Category Archives: Value Stocks

AS Creation (DE000A1TNNN5) Half year report 2013 – SELL

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AS Creation was on my watch list for a potential sale quite some time.

The initial investment casé was as follows:

At the time of writing in 2010, AS Creation was trading at around 29 EUR. We thought at that time that either “reversion to the mean” of net margins of around 5% and/or the Russian JV could give earnings and of course the stock price a nice boost. Our overall fair value at that time was estimated at around 38 EUR, a weighted average of good/medium/weak scenario.

In the meantime however, both assumptions were not reached. Net margins went down to 2.4% in 2011 and back to 3.6% in 2012. So far away from the 5% we assumed for the good case.

Additionally, based on the 6 month report issued on Monday, the Russian JV seems to develop rather dissapointing. The second quarter alone brought an additional “at equity” loss of 1.5 mn EUR after 0.5 mn loss in Q1. The reasons for this disappointing developement were “unforeseeable” difficulties in getting their stuff into the sales channels. This sounds like a quite weak explanation. Additionally they mention declining demand in Russia which fits into my “Gorilla” thesis.

So our old “best case” seems hard to reach. I mean if they don’t earn their margin now, with parts of Germany in a real estate bubble, then I highly doubt that they can do that ever again.

Combined with some other issues, like a non-explained general waiver for management in connection with the ongoing cartel investigations, I do not see a lot of upside in the stock for the next couple of years.

As the current share price is way above the estimated “Mid case” valuation, the only possible consequence is to sell the AS Creation position completely.

This further increase the cash pile, so I have to work hard on new ideas….

Short cuts: Praktiker/Hornbach, Thermador, Portfolio transactions

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Praktiker/Hornbach:

Yesterday, Praktiker gave notice that also the “healthy” subsidiary Max Bahr is insolvent and will seek creditor protection. In my opinion this coul simply the following:

1. an even lower recovery for the Praktiker Bonds. I had read a couple of analysis where people thought that Max Bahr could be sold for hundreds of millions with the proceeds covering the bond partly. Under current circumstances, Praktiker Bond holders in my opinion would be lucky if they get even 5% of nominal back. There will be nothing left.

2. It will be much harder to keep Max Bahr as a fully functional competitive entity. So this improves the outlook a lot for the other DIY chains. If for instance Hornbach could get 10-20% of Praktikers business, this might turn into nice growth. I am therefore quite surprised that the Hornbach shares didn’t react on this news. I personally think that there is a good chance to see a “Schlecker” effect. Schlecker had a higher market share compared to Praktiker, but according to this article, competitors DM and Rossmann saw sales jumping +14 to +16%. A lot of this increase is sales per existing square meter, so I assume with a nice profitability.

I think Hornbach at the moment provides a good risk/return relationship. The had a rather bad last quarter due to the ugly weather. Based on personal observations, I assume that the made up for that in the current quarter plus tailwinds from the Praktiker bancruptcy make me positive about the shares.

Thermador

Thermador issued half year numbers a few days ago, here and here.

Clearly, 2013 will be a difficult year for them. But as the already mentioned after Q1, Q2 was already relatively seen much better than Q1 (sales down -5.2% against 2012 vs. -8.7% in Q1). Profitability is clearly lower, but all in all I think they are still doing quite well. I would have hoped that the stock price might go down a little bit in order to add to my half position, but it seems not to be the case right now.

Portfolio transactions

I sold the second half of the Dart position today at ~2.45 GBP. On the other side, I am adding to Hornbach Baumarkt as I think there is a very good chance for a positive medium term surprise despite all the issues. I will increase from currently 3.7% of the portfolio to a “full” 5%.

Dart Group – When to sell / Skill & Luck in investing

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Today, Dart Group issued preliminary 2012/2013 figures which were excellent.

The stock price jumped another 10%, making Dart my first triple in the 2.5 year history of the blog portfolio:

For me, two questions are now interesting:

1) Should I sell ?
2) Was this skill, luck or both ?

Re 1)

The nice thing about the blog is that you can always go back and look what you have written back then.

Dart was actually the first tangible result of my “Boss Score “model back in June last year. Additionally, at that point in time, the stock was very cheap by any standards.

That’s what i wrote about valuation:

Valuation

A few simple thoughts about valuation:

Dart Group will never be a P/E 15 company, but it could easily be a P/B 1 company. At the moment, you get a company which increases shareholder equity by something close to 20% p.a. at 0.6 times equity. If we assume for instance they manage to generate 15% ROE in the next 3 years and the company would trade at book at that time, we would have a fair value of 1.7 GBP per share or an upside of 150% over 3 years. More than enough for me.

Looking back, under my metrics, Dart increased equity by 8% in 2011/12 and 18% for 2012/13, on average 13%. So slightly below my expectations but still very good. However the share price has shot way beyond my expectations.

Compared to back then, Dart now looks quite expensive as this table shows:

at purchase now Easyjet Ryanair Vueling
P/E: 4.7 11.0 24.6 18.3 11
P/B: 0.6 0.6 1.8 3.33 3.2 1.17
P/S: 0.1 0.1 0.4 1.4 2.1 0.2
Div. Yield 2% 0.87% 1.70% n.a. n.a.
Market Cap 97 mn 348 5558 10290 275
Debt/Assets 2% 1.70% 22.30% 39% 4.50%
EV/EBITDA 0.02 1.8 10.2 8.2

I have included some other discount carriers in the table. Compared to Easyjet and Ryanair, Dart looks rather cheap, but honestly I do not really understand why Ryanair and Easyjet trade so high. Vueling from Spain in comparison does look cheaper than Dart on that basis.

All in all, Dart performed according to my expectations, but the multiple expansion was clearly above expectations.

Personally, I don’t believe that a business like Dart will trade at 2 times book in the long run, nevertheless, momentum and comparable valuations could carry the stock even higher.

As a compromise, I will sell half of my position as of today.

2) Skill or luck

A second question one should always ask oneself: Was this just luck or was some skill involved.

With Dart, I actually try to improve my process compared to the past. I looked quite deeply for instance into fuel hedging as well as into the business model.

That is what i wrote in the first post about the business model:

Business model

There is an interesting discussion about the business model to be found here.

In essence within the airline business, their main competitive advantages seem to be

– regional focus (not fighting on the crowded London market)
– buying cheaper used airplanes for cash instead of leasing new ones (used aircraft buying seems to be one of the special abilities of the CEO..)
– higher flexibility due to ownership and contracts with Royal Mail
– differentiation with slightly better services as a “family budget” airline

I am not able to judge how this holds against Ryanair and Easyjet going forward, but so far the strategy seems to have worked OK and better than many of the smaller competitors.

Actually, part of that competitive advantage, the Royal Mail contract got lost earlier that year and they earn lower margins. What I clearly didn’t see was the fact that Dart could compensate this by growing quite significantly with their packaged tours. This was luck.

Secondly, the stock got a lot of tailwind by the very good performance eof Ryanair and Easyjet. Over the last 12 months, Ryanair gained 84% and Easyjet 147%. Compared to that, Dart’s 192% look good but not totally out of line. That was luck too.

So overall I would say my dart investment was maybe 50% skill and 50% luck. Clearly, my boss model and the research helped to identify a stock which was undervalued. However the timing and the extent of the share price increase and multiple expansion are more luck than anything else.

Thermador Groupe (ISIN FR000006111) – a true “hidden champion” from France ?

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Back to my favourite hunting ground France, the country which, according to the “famous” Harvard professor Niall Fergusson, will burn this summer.

Thermador Groupe is (as many others) a result of my boss screener. The score is not super high but indicates that it might be a high quality company at an attractive price. So what are those guys doing ? According to Bloomberg the following:

Thermador Groupe wholesales plumbing supplies. The Company buys plumbing supplies primarily from manufacturers outside France and distributes them throughout France. Thermador distributes ball, butterfly, check, motor-operated and solenoid-operated valves, pneumatic actuators, central heating system components, plastic pipe, and domestic and small community pumps.

Doesn’t sound too exciting but that is usually a very good sign.

Valuation looks Ok, but not exciting:

Market cap: 247 mn EUR
P/E (2012) 11.7
P/B 1.9
P/S 1.2
EV/EBITDA 6.2
Div. yield 5.4%

The company is debt free and showed 5.4 EUR net cash per share at year end 2012. So far so good, but why should this company be a “hidden champion” ?

A quick look at profitability over the last 11 years shows already, that those guys seem to do something right:

NI margin ROE ROE adj
31.12.2002 6.5% 12.7% 15.9%
31.12.2003 7.7% 15.4% 22.3%
31.12.2004 9.3% 18.4% 20.5%
30.12.2005 10.1% 19.5% 23.6%
29.12.2006 11.2% 22.6% 24.4%
31.12.2007 12.0% 24.5% 24.3%
31.12.2008 11.0% 22.2% 22.3%
31.12.2009 9.2% 15.9% 18.8%
31.12.2010 9.6% 15.8% 17.4%
30.12.2011 10.6% 17.8% 20.1%
31.12.2012 10.1% 17.0% 20.1%

High single digit margins and consistently ~20% return on investment implies that those guys know what they are doing.

But it gets even better. Despite good growth in those 11 years (sales doubled), the showed a very healthy free cashflow generation.

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EPS FCF p. Share DIV
31.12.2002 1.66 1.09 1.51
31.12.2003 2.10 3.49 1.44
31.12.2004 2.70 1.40 1.44
30.12.2005 3.10 3.11 1.80
29.12.2006 3.96 0.94 2.06
31.12.2007 4.84 1.16 2.31
31.12.2008 4.96 2.27 2.61
31.12.2009 3.90 6.56 2.61
31.12.2010 3.99 0.97 2.61
30.12.2011 4.83 3.84 2.61
31.12.2012 4.98 4.25 3.05
       
Total 41.02 29.08 24.07

Around 75% of earnings have been converted into free cash flow and again, 90% of free cash flow has been paid out as dividends. Those are quite impressive numbers for a “traditional” business.

Business model

Again, the question here is: How do they do this ? On the surface, a wholeseller should not be able to make a net margin of 10%, so there must be a lot more to this story.

Thankfully, one doesn’t need to look around in the web to find out about them because they produce a fantastic annual report in English language.

If I understand correctly, the Thermador business model looks as following:

– they are basically the interface between a large number of manufacturers and DIY stores / local wholesale companies
– they are specializing on relatively complex pump systems where few if any manufacturers are able to produce the full range of components
– in effect they are a kind of “virtual” conglomerate which offers those system and guarantees availability of all relevant parts
– it looks like that they mainly source in Italy and China and then warehouse and distribute the systems in France
– according from their numbers, they buy stuff from around 200 producers and sell/distribute to up to 3000 customers per subsidiary

The last bullet is important: A “Normal” wholeseller, for instance in the food industry doesn’t have a lot of end clients. In such cases it is relatively easy to “cut out the middlemen”. For a wholeseller with a larger number of partners on each side, it is much easier to create value and extract higher margins.

Interestingly, they manage to do this (so far) by only 1 big distribution center in Southern France.

Uniqueness of the business models:

Despite having 8 subsidiaries which sometimes use the same providers and have the same clients, they are run completely independent. That is what they say in their annual report:

People sometimes ask us about the suitability of our organisation chart: why 8 subsidiaries with 8 management teams, 8 sales teams, 8 purchasing departments, 8 warehouses, etc. Wouldn’t we achieve economies of scale if they were aggregated? On the contrary, we think that the drawbacks this presents are more than counterbalanced by the efficiency inherent in small, specialised and highly motivated teams.

The 8 subsidiary directors do indeed have maximum freedom to develop their companies, and enjoy the support of the Group, which provides them with the financial, property and IT resources they need. They are very close to their markets, and have many years’ experience with the Group, with a sound knowledge of their businesses. Guillaume Robin looks to Marylène Boyer and Hervé Le Guillerm for day to day support in managing the Group. A more formal monthly meeting reviews cross-company issues and makes the decisions needed to ensure the Group works efficiently. Each week, the nine directors get together for lunch to talk about current topics. Twice a year, they spend a whole day off-site to discuss strategy and organisation. Finally, each January, fifty managers and supervisors from the Group get together for presentations of each subsidiary’s projects. The audience is then invited to ask the subsidiary directors about their visions, analyses, decisions and forecasts.

For anyone having “inside” experience in a large international company with a big HQ, this almost sounds too good to be true. Coincidently, I just read “The Outsiders” and I have to admit, that up until now I didn’t really think about organizational structures so much. But based on the book and my own “day job” experience, I believe that such a company without a big HQ has in itself a competitive advantage against competitors with a rigid hierarchies. Such companies are much faster and at the end of the day more efficient, because the big waste always happens at headquarters.

As a picture in the annual report shows, all the companies are located next to each other, however in different buildings.

thermador

What they seem to share (and what makes a lot of sense) is their IT system and of course the distribution center.

A few real “gems” from their annual report:

Since our teams are part of small companies, each person feels personally concerned: waste leads to an increase in costs and a drop in profits. We are therefore careful to turn out lights when we leave offices, close windows when the heating is on, recycle paper and to avoid heating (or cooling) excessively.

or this one:

Our travelling salespeople do not have “company” fuel cards. When they use their vehicle for professional travel, they are reimbursed on a per-kilometre basis. It is in their interest to drive economically. When they rent vehicles, they are limited to small cars which consume little fuel. Also, we ask all employees of the Group to live within 50 km of our head office.

Other positive facts:

– Management owns shares, management salaries are reasonable
– organic growth, no acquisitions
– clear structure, no minorities
– conservative discount rate for pensions (3%, below official guidance)
– all real estate owned, no signifcant leases

.
Profit sharing with employees

Again from the great annual report:

Variable component:
Since the beginning, Thermador Groupe subsidiaries’ profits have been shared with employees. Even before statutory profit sharing, we introduced our own brand of profit sharing in Thermador, the first company created in the Group’s history. This virtuous practice spread to the other subsidiaries subsequently. Profit sharing is the result of a year’s work, during which the management teams present the operating accounts of each subsidiary on a monthly basis. Everybody can understand how the annual result is put together, and what mass of profit sharing will be distributed. The distribution of that mass is decided by the management team, and takes into account each individual’s performance as fairly as possible.

In each subsidiary, the profit sharing amount therefore depends on profit, which means there are major differences between the companies of the
Group. It varies from 12 to 27 % of salary. The average for the Group is 22% of gross annual salary.

Again, this is something I have never read in such a clear and precise way in an annual report.

Funnily enough, a lot of this sounds exactly like in the Les Schwab autobiography I have reviewed a few days ago. Who would have thought that something like this can be found in “socialist” France ?

Stock price & valuation

The stock price is still far away from the highs in 2007:

From a valuation perspective, I don’t want to be too sophisticated. This is not a super cheap stock but a very high quality stock. Would this be a UK or US stock, it would trade at least at 8-10 EV/EBITDA. As this is a French stock, one should not expect a lot of “action”. Nevertheless I find it attractive at current levels as I am convinced that they will find ways to grow their business in the future.

Risks

Clearly, the economic situation in France is the biggest risk. Thermador started to expand interenationally. In their own style, they created of course a seperate entity for this. We will see if the business model works internationally as well. The unit Thermador International founded in 2007, grows quite quickly, but has yet to achieve the profitanility of the other subsidiaries.

Additionally, any consolidation, either on the manufacturer or client level might make Thermador’s business more difficult.

Finally, some very clever B2B internet company could try to compete with Thermador. However, I think Thermador is much more than matching producer and clients. There is a lot of distribution know how and facilities involved plus guaranteeing services and spare parts within a short time frame. But clearly, this is something to watch out for.

Summary:

Thermador is in my opinion a true “hidden champion”. For me the reason why this company trades below its “true” value is the uniqueness of its business model combined with they way the company is run and organized. Together, this is what I would call a “Les Schwab moat”, the power of a highly motivated company in a competitive market.

Clearly, the current situation in France doesn’t make things easier for Thermador. Nevertheless I entered into a 2.5% portfolio position at EUR 58.20 per share. As this would bring my net France exposure above 20%, I sold out the Bouygues stock as a risk management measure.

Buzzi revisited – time to SELL

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Buzzi was part of our initial portfolio. In our initial investment thesis (German), the main reason was simple:

The stock, especially the Pref shares were significantly below book value, Buzzi had never made a loss in the past, “normalized” earnings and p/E ratios were low and it had a nice dividend yield.

We bought into the pref shares share at around 5,50 EUR

Additionally, the fact that Buzzi was only to a small extent an Italian company but rather a very international company due to the Dyckerhoff take over with large exposures in the US and Germany was maybe underappreciated.

Since then, a view things happened:

– Buzzi showed a loss twice, for 2010 and 2012 with only a mini profit in 2011
– when the price of the shares dropped in autumn 2011, I increased the position at 3.28 EUR per share
– the share price of the more expensive common shares performed a lot better than the cheap “Risparmo” shares. The difference since 01.01.2011 is a staggering 28% including dividends
– howver, both, the pref shares and the common shares outperformed the Italian stock index FTSEMIB by 17% resp. 45%

The more interesting question is: How did Buzzi perform against our initial expectations ?

In different posts I came up with different “reversion” to the mean approaches, among others

Reversion to the mean net income/PE
Initially: average P/E for the pref shares of 6. net margin of 9.6% (12 year average)
Now: After 15 years, average net margin decreased to 7.11%. Based on current sales of ~14 EUR per share results in 1 EUR per share normalized profit, so with an average PE of 6, the pref shares are fairly valued. I would argue to common shares are even overvalued.

Reversion to the mean EV/EBITDA
Initially: Assumption EV/EBITDA of 5.5 and EBITDA Margin of 26% (12 year average)
Now: 14 year EBITDA Margin is 24.8%. With current debt, the fair value of a Buzzi share would be around 13 EUR. This means the common shares are fairly valued, the upside in the pref shares without any other catalyst would be that the relative underperformance would be compensated at some point in time.

Free cash flow:
I had assumed free cash flow to equity of 200 mn EUR as “normal” level based on a 7 year history. “Adjusted” free cashflow both in 2011 and 2012 are more like 100 mn EUR, bringing down the average to 175 mn EUR. If I use this as a basis and the same discount rates I used back then (12-18% for a cyclical pref share), I end up with a fair value range of something like 4.75 EUR – 7.11 EUR per share. So the current share price would be rather in the higher part of the range.

Overall issues with mean reversion

Those three examples show a problem with “Mean” reversion plays: What is the mean ? In the Buzzi case, the mean now goes down every year, reducing the fair value for the mean reversion valuation.

Clearly, the current down cycle is a very severe one, but maybe the previous up cycles used for the mean were above the mean ?

What to do now ?

For me this is a typical situation where one should sell. Initial expectations have not been met, fair value has gone down and share price has gone up. Of course one could argue that the “mean” will go up and the sentiment is getting better with recent buy ratings among others from Deutsche bank.

In recent times, some US funds actually built up meaningful positions like Marketfield Asset Mgt. with ~2.9% of the common shares, and another, Mackay Shields with around 2.1%.

Nevertheless, I don’t think that at current levels and based on the current situation that there is a lot of “margin of safety” left in Buzzi. I will therefore sell the complete position at today’s VWAP. At the time of wirting, this would be a total gain of ~36%, mainly attributed to the second purchase at 3.28 EUR in late 2011.

IGE + XAO SA (ISIN FR0000030827) – another hidden French champion ?

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DISCLAIMER: The stock discussed in the following post is a very illiquid French small cap. The author might own the stock. Please do your own research. Do not blindly follow recommendations neither on this blog nor anywhere else.

Sometimes investment ideas are created from quite random events. I was looking into my database for interesting French stocks (as always). Out of interest, I thought that I want to tackle a French software stock next.

Among the few software stocks I just picked randomly the company called “IGE + XAO SA” because of its strange name. And guess what ? This company is creating CAD software for electrical installations with Gerard Perrier, my last stock pick as one of the major clients.

So despite the rather expensive valuation numbers, I decided to dig a little bit deeper.

“Tradition” Valuation metrics:

P/E Trailing 14.2
P/B 2,9
P/S 2.6
EV/EBITDA 5.1
Dividend yield 1.8%
Market cap EUR 61 mn

Not so exciting at first. However, when I ran IGE through my checklist, it scored very high (20 out of 27), at par for instance with Vetropack and AS Creation mostly due to the following facts:

– great free cashflow generation (FCF on average 1.2x Earnings !!!)
– rock solid balance sheet with ~15 EUR net cash per share
– Management owns 20%+ of company, CEO & founder still on board
– company started to significantly repurchase shares again in 2012 (Sharecount decreased by 20% since 2008)

If I would take into account net cash and the share repurchases, IGE would even met my P/E and dividend criteria, scoring 22 out of 27, equal with Tonnelerie.

So the result from the checklist is clear: Dig deeper !!!!

Business model / “Scuttlebutt”:

The company is mainly a Software company which, according to their Webpage offers the following products:

The Electrical CAD Software Specialist and you….
For over 26 years, the IGE+XAO Group has been a software publisher designing, producing, selling and ensuring the maintenance of a range of Computer Aided Design software (called “CAD”). These CAD software products have been designed to help manufacturers in the design and maintenance of the electrical part of production processes. This type of CAD is called “Electrical CAD”. IGE+XAO has built a range of Electrical CAD software designed for all the manufacturers, which functions either with an independent computer or with a company network.

So this is a very specialized “niche”. If I search for the German “Elektro CAD” in Google, it is already clear that IGE is not the only one offering this kind of Software.

The first question I would ask myself: “General” CAD Software is used everywhere, so can’t just the general CAD packages take over this job ? Well, according to this site ( a competitor) , this doesn’t seem to be so easy.

There seems to be also some competing products, for instance I found this German discussion board where different E-CAD or CAE systems are discussed. One of their main products, CADdy seems to be based on a old German DOS program and has been developed further by IGE.

Overall, I think that with specialised software like this, one should see quite significant network effects, i.e. if one product gains dominance, than this will be self-sustaining as there is little incentive to use different programs of that complexity for instance when you switch firms. I browsed a little bit in CAD forums and this has been confirmed quite often, for instance here. So once a program in this area is used and people are educated on this program, they will want to use it further on. What I found interesting is the fact that in this forum, A German IGE +XAO employee actively moderates everything which has to do with their products.

I think this is also the reason why they have 70% market share in France according to their 2011/2012 investor presentation. Which, of course, makes gaining market shares in other countries quite difficult.

This 70% market share might also explain the nice margins the company is enjoying. 20.9% Operating margin and 18.4% net margin are clearly not something one finds easily, not even with software companies.

ROE looks OK with 20%, however we should not forget, that basically all the equity is basically net cash and only a small part of that is really needed.

Those margins are on par or even better as heavyweight software champions like SAP or Dassault or CAD expert Nemetschek. Teh only difference is that those companies are much more expensive

As it looks for now, their business isn’t subject to the overall slow down in the French economy. In their latest half year report from the beginning of April, they still show solid growth rates of 5%. Net income didn’t grow due to higher tax expenses, but that should be a one time effect.

Net profit margin development

One thing that puzzled me, was the development of net margins. We can see that with one exception (a jump in 2008), Net margins increased steadily from 7.4% in 2002 to a fantastic 18.4% in 2012.

NI margin
31.12.2002 7.4%
31.12.2003 7.6%
31.12.2004 8.3%
30.12.2005 8.5%
29.12.2006 10.4%
31.12.2007 11.8%
31.12.2008 15.3%
31.12.2009 12.6%
31.12.2010 14.1%
30.12.2011 16.2%
31.12.2012 18.4%

In my opinion, this creates a series of questions:

– how did they achieve this ?
– are those margins stable ?
– do we have to expect reversion to the mean at some point in time ?
– what would be the “Mean” for margins ?

In order to understand better the increase in margins, I compared 2002 with 2007 and 2012 in the following table:

2012 in % of sales 2007 in % of sales 2002 in % of sales
Total sales 24.2   20.7   15.7  
             
external costs -5.4 -22.1% -5.5 -26.5% -5.4 -34.6%
salaries -12.3 -51.0% -10.7 -51.7% -7.1 -45.4%
other cost -0.6 -2.6% -0.5 -2.4% -0.5 -3.1%
Depr. -0.5 -2.1% -0.7 -3.5% -0.8 -5.1%
             
Operating result 5.4 22.2% 3.3 15.8% 1.9 11.8%
             
Net interest reslt 0.3 1.4% 0.3 1.4% 0.0 0.2%
             
EBT 5.7 23.7% 3.6 17.3% 1.9 12.0%
             
Tax -1.5 -6.1% -1.2 -5.7% -0.7 -4.5%
             
Net result 4.3 17.6% 2.4 11.6% 1.2 7.5%

The interesting thing here is that the improvement in the margin can almost be fully attributed to the decrease in percentage points to the decrease of external purchases / services. To me this looks like the typical “economies of scale” at a software companies. Once you have written the code, selling additional licenses increases the margin.

Competition

I found an interesting interview in French from 2009 where the CEO has been asked the question. His answer was (my translation):

– in everything related to aerospace etc., there are only Japanese and American competitors which do not seem to cross borders
– for industrial installations, there seem to be local competitors in each country
– in everything which is related to buildings, Autodesk is considered the main competitor

I think there competitive position is quite good. Their current niche is still to small to really interest a large player to enter on a “green field approach”.

Stock price

Looking at the stock price alone makes me ask myself why I didn’t discover the stock already last year when it was really really cheap. On the other hand, the more important point will be: What is the intrinsic value now ? Is there still enough upside ?

Management

As a hobby investor, I do not have access to management, However i watched on Youtube some interviews with the CEO (for instance here. The general impression was quite good. The only thing that I noticed is that the CEO is also active as the head of the local commercial chamber as well as some function at the local airport. This might lead to additional business contacts on one side but maybe distract him from the companies at other times.

Picture of the CEO:

Renumeration for the CEO was 250 k in total for 2012, that is quite OK for such a succesful year. Compared to the value of his shares (~7 mn EUR), I think the interest is quite well aligned with shareholders.

Shareholder structure:

A few words here because for a small French company, the shareholder structure is rather unusual. There is no majority shareholder.

The 2 top shareholders

Irdi Midi Partners 14.1%
Odysee Ventures 12.3%

are French private equity companies which ahve reduced their stakes lately. On the other hand, Amiral, the well known French value investment firm has recently increased their stake from ~3% to 9%.

That means howver that in theory the company would be “available” for a competitor to buy. Maybe this explains the quite shareholder friendly policy of the company which is ussual for France.

Edit: Longer term shareholders seem have double votes, so the Management plus IRDI might still have the majority, but how long ?

Valuation

Comparables: Just for fun, lets look at some other Software companies. I picked out 5 others:

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Name Rev – 1 Yr Gr OPM EBITDA Mrgn 3Yr Avg ROE R&D/Net Sales:Y EV/EBITDA T12M EV/T12M EBIT
               
IGE + XAO 4.8% 22.9% 23.9% 18.2% 25.0% 6.8 7.1
PSI AG 6.7% 6.3% 8.6% 11.4% 9.6% 14.0 18.7
NEMETSCHEK AG 6.8% 16.8% 23.0% 20.2% 25.1% 10.0 14.3
DASSAULT SYSTEMES SA 13.8% 24.7% 29.3% 14.6% 18.1% 16.8 20.0
AUTODESK INC 4.4% 15.1% 20.7% 14.2% 25.9% 14.7 20.0
SAP AG 14.0% 25.5% 30.8% 23.8% 13.9% 16.7 20.5

Although its maybe not really fair to compare them, people pay for the same kind of profitablity aroound twice or three time as much for the larger companies.

This could be clearly also a function of better growth prospects, on the other hand it could also indicate what a potential buyer could be willing to pay.

Risks
As a French company, IGE is clearly subject to a worsening of the situation in France. With 73% of sales in France, there will be clearly problems if France goes into a real deep depression.

Another risk as with all cash rich companies could be that they use their cash for expensive acquisitions. So far, they haven’t done it but one never knows.

Summary

Overall, I think IGE + XAO makes a compelling investment case:

+ high margins and return on capital, rock solid balance sheet
+ capital light software company with good local competitive postion
+ for a French company surprisingly share holder friendly
+ potential target for buy out or take over

The major risk is of course the overall developement of the French economy. Nevertheless this is also the reason why one can buy this excellent company at a very attractive price.

I will therefore add IGE & XAO to my portfolio. I assume that I could have purchaes ~300 k EUR of shares over the last 6 weeks since I follow the company at ~42.50 EUR per share, making it a 2% position in my virtual portfolio.

Final remark on sizing /portfolio risk

The 2% portfolio weight might look a little bit small compared to the enthusiasm of my review. On the other side, my total French exposure now has hit 20% gross (~18.5% net of hedge). This is of course a quite conncentrated bet on France not going down the drain. So I try to limit my exposure within this concentrated bet on France by having a kind of “basket” approach and spread to different companies. Let’s see how this one works out…

Quick updates: WMF AG

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WMF, the succesful German manufacturer of Coffee machines and cutlery released 2012 earnings last week and the annual report today.

Additionally, two rather strange things happened:

1. Despite a good result and extremely strong Free cash flow, they cut the dividend from 1.40 EUR to 1 EUR per share citing the need to “strengthen the internal funding capacity” of the company.
2. Yesterday, the CEO who successfully turned around the company, resigned as of may 31st 2013.

Quick Recap: Last year, the former private equity owner Capvis sold out to KKR, the legendary P/E company.

The reduction of the Dividend and especially the reason given is of course a joke. WMF has net cash and could be leveraged quite a bit before you start cutting dividends.

To me this is a kind of “deja vu” with another German company i used to own (before i started the blog), ANZAG AG, a German pharmaceutical distribution company.

KKR indirectly bought the majority of ANZAG vie their Boots/Unichem purchase. Then in 2009, they started to cut the dividend and communicating bad outlooks before they then managed to buy out the remaining minority shareholders for 31 EUR. In my opinion, KKR is not unfair, but they make sure that the upside remains with them and not minority shareholders.

So I do not understand, why now the share price goes up so much. For me, the situation is very different to the Capvis situation. Capvis in my opinion always wanted to exit via a share sale, so the interest of minority shareholders and Capvis were more or less aligned.

KKR on the other hand, will most likely look for another solution (break up, leveraging up, mergers). So the firing of the CEO and cutting the dividend could be the first sign that they are changing the strategy and that the “ANZAG strategy” might be applied here as well. In my opinion, the interest of majority shareholder and minority shareholder are less well aligned as before and the resignation of a very succesful CEO is one “early warning” here.

Additionally, in my (non growth) valuation model, the ordinary shares already look overvalued, the pref share which are owned are fairly valued.

Also, the chart looks kind of “stretched”.

So as a result, I will start selling the WMF pref shares (~3.7% of the portfolio) from today on under the usual rules.

Quick updates: Installux, EMAK, SIAS & ATSM

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As I am not doing this fulltime, I sometimes miss if companies publish their results. In principle, for my “Value companies” I don’t think that one time period makes a big change in the overall investment case. However it definitely makes sense to look at existing companies at least once a year.

Installux

As reader Caque commented, Installux reported prelimary earnings a few days ago.

With 6.67 mn EUR or around 22 EUR per share, earnings were surprisingly good. Net cash is now at 18.8 mn EUR or 62 EUR per share. So trailing EPS ex cash is around (100/22) ~4.9 times, quite low for a company which earns around 15-20% ROCE.

2013 will clearly be a challenge for them, according to the last sentence of the statement:

L’environnement général incite Installux à la prudence quant à ses perspectives 2013. Le groupe anticipe un repli d’environ -8%. “Cette tendance se confirme malheureusement en terme de volume d’activité sur le 1er trimestre (-13%),

-13% in sales in the 1 quarter is quite substantial. On the other side, this might open up some interesting entry points during the year. Nevertheless it should be clear that France in general is going through a quite difficult year. As ussual, the stock price doesn’t do much and volume remains low:

One remark from my side: France and the Netherlands are Germany’s major trading partners. I cannot understand how people can be so positive about German companies and negative about Netherlands and France in particular.

EMAK

EMAK came out with a investor relation presentation including preliminary annual figures already a few weeks ago.

Interestingly, the “old” EMAK business is doing quite poorly, profit is down 50% or so. The “new” businesses acquired from the main shareholder were holding up much better. So looking back, the dilution is not that big.

EPS was ~5 cent per share so we have a trailing P/E of around 10. If they really make good on their ambition level (38-40 mn EBITDA), the stock would be quite cheap. Let’s wait and see, no need to do something at the moment. This has 2-3 years more to play out.

The stock price at the moment seems to “lazily” trail the FTSE MIB to a certain extent:

SIAS SpA

SIAS came out with preliminary 2012 numbers already 4 weeks ago.

What was clearly an issue is the fact, that traffic declined significantly in 2012, much more than expected. So despite a overall tariff increase, revenues stayed flat.

The good news: On April 15th, they are expected to pay the special dividend of 90 cent per share , distributing what is left from the sale of the Chilean asset sale and the purchase of the concession.

Operationally, there seems to be additional preassure from the regulatory side, as agreed tarrif increases have been suspended by the regulator.

After the special dividend, a large part of the “special situation” aspect (extra asset) has now played out. Howver, the fundamental part looks not as good as I have though initially. I will need to decide if I hold on to SIAS as a “Normal” value investmetn or sell it at some point in the near future. Fundamentally, the company does a lot worse than I had exepected. Thankfully, the entry price was low enough and investors seem to liek special dividends.

The stock price has outperformed the FTSE MIB in the last 12 month by a margin of more than 30%. Quite significant for a purely domestic business:

Even more interesting:

Autostrada (“ATSM”) now caught up with SIAS ver 2 years as it turned out that the “Italian Job”, the Purchase of Impregilo,turned out to be a great special situation investment, netting Autostrada a nice profit.

http://chart.finance.yahoo.com/z?s=SIS.MI&t=1y&q=l&l=on&z=l&c=FTSEMIB.MI&a=v&p=s&lang=de-DE&region=DE

Maybe time to switch back into the “Cheapie” ? Let’s wait and see. Definitely worth to check the Autostrada annual report this year.

Quick updates: Sol SpA, AS Creation, Vetropack

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Sol SpA

Sol came out with a “preliminary annual” already end of March. The numbers were not really surprising.

Sales were up 4.9%, EBITDA was up +1.4%, however net result was down -6.8%. I find this surprisingly good especially considering the tough environment for the mostly Italien based industrial gas business.

Most interesting is this part of the statement:

In comparison to 2011, the sales increased slightly in Italy (+0.2%) but much more abroad (+10.8%), which represents 46.8% of the total turnover. The home-care business, in which the Group operates through VIVISOL, marked a growth of 10.9% (sales equal to € 264.9 ml), while the technical gases business increased of 1.3% (sales equal to € 344.9 ml).

I think this is also the reason why the share price is doing quite well at the moment, despite the overall EPS decrease.

AS Creation

Also last week, AS Creation came out with its annual report for 2012. Numbers were ok (EPS 2.67 EUR per share against 1.69 EUR last year. Dividend will be increased to 1.20 EUR.

This is all quite positive, however the shares are now not cheap anymore. With a trailing P/E of 16 and the German economy running on full steam, there seems to be quite a lot of positive expectations for the Russian JV priced in.

AS Creation is one of the stocks where I have to check in more detail if there is still a real “margin of safety” at this level. (Edit: Interestingly, in Bloomberg they show a wrong EPS number for 2012. Here the EPS is 3.22 EUR, this makes the stock look cheaper)

The stock price has great momentum and is on its way to challenge the ATH from 2007 at around 50 EUR:

Vetropack

Last but not least, Vetropack came out with their 2012 report some days ago. Although EPS wass up strongly at 197 CHF per share, operating profit was down. The reason for this was a sale of non used real estate. Vetropack invested significantly more in 2012 than 2011, the question will be if this results in more growth.

In 2012, positive developements in some countires were off set mainly through negative developements in Switzerland and high energy costs.

I still like Vetropack as a very boring, extremely defensive (indirect) consumer play, again one has to monitor if the capital is allocated efficiently. At the moment a solid “hold” position.

The stock price is stagnating clearly, also compared for instance vs. Italian competitor Zignano:

Vetropack is trading at a discount (EV/EBITDA) both to Zignano and Vidrala, the 2 European peers which, in my opnion should be theother way round.

Quick updates: G. Perrier, Maisons France Confort, April

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Some quick updates on French stocks:

G. Perrier

Already some days ago, G. Perrier announced preliminary 2012 numbers.

Highlights:

– Sales up 7% (+4% without acquisitions)
– Profit up 13.2% to 7.94 mn or 4.02 EUR per share

In my opinion, this is an absolut outstanding result if one considers that G. Perrier is more or less a purely domestic French company and clearly shows the quality of the company and their business model. I am not sure when the annual report is out, but as discussed perviously, I will increase the position further, target is now a full position.

Maisons France Confort

Also already a few days ago, Maisons France Confort issued annual numbers including the annual report. As some readers might remeber, i had two posts about them (part 1 & part 2), but didn’t include them in the portfolio yet.

Looking at the stock price action, it seems to be that market participants had expected better numbers or a better outlooK:

Final numbers were 2.70 EUR EPS for 2012. With around 7 EUR net cash per share, this translates into a trailing P/E of ~5.9. Of course, 2013 will not be easy for them, i guess the late spring in Europe will not improve things and the business model of MFC has much more exposure to the weak French economy. Nevertheless it looks like a potentially interesting cyclical entry point into a real good business. I will have to follow up on that one.

April SA

Quite similar to MFC, April came out with its 2012 numbers and the stock got hammered quite significantly.

The company earned 1.31 EUR per share, additionally there were some positive effects in the other comprehensive income. April clearly has the same problem as any financial services company which is very low interest rates. Nevertheless it is not clear to me, why the share price has now decoupeled from peer company AXA.

I will clearly have to look at the annual report, but so far I don’t see any reasons to sell.

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