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%.

14 comments

  • Nice business, great stock performance; nevertheless I wonder about the business´cash generation ability; according to my data FCF reached Euro 8 million in 2011 and Euro 7 million in 2012; on sales of Euro 122 and Euro 130 million this does not seem to be outstanding

    • thanks for the comment. To be honest, FCF to sales is not a very relevant metric in my opinion. I look rather at FCF to EV or FCFE/Equity.

      I find the free cash flow generation at PERR surprisingly good. over the last 7 years, they doubled sales but were still able to tranform 75% of the earnings into free cash flow.

      This means they can grow signifcantly without investing a lot of cash. I wish a knew more companies like this at similar valuation levels.

  • Apropos französische Aktien, andere Frage:
    Ich beschäftige mich gerade mit der Abwägung von Plastic Omnium (m.E. gut aufgestellter, günstiger Automobilzulieferer) gegen die Burelle SA.
    Burelle als Mehrheitsaktionär (55,1%) von PO ist ebenfalls börsennotiert und hat ebenfalls einen Mehrheitsaktionär (Familie Burelle, 77%), leidet aber unter einem deutlichen Holding-Abschlag, der in den letzten Jahren weiter zunahm.
    Durchgerechnet bekommt man bei einem Kauf von Burelle-Aktien die Plastic-Omnium-Aktien zu einem Rabatt von 50% (und den eher belanglosen Rest für lau), so dass das durchgerechnete KGV bei sagenhaften 4 liegt.

    Preisfrage: Was spricht für und gegen eine Aufllösung des Bewertungsabschlags gegenüber Plastic Omnium? Willst du dir das mal mit Blick auf deine “Spezialfällen” anschauen?
    Ich persönlich finde es sehr spannend, bin aber unschlüssig und bleibe vorerst bei PO.

    Aufmerksam wurde ich auf Burelle durch diesen Blogeintrag: http://seekingalpha.com/instablog/6727011-the-scepticist/1553651-burelle-sa-most-hidden-gem-on-french-equity-market

    • Kann nicht viel zu Plastic sagen, in meinem Modell scheinen Sie aber ,aufgrund der doch recht hohen Vola, im Ergebnis als recht teuer.

      Der Discount bei Burelle sieht in der Tat hoch aus, auf den ersten Blick glaueb ich auch, dass Burelle eigentlich keinen zusätzlichen Leverage hat.

      Das könnte man sich in der Tat mal anschauen 😉

  • Stimmt, da gab es Übernahmen. Aber in den letzten 10 Jahren wohl etwas mehr als von dir angegebene einzelne Übernahme: http://www.gerard-perrier.com/de/gruppe-gpi/die-geschichte.html
    – 2005: Ardatem
    – 2007: Maditech (?)
    – 2007: SEIREL AUTOMATISMES
    – 2011: SERA
    Insofern Widerspruch zu dieser Aussage: “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.”
    Das Wachstum der letzten 10 Jahre fand auch gutenteils durch Übernahmen statt, der Anteil organischen Wachstums ist entsprechend geringer.

    Frage: Konnte der Kauf von SERA wirklich aus dem Cashflow bezahlt werden oder sind die Rücklagen dadurch heute vielleicht geringer als 7 Mio€?

    PS: Bleibt aber eine interessante Entdeckung!

    • Hi Al,

      danke für den Hinweis. Ich hatte mich fahrlässigerweise auf die Bloomberg Infos verlassen und nur die letzten 3 Geschäftsberichte gelesen….

      Zu Sera: M.e. Haben Sie SERA quasi zu Null übernommen, allerdings mit deutlich mehr Verbindlichkeiten als Assets. Deswegen auch kein Cash Abfluss. Die entsprechende Bilanz von Sera im GB 2011 sieht zumindest so aus.

      mmi

  • Spannende Analyse!
    Das habe ich direkt “gestohlen”, in Teilen abgeschrieben und in Teilen einfach mit Link verweisen: http://www.stw-boerse.de/forum/messages/1719/3345.html

    Angesichts der hohen Barrücklage haben mich die Schwankungen bei der Dividendenzahlung etwas gewundert: http://www.gerard-perrier.com/de/unsere-finanzdaten/unternehmenskennzahlen.html
    2007: 1,55€
    2008: 1,15€
    2009: 1,15€
    2010: 1,93€
    2011: 1,40€
    Warum kam es nach 2007 und 2010 zu Rückgängen der Dividendenzahlungen?
    Oder kam es 07 und 10 zu einmaligen Sonder- oder Jubiläumsausschüttungen?
    Oder gibt es doch Gründe, warum das höhere Ausschüttungsniveau nicht auf Dauer beibehalten werden konnte, sondern die hohen Cashbestände notwendig sind?
    Für 2008 kann man argumentieren, dass die Rücklagen auf einem Langzeittief rangierten. Aber 2011?
    (Auf jeden Fall deute ich die mehrfach gekürzten Dividenden so, dass bestenfalls ein kleiner Teil der Barrücklagen “gehoben” werden dürften, ich sehe hier wenig Spielraum für eine “Adjustierung”.)

    Ciao, Al Sting

    • ich denke mal dass die wie ein typischer Familien geführter Betrieb einfach vorsichtig sind. Evtl. wollen sie vielleciht auch ein wenig Pulver für Unternehmenskäufe trocken halten. 2011 haben sie ja mal einen kleinen Laden gekauft.

      mmi

  • Hey mmi, nice pick!

    What sucks a little is that their cash seems to be infected by the “Apple virus”, so probably you don’t want to adjust for it.

  • Hello
    I’m a shareholder also.
    I like their solid and stable margins.

    A few comments
    I think Ardatem is a moat because you need certifications (be an approved supplier) to operate in a nuclear facility. This limits the number of competitors. Even if no new plants are constructed, EDF will need to invest heavily in maintenance of existing plants. And of course if you are “in the loop” for a long time you know the installation, the people, the procedures, the constraints of your client, etc;..

    I think a large part of their business is design/service. For the manufacturing part, I think it’s mainly a matter of using off the shelf electric/electronic components to build a solution for a specialized need, test and maintain it.

    More generally their clients are industrial companies. If the control system goes bad, all the process stops. And of course it’s worse if it’s a safety related system. So I think these clients will seek reliability/confidence rather than cutting costs, as you pointed out.

    http://en.wikipedia.org/wiki/Industrial_control_system

    Last remark : your blog is definitively moving small caps. PERR is up 2% today. Please warn me next time (I’m joking of course).

  • Hey,
    Nice writeup!
    Tell me, how did you come upon this interesting stock?
    Another thing, maybe a french company named PRECIA will interest you as well. It’s quite a small cap and has great financials as well.

    Michael

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