Category Archives: Checklist

Good or Bad Capital Allocation: Example SAP SE (ISIN DE0007164600)

In my previous post on capital allocation, I had mentioned SAP as a company which might have overpaid for an acquisition. A reader commented that SAP is a good capital allocator because they increased EPS over the last 10 years.

Increasing EPS itself in my opinion is not a “proof” for good capital allocation. Actually, this itself says nothing at all. If you have a stable business, just retaining earnings and doing nothing will increase EPS as long as interest rates are positive. Good capital allocation is when you create value from retained profits.

The best way to find out if value is created is to look at how returns on equity and return on capital develop over time.

Let’s take a look at SAP over the past 17 years with some per share numbers:

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Some thoughts on (Australian) Leasing / Equipment rental companies

One very interesting aspect about Australian stocks is that there are many listed companies whose main activity is some sort of leasing. Those companies are all quite profitable and relatively cheap.

So far I only had looked at one leasing company, AerCap, the US based Aircraft leasing company.

Leasing business

The leasing business simply stated is asset based lending without a banking license. The client, instead of buying something outright and recieveing a loan from a bank, “leases” the good, pays installments and hands over the good after some time back to the lessor.

The leasing company therefore has the following main risks to bear:

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Checking the checklist: Maison France Confort (ISIN FR0004159473)

Looking at other good investors is one of the simplest way to generate investment ideas. I had linked to Ennismore already, which is a very interesting European small cap manager.

In their monthly updates, they always feature one stock. In the most recent December Newsletter, they write about Maisons France Confort (highlights are mine):

Maison France Confort – French housebuilder (1.2% NAV)
Maison France Confort (MFC) is a construction company that designs and builds family homes in France. Unlike many other markets, in France there is virtually no development risk for the company because land is purchased separately by the customer and the house will only be built once it is fully financed. MFC’s model is to provide a service designing the building and sub-contracting its construction. This ties up little capital and has allowed them to generate post-tax returns on net operating assets of 30% over the last 10 years. The company was founded by the Vandromme family five generations ago and they still own over 30%. It is run by brothers Philippe and Patrick Vandromme who have built MFC into the largest player in what remains a very fragmented market, with a 6.6% share of the self-build market in the regions that it operates in (4.0% for France as a whole). MFC has consistently taken share over the last 15 years through organic growth and acquisitions, a trend we expect to continue. MFC benefits from its greater scale: its large number of architects give it a more extensive range of houses (particularly energy efficient homes), it has a more professional and bigger sales force, a strong brand name, greater capabilities to deal with regulations and bargaining power with subcontractors and raw materials suppliers. As a result, revenue grew at a compound annual rate of 15% from 2000 to 2011, of which over half was organic, while the market for single homes was broadly flat in volume terms.

MFC primarily serves the lower end of the market, particularly first time buyers, with the average house costing EUR 100,000 to build (excluding VAT). With general economic weakness in France, tighter lending conditions and uncertainty around the new government’s incentives for homebuyers, housing starts are down 14% year on year for the nine months to September 2012 and MFC’s order book is down a similar percentage on a like for like basis. However the cost base is highly flexible, we estimate around 90% is variable with demand, and this allowed the company to remain profitable even in very weak markets from 2007 to 2010 (we also like the fact that Philippe and Patrick waived their bonuses in each of these years). With net cash of EUR 59m (equivalent to a third of its EUR 174m market cap) MFC is in a good position to take advantage of the weak market and has a proven record of strong capital allocation, buying back shares at depressed levels and making small bolt-on acquisitions that typically have a 3-4 year payback. At the current share price of EUR 25.10 the historic dividend yield is more than 5% and MFC has an enterprise value that is 3.2 times its operating profit over the last year and only six times the trough profit achieved in 2009. This is far too low for a business that has consistently generated a high return on capital and we think the shares have at least 80% upside.

As I am considering France one of the most attractive stock markets (for small caps) anyway, and the write-up is really interesting, lets test my new checklist for Maison France Confort:

1. Market cap between 25-250 mn
market cap 175.7 mn –> Score +1

2. less than 3 analysts following on Bloomberg or very bad sentiment
no, 7 analysts follow, mostly positive outlook, however only small cos. –> Score 0

3. No English annual reports, short quarterly updates etc., no share price on company homepage
I didn’t find recent English reports, only relatively slim intra year updates –> Score +1

4 . Potential special circumstances like Euro crisis, very diverse business activities, complex structure, Spin off etc.
Not really, although “france bashing” seems to increase –> Score 0

5 . Low historical beta /volatility
Beta of 1.0 –> Score 0

6. Dividend yield > 3%
Div. Yield 5.13% –> Score +1

7. P/E < 10
Trailing P/E of 8.7 –> Score +1

8. P/B < 1.2
P/B 1.5 –> neutral

9. EV/EBITDA <= 6
EV/EBITDA = 2.2 !!! –> Score +1

10. 10 Year mean reversion potential > 50%
Yes, Based on EV/EBITDA, mean reversion potential would be 200%

11. Positive 10 year FCF yield
Very solid FCF generation (~10% p.a.) –> Score +1

12. Large acquisitions in the past ?
neutral, no big acquisitions, but series of small ones –> score 0

13. Large share Intangible assets ?
40% of book value intangible —-> Score 0

14. Pension liabilities, operating lease ?
Nothing discovered at first glance —> Score +1

15. Low debt (net debt/equity <0.5)
Significant net cash —> Score +1

16. Family owned / run
Yes, 5th generation —> Score +1

17. Treatment of shareholders in the past ?
looks fair, share buy backs —> Score +1

18. Sharecount stable or decreasing ?
Decreasing —> Score +1

19. Alignment of management and shareholders
Good, CEOs skipped bonuses etc. —> Score +1

20. Insider Share purchases/sales last 12 months ?
No —> Score 0

21. Subjective impression of company management (pictures, speeches, comments)
Good —> Score +1

22. 10 Years of history available ?
Yes, Score +1

23. Industry attractiveness
neutral (“discretionary consumer”) —> Score 0

24. Positive/neutral price momentum ?
positive —-> Score +1

25. high quality investors as share holders ?
Yes, Ennismore, Amiral —> Score +1

26. Do I understand the business model ? Is it attractive
looks like a very capital efficient, attractive business model —> Score +1

27. Potential short/medium catalyst ?
Not really —> Score 0

28. 10 year sales growth above inflation ?
Yes, 10 year growth 11.8% p.a –> Score +1

All in all, this results in a quite good score of 19 (out of 28), which compared to my other stocks looks quite good. So this is definitely a stock to follow up more closely.

I am still considering if I might implement either a higher range (like -3 to +3) or decimals to further differentiate. Like for instance at the moment I would give a +1 score to an entity with 30% debt as well as to one with net cash etc. However I am not sure if this makes the “first step check” to complicated.

Summary:
Based on my checklist, Maison France Confort looks very interesting and definitely a stock to follow up. Cheap on many metrics combined with a very capital efficient business model makes it interesting. Only drawback is the focus on the currently dwindling domestic French housing market, where the portfolio is already exposed to via Poujoulat (chimneys), Installux and even Bouygues.