value and opportunity

Installux is a small French Company which according to Bloomberg:

manufactures and distributes aluminum and steel components used in carpentry, locksmithing and building. The Company also refurbishes office buildings and factories.

Traditional valuation numbers show that the stock is relatively cheap and conservatively financed:

Market Cap 44 mn EUR
P/B 0.81
P/S 0.4
P/E 7.8 (Trailing 2011)
Div. Yield 5.5%

So far so gut, however, EV/EBITDA is at a sensational 2x EV/EBITDA

This is due to the fact that the company has around 46 EUR per share in net liquidity. Unfortunately, the 2011 report is not yet available, but some preliminary figures can already be accessed for instance here.

If we adjust the P/E for cash we would get a corresponding lower PE of around 5.2 for 2011.

A company with a valuation at 2 x EV/EBITDA and a P/E of 5 needs to have some kind of serious problem. However if you look at Installux, it is hard to find problems. Let’s look at historical numbers:

	EPS	NI Margin	ROE	ROIC
1999	10.2	5.5%	16.7%	15.9%
2000	13.4	6.2%	19.1%	18.7%
2001	14.1	6.3%	18.4%	15.5%
2002	10.4	4.6%	12.7%	13.0%
2003	12.4	4.7%	13.8%	14.9%
2004	17.5	5.6%	17.7%	15.5%
2005	18.5	6.6%	16.6%	15.0%
2006	19.8	6.4%	15.4%	14.6%
2007	18.8	5.6%	13.3%	13.2%
2008	17.9	5.4%	11.9%	11.8%
2009	15.1	4.7%	9.5%	10.2%
2010	21.8	6.4%	12.6%	19.6%
2011	17.9	4.9%	#DIV/0!

What we can see here is a generally growing profit (with some minor hiccups), an unspectacular but very stable Net margin between 4.7% and 6.4% and Mid teen ROEs and ROICs.

The business is highly cash generative. Despite the growth achieved, over the last 13 years, on average 12-13 EUR free cashflow per share have been generated. Around half of that has been paid out as dividends, the other half has accumulated on the balance sheet (in 1999 Installux still had a tiny amount of net debt).

Also the balance sheet is cleaner as clean, no goodwill, no pension liabilities and no operating leases as far as I could see.

So let’s stop here and summarize:
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.

Let’s have a quick look at the business:

Installux is processing aluminium, i.e. shaping and forming and coloring it to be used in shops, for windows etc. Interestingly, despite the fluctuation in aluminium prices, they seem to be able to pass on price changes relatively quickly.

Their clients are mostly “corporates” like building contractors etc., they run a small retail segment which however doesn’t seem to be very profitable at the moment (Roche Habitat).

A Net margin of 4-6% is Ok, but does not indicate a big moat. The relatively high returns on equity and invested capital seem to be the result of a relatively low fixed asset base required to run the business.

So the business seems to be nothing special, but produces double digit returns on invested capital which is quite good and is not really cyclical.

In the last 13 years, Installux roughly doubled its sales and profits, so one could not say that this is a shrinking or dying business either.

Management

The current CEO Christian Canty seems to be in charge since 1987 and has bought the company according to the company history website in 1991. They made small acquisitions along the way but nothing spectacular. He is 65 years old and might not continue forever. However his son, Christophe age 38 seems to be already working in the company as a director.

He holds 50% plus some shares and has been buying smaller amounts of shares for instance in 2010 (1500 shares according to the annual report).

I haven’t found a disclosure how much he pays himself, but with a total of +12 mn salaries for all 450 employees, there is not a lot of space for a large CEO salary. Additionally they don’t issue any options or new shares to directors.

It is interesting to read Canty’s “press communication” which seems to be issued in irregular intervals. Another one can be found here.

It becomes clear how cautious he approaches exports and how hands-on he comments on the loss of his smallest division, Roch Habitats. One gets the impression that the “boss” is in control of things.

I also didn’t find any hint that any improper transactions etc. have been made between the CEO as majority owner and the company.

So why is the stock so cheap ?

Some possible reasons are:

– no investor relations at all, on their homepage you neither find a share price nor a link to the annual reports or quarterly news. This is the first time that I see a company homepage of a listed stock which basically denies the existence of its share….

– no trading volume. On a “good” day, 100 shares are being traded. prices jump around a lot between auctions.

– small free float: The CEO Christian Canty owns 50% of the shares and three 5% packages of French institutions are disclosed in the 2010 annual report. No international shareholders as far as I could see.

– even on Bloomberg, you cannot find links to recent news, reports etc. Also the historical numbers are screwed up. In their historical earnings database they show a profit per share of 175 EUR in 2004 per share instead of 17,50 EUR.

– Installux generates more than 95% of sales in France. if France goes into deep recession, it will be hard to compensate for Installux

Valuation

With a stock like Installux, one can take a rather simple approach. As we have seen, the business is cash generative. So if we assume that they just continue to produce around 5.5 mn profit a year and discount this with 10%, we would get a valuation of 55 mn EUR. Plus the 14 mn cash on hand would make a conservative “no growth” valuation of around 230 EUR per share.

Of course we do not have something like a “catalyst” here, on the other hand at least based on historical volatility, a 10% discount rate might even be too high.

Another way to look at this would be: At the moment one can buy Installux at ~80% of book value. The earn 15% on Assets ex cash so one is buying at close to 20% effective ROE (ex cash) which is really really good !!!!

Share price

The stock price looks pretty boring:

Nevertheless, Installux has easily outperformed the CAC 40 even before dividends.
So let’s stop here and summarize:

+ Installux is a very conservatively financed company with a profitable growing business which doesn’t need a lot of assets to run

+ current valuation seems very cheap and neither takes into account the cash on hand nor the relatively high ROCEs and low volatility

+ a very conservative valuation approach would imply at least 50% upside in a no growth scenario

+ if Installux would continue growing at approx. historical growth rates, the stock should be much more expensive.

– however no catalyst in sight other than a slowly growing dividend which might help in the long run. So this is for the patient investor.

For the portfolio will start to accumulate shares at my usual rules (max 25% of daily volume).

Appendix: Others sources from the web for Installux:

– relatively good blog post 2 years ago on a French value blog which doesn’t seem to be active any more. He concludes that the stock is very solid and extremely cheap.

– from time to time there are posts in the boursorama forum. Th few people who discuss the stock seem to come to the same conclusion

– “Worlreginfo” seems to be the best source for Installux company filings