Duell: Colefax Plc vs. AS Creation AG – part 1
AS Creation is one of my core holdings. It is the clear market leader for wallpaper in Germany, however subject to an Anti Trust probe. Historically, AS Creation has produced rock solid returns. Currently there is some grwoth potential in the stock as they are building up a significant joint venture in Russia.
I was not aware that there is a UK listed company specialising in wallpaper as well. Interactive Investor Blog (highly recommended by the way) had a very nice summary post on Colefax Plc a few days ago.
So I thought it might make sense to compare the two companies “head to head”. I am not sure if Colefax and AS Creation are really competitors. Colefax sells most of its products in the US and the UK and only a relatively small part in Europe, whereas AS Craetion is more focused on Germany with some French wholesale activities.
Colefax has a market Cap of ~31 mn GBP, AS Creation around 62 mn GBP.
Let’s have a quick look at “traditional” valuation metrics
| Colefax | AS Creation | |
|---|---|---|
| P/B | 1.19 | 0.77 |
| P/B tang | 1.19 | 0.86 |
| P/S | 0.41 | 0.36 |
| P/E | 7.7 | 11.1 |
| EV/EBITDA | 3.31 | 4.75 |
| EV/EBIT | 4.6 | 9.1 |
| Debt/Capital | 0% | 27% |
Apart from Price/Book and Price sales, Colefax looks a lot cheaper than AS Creation. AS Creation has some debt on its balance sheet vs. Colefax which actually shows net cash. AS Creation used to have little debt or net cash as well, however the investments in the Russian JV have been funded with debt.
Let’s look at historical profit margins next:
| Net margin | ||
|---|---|---|
| ACW | CFX | |
| 1999 | 5.66% | 4.67% |
| 2000 | 5.75% | 5.61% |
| 2001 | 5.38% | 3.77% |
| 2002 | 5.23% | 2.78% |
| 2003 | 3.94% | 3.05% |
| 2004 | 5.00% | 3.43% |
| 2005 | 5.33% | 4.13% |
| 2006 | 6.68% | 5.49% |
| 2007 | 5.95% | 5.20% |
| 2008 | 5.06% | 2.51% |
| 2009 | 4.14% | 3.43% |
| 2010 | 4.55% | 5.88% |
| avg | 5.22% | 4.16% |
From 1999 to 2010, AS Creation managed to earn 1% more margins on average with a lower volatility than Colefax. So one could conclude that AS Creation at least historically had better pricing power than Colefax.
However if we look at ROE and ROIC, the picture changes completely:
| AS Creation | Colefax | |||
|---|---|---|---|---|
| ROE | ROIC | ROE | ROIC | |
| 1999 | 12.98% | 6.90% | 26.01% | 17.82% |
| 2000 | 14.87% | 8.19% | 30.92% | 20.42% |
| 2001 | 13.52% | 10.39% | 17.72% | 13.15% |
| 2002 | 12.42% | 9.83% | 12.83% | 10.37% |
| 2003 | 8.79% | 7.74% | 14.83% | 12.81% |
| 2004 | 11.53% | 9.63% | 17.55% | 19.24% |
| 2005 | 12.41% | 11.05% | 20.22% | 18.01% |
| 2006 | 14.93% | 12.54% | 25.34% | 22.55% |
| 2007 | 13.45% | 10.42% | 23.57% | 26.94% |
| 2008 | 11.36% | 7.86% | 9.07% | 22.37% |
| 2009 | 9.14% | 7.97% | 10.75% | 16.55% |
| 2010 | 9.73% | 8.00% | 18.85% | 21.06% |
| avg | 12.10% | 9.21% | 18.97% | 18.44% |
Colefax shows almost twice the returns on equity and invested capital compared to AS Creation. The absolute amount achieved by Colefax is remarkable as well, even if some of the difference could be explained by differences in UK and EUR interest rates.
Before jumping to the conclusion that Colefax is the cheaper and more capital efficient company, we should chekc 2 major items which may distort return on capital numbers and Enterprise Value (EV) multiples:
– pension liabilities
– operating leases
Pension liabilities:
Interestingly enough, Colefax seems to be a very untypical UK company. They have only a tiny defined benefit plan (DBO) with liabilites of 1 mn GBP. AS Creation’s DBO liablities are higher at around 7 mn EUR. So no big impact in both cases (remark: to be on the safe side, DBO should always be added to finanical debt)
Operating leases
This is more interesting. AS Creation only records 600 tsd EUR of Operating leasing liabilities whereas Colefax has around 25 mn GBP gross liabilites. If we look at the different components of assets required to run the busines we see some intersting numbers:
| Colefax | AS Creation | |
|---|---|---|
| Sales | 77,722 | 184,603 |
| Non-Current Assets | 7,282 | 50,770 |
| Net WC | 11,881 | 66,424 |
| Operating Leases | 25,258 | 600 |
| NCA/ Sales | 9.4% | 27.5% |
| NCA+OL/Sales | 41.9% | 27.8% |
| Net WC/Sales | 15.3% | 36.0% |
| NCA + NWC+OL | 44,421 | 117,794 |
| in % of Sales | 57.2% | 63.8% |
| EV/EBITDA | 3.31 | 4.75 |
| EV/EBITDA OL | 7.20 | 4.80 |
| Net Debt+OL+pension/total Assets | 47% | 14.4% |
Non Current Assets (ex Goodwill) at Colefax in percentage of sales is only a fraction of AS Creations non -current assets. However taking into account the (gross) operating leases, the picture suddenly shifts dramatically.
Both, EV/EBITDA and leverage ratios suddenly shift to AS Creations favour if one accounts for the operating leases.
Colefax still uses less capital in percentage of sales, but this is “only” due to much lower working capital requirements.
I don’t really understand why Colefax needs to rent such a large amount of land and buildings if they are not producing the stuff. Do they have a warehouse in Central London ?
Business models
One thing I forgot to mention is that the two companies have very different business models, despite both selling mostly wallpaper. Colefax only designs and distributes their products, whereas AS Creation creation really produces all the wallpaper themselves.
“Producing” wallpaper is basically only a specialised version of printing, with the big advantage that at least so far the internet has failed to come up with a paperless alternative in contrast to many other printing products.
Despite having outsourced production, Colefax employs 305 persons (fy 2011) for 77 mn GBP in sales whereas AS creation generates 172 mn EUR sales with 706 employees (2010).
The differences in the business model can be easily seen if we look at the major cost blocks compared to sales:
| Colefax | AS Creation | |
|---|---|---|
| Staff cost | 14,933 | 39,336 |
| – in % of sales | 19.2% | 21.3% |
| Marketing, distribution & admin | 36,345 | 27,166 |
| – in % of sales | 46.8% | 14.7% |
| COGS | 34,929 | 96,064 |
| -in % of saless | 44.9% | 52.0% |
Colefax needs to spend a lot more on advertising and administrative expenses than AS Creation. I am somehow surprised that Colefax seems to buy their merchandise cheaper in relation to sales than AS Creation has to pay for the raw material.
Staff costs are relatively comparable, which is interesting as well.
First results:
– Colefax “design and distribute” model is less capital intensive than AS Creation’s “full production” operations
– taking into account operating leases, the major advantage seems to be a lower amount of required working capital
– surprisingly, Colefax seems to require a lot of fixed investments if one includes operating leases
– however return on invested capital is still higher for Colefax despite slightly lower profit margins
– the higher voltality in Colefax profit margins ist most likely due to higher leverage through off balance sheet operating leases
– so far I can see no clear “winner” between the two companies. Both copmpanies have problems but also opportunities.
– Colefax might be a good diversification in order to gain exposure to UK and US housing recovery while AS Creation has growth opportunities in Russia and benefits from a still strong domestic market
In the second part I will try to come up with a valuation for Colefax Plc to see if it is an interesting investment for the portfolio.
value and opportunity 