither….. But it may take some time.”

    This is of course the tricky bit. Of course they won’t do that indefinitely, but essentially historic invested capital is sunk. All that really matters is marginal investment in tangible assets and the return on that. And then of course you run into the question of what is Cost of Capital. It isn’t yours, its the firm making the investment. If for some reason they have, or perceive to have a lower CoC, then that’s what marginal returns for the industry will coalesce around.

    France is in a weird area because the regulator has allowed/forced the incumbents to sell capacity to a new entrant and so you are seeing the status quo blown up, but looking at just the directly attributed assets for the Telecom business (which I’m too lazy to look up, but I assume excludes goodwill) the segment ROA is still quite high. This is a little off as the debt isn’t held at the segment level so interest burden is too low, but it is indicative that things can get worse.

    I’m not sure you can make the statement that the business is underearning “historic” profitability when I sub in the idea of “normal” profitability when the the biggest segment has structurally changed. Add in that the Media segment which is 16% of operating income and is or soon will be structurally impaired and you are all of a sudden betting an awful lot on the recent levels of profitability in the construction business being sustainable – which they might be, but they aren’t far off historic peak levels of margin. Even Colas – go back ten years ago and the current levels of profitability don’t seem especially trough-y

    Its an interesting idea, I just think the SOTP approach right now is maybe not the right way to look at things, of course in general I dislike SOTP and tend to dislike using comp multiples in any way.

  • The Telco industry is in upheavel. The traditional business model of charging for discrete units of service like minutes or text messages is deteriorating. Charging for bits does not bring the same pricing leverage because the services that are represented by those bits belong to other parties.

    The industry has turned into Alice in Wonderland’s Red Queen. This means that every telco has to run in order to stay in the same position. The increasing demand for bits brings with it huge obligations for investments in network capacity, but without the profit margins to generate adequate return on capital.

    • Yes that’s true. Most of the money spent for 3G licenses was basically burnt. Howver, 4G licenses are much cheaper now. The question is: Will Mobile operators run their business indefinitely with below cost of capital returns ? I don’t think so and Carlos slim neither….. But it may take some time.

      Again, I would not want to invest in fixed line and most of the value for Bouygues is the infrastructure part.

      • My thesis is that telco’s will run their business indefinately with below cost of capital returns. Call it Marx’s theory of Verelendung applied to the profitability of a corporate sector.

        The only potential for improvement that I see, is the innovation of new, high margin services. Services like mobile payments, Youtube like content delivery and app stores might be succesfully introduced.

        The problem is that those services already exist. Perhaps the public sector will allow the telcos to monopolize the delivery of such services over their own networks. (Yeah right!) If not, well then the telcos stand a snowball’s chance in hell of succesfully competing with the likes of Paypal, Google and Apple.

  • I liked your analysis. Bouygues seems to get a lot of headwind at the moment for being seen as Sarkozy-friendly. This is specifically true for TF1 and the telecom-segment. One risk I would fear related to the share-price is the question, whether the dividend will stay at this level, if France falls back into / stays in recession. It is, at the moment, probably regarded as a pure dividend-stock by the market.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s