Installux Post Mortem

Intro:

As part of an improved investment process, I will try to write better “post mortem” analysis after exiting an investment. I did this in the past especially for bad investments but I plan to do this now for every investment that I fully exit. Interestingly, very few fund mangers talk or write in detail why they have been selling. 

Installux post mortem:

As mentioned in the comments of the original post, I sold my Installux shares yesterday at around 390 EUR, netting a total gain of 206% or ~13,7% p.a. over ~ 8.5 years. 

Installux was my second longest standing position in the portfolio. I was able to buy the shares cheaply mostly on a “mechanical basis” in 2012. This was my summary back then:

We have a consistently growing and profitable business with very low volatility, attractive ROE and ROIC and a valuation of 2x EV/EBITDA and 5x P/E adjusted for cash (7.8 unadjusted) which produces a large amount of free cashflow despite growing nicely over the years.

So what happened since then ? This is how the stock price looks like for the last 10 years:

Installux

The stock price had a nice increase over 5 years from the time i Bought until 2017, before a consolidation until the end of 2019, then a sharp drop and a swift recovery in 2020/2021.

So buying in early 2012 at around 146 EUR per share looks like good timing. It should not be forgotten however, that back then the Euro debt crisis reached its peak and European stocks, especially France and “Club Med” were extremely unpopular. 2012 was a lot worse for Installux than 2011, so it was not a smooth ride.

On a fundamental basis, from 2011 to 2019 (pre pandemic) this is how things developed:

  2011 2019 (EUR 390/share) Total growth CAGR 8Y
Sales mn 112.9 133 17.80% 2.07%
Operating profit mn 8.6 12.3 43.02% 4.57%
Net Profit mn 5.4 8.695 61.02% 6.14%
EPS EUR 17.97 29.57 64.55% 6.42%
Net cash per share EUR 46 79    
Trailing PE 8.12 13.19    
Trailing PE ex cash 5.56 10.52    
Sum dividends 2012-2019   54.5    

So we can see that overall top line growth was very moderate, however Ppofit and especially EPS increased faster. Based on the initial purchase price of 146 EUR, the overall return of 200% can be split up roughly into: 

Dividends + increase in net cash ~ +50%
EPS increase ~+65%
Multiple expansion +90%

In total, the main performance driver was multiple expansion. The stock is still not expensive, but not “dirt cheap” anymore. Compared to the French Small Cap Index “CAC Small”, Installux slightly outperformed (vs. 160% in the same time period for the CAC small cap index).

2020 will clearly look a lot worse than 2019. Although Installux managed to stay profitable, sales dropped ~-27% yoy and EPS dropped by -74% yoy. the first 6M normally account for more than 50% of the profit, To be honest, I am not sure that they will reach 2019 levels already in 2021, this could take longer as some of their customers (retail) might suffer longer lasting negative effects.

What else happened ? 

Christian Canty, the founder passed the reign in 2018 to his son Christophe. The ownership of the family has increased to ~71% from slightly over 50% when I initially bought the stock. In October 2020, Installux disposed its long struggling division Roche Habitat for an unknown amount.

Why did I sell ?

For me a combination of the following factors led to this decision:

  • I have a couple of ideas and needed to sell a position to fund these new ideas
  • The recent stock price recovery seems to assume a very fast recovery of the business which I find questionable
  • I am uncertain, how fast Installux will reach 2019 levels as some of its product lines might be hit hard for longer
  • in addition, I don’t see better growth potential than in the last 8 years
  • finally I think Aluminium as such, which is the basis of Installux products will have a hard time in the next few years. Aluminium production is very energy intensive and they will struggle with regard to Decarbonization. I think there is a high risk that Aluminium prices will significantly increase which is net negative for Installux
  • I think it is pretty obvious that the company wants to go private at some point in time and I am therefore not sure how interested the Canty family is in a good performance of the stock price.

Therefore I decided to sell at 390 EUR per share and redeploy the proceeds into a new position that I will reveal soon.

Lessons learned

Installux was a good investment, but mostly because I was able to enter very cheaply when no one else wanted to buy into these countries. Operationally, the company did OK but not great. Nevertheless, the combination of some EPS growth, Dividends and multiple expansion resulted in a very decent return with an acceptable downside risk.

In general, buying a family run company with a  sustainable business model, a fortress balance sheet and an extremely low single digit PE can produce very decent returns even with little growth. However, theses days, such situations are super rare or even non-existent, so it is hard to repeat this model. 

One of the positive aspects of Installux was that it was always a “low maintenance” investment: A solid business with only little news flow fits for my style of investing. This is different with higher valued growth stocks where one must be more active in assessing valuation and future prospects.

 

 

 

8 comments

  • GNP-GlobalNosePicking

    With France’s crude reality described in link here, I would also chicken away… https://youtu.be/nXZyzb3xJa4

  • With gross margins consistently above 50%, I do not get the raw material risk. Futures indicate a low one-digit price increase y-o-y. Is that all?

    Will this matter much compared to the rationalizing of the production facilities?

    • Well, my argument is that passing rising prices to struggling customers will be difficult. You might also know that commodity futures are not really a good indicator for future prices. But anyway, this was just my opinion and my readers are on average much smarter than I am.

      One remark: I guess you meant “Streamlining production ?”. “Rationalizing sounds like a “False friend” translation of the German word.

      • Thank you for taking the time to answer. I appreciate it. Sorry for my English. I think you are smarter than me, but I am still holding Installux.

        Yes, futures are no predictor for prices. On the other hand if there is something going on like a supply shortage in the near term and an expected market equilibrium in the future you can use the futures to guess what the market expects.

        I just meant if the gross margins were really thin a price increase of the inputs can be devastating, but here I think they will manage. Long-term electricity will only get cheaper with renewables (input of aluminium cost). I have expected an uptick in demand due to the increased importance of a nice home (retail market). Do you think the downtrend of office space will have a larger impact?

  • Always love your write ups, especially these kind of introspective posts.
    Isn’t the family maybe wanting to go private soon(ish) a positive catalyst if anything? Even with their majority ownership wouldn’t they want to buy out the rest?

    • This could be. However minority protection is not that strong in France. Installux has never done anything negative about minorities, but on the other hand, they are also not minority shareholder-friendly. For instance, they refuse to speak with minority investors.

  • Hi,

    On the fact that high aluminium price is a net negative for Installux: couldn’t the company just pass on a potential increase in input costs to its clients (with a mark-up of course) ? There are other transformation businesses for which an increase in input prices is a net positive for the company (the steel industry and the price of iron ore for example)

    • In theory yes, if your product is absolutely needed. However, if you want to pass through increases to struggling retailers or if there are substitutes, then it will be much more difficult.

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