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How it all started: Like most of you I lost a large chunk of my savings in the financial crisis of 2008-2009. During that period I was working hard to get my master degree in Biomolecular sciences. As most people I watched a lot of messages pass by on the news about the stock market and how deep... More
  • Burelle SA, Most Hidden Gem On French Equity Market 3 comments
    Feb 14, 2013 4:57 PM

    Profile and ownership structure

    Burelle SA is a French family holding company with three subsidiaries:

    1. Plastic Omnium (Ownership: 56 %)
    2. Burelle Participations (Ownership: 100 %)
    3. Sofiparc (Ownership: 100 %)

    Burelle family owns 77,85 % of outstanding shares. Surprisingly there is also one fund that holds 4,29 % of shares.

    Summary of subsidiaries:

    Plastic Omnium (POM.PA) is an industrial group active with two large divisions: Automotive division (90% of sales in 2012) and Environment division (10% of sales in 2012). The automotive division is active in fabricating structural body parts for cars (such as bumpers) and fuel systems. The environment division sells products and services for waste management and urban installations. At first sight this company lacks sexiness, but it contains all ingredients for superior investment quality. You can find the ticker here. In summary:

    1. World leader in most of their activities
    2. Technological innovation (R&D costs are 5% of sales)
    3. Playing the green card: strong focus on CO2 reduction
    4. Clean balance sheet (low debt position)
    5. Balanced client portfolio in automotive division
    6. Strong record of FCF generation (three years in a row)
    7. High exposure to emerging markets
    8. Company's automotive sales growth outperformed worldwide growth (16,7 % vs. 6,6 %)
    9. Self financed growth
    10. High return on equity (22%) supporting growth
    11. Management with a long history in the industry
    12. Company with a clean track record of profit making (2008: only year with reported losses over an existence of more than 60 years)
    13. Family held business (Burelle family)

    Sofiparc (private) is a real estate company. It owns land in Lyon and Saint-Priest and is leased to several respectable companies (such as McDonalds, Novotel and Ibis). Secondly it owns a large office building in the region of Paris that is mainly rented to Plastic Omnium.

    Burelle participations (private) invests in French companies trough equity funding, mezzanine funding and investment funds. Its goal is to generate returns in a mid-term investment horizon and to spread risk trough a large spectrum of businesses and sectors.

    Weight of subsidiaries

    Burelle SA can be approximated as an unlevered mono holding of Plastic Omnium. The other two subsidiaries have a relatively small weight in the portfolio. Burelle SA has a little more financial dept on its balance sheet then Plastic Omnium. This additional debt is related to its real estate activities (Sofiparc).

    Valuation:

    Purchasing Burelle SA stocks is purchasing Plastic Omnium stock with a considerable discount. A brief summary (based on financial report 2011 and Bloomberg) is displayed below. It can be concluded Burelle SA is cheaper on every valuation ratio. Plastic Omnium itself isn't expensive either.

     

    Plastic Omnium

    Burelle SA

    Current stock price (25/01/13)

    28.38 €

    235.00 €

    Price / Earnings

    7,69

    3,69

    Enterprise value / EBITDA

    6,93

    5,70

    Price / book

    1,88

    0,87

    Enterprise value (M €)

    2052,59

    1683,88

    EBITDA (M €)

    296,40

    295,43

    Intrinsic value of Burelle SA can be approximatly calculated as follows:

    Intrinsic Value = 15,63 * Stock price of Plastic omnium

    For every share of Burelle SA there are 15,63 shares of Plastic Omnium present in the holding. Approximation: Burelle SA is an unlevered mono holding of Plastic Omnium. Calculation above thus neglects the value of the two other subsidiaries. At current stock price of Plastic Omnium one share of Burelle has an intrinsic value of 443,47 €. This comes down to a discount of 47 %.

    Discount relative to Plastic Omnium is at its 3 years high

    One reason to believe Burelle SA share will outperform Plastic Omnium is the incredible discount in respect to its intrinsic value. I calculated discount by using the above formula and adjusting for variation in the number of Plastic Omnium stocks held:

    As you can see discount has been trending up since the bottom of 2009. Discount has been growing because Plastic Omnium 's share price rose much faster than Burelle SA's share price:

    (click to enlarge)

    Why discount is peaking now

    In my perspective there are several possible reasons why Burelle SA is discounted relative to Plastic Omnium:

    1. Holdings are always traded with a discount because of additional operational costs of a holding
    2. All communication is in French, making it inaccessible for foreign investors
    3. Slow down in West European car market puts psychological pressure on this stock
    4. A seemingly random portfolio of businesses making it a less transparent investment
    5. Burelle family seemingly doesn't care about stock price
    6. Average trading volumes are low due to lack in free float
    7. High nominal stock price
    8. Low dividend yield

    There is an obvious reason why discount is growing. That reason is the psychological effect on French investors: Western European car sales are slowing down. French population sees its home land car manufacturers (Renault and Peugot SA) swim in difficult water. This results in slicing down the number of jobs in France and social agitations. Production moving away is a common Western European trend, cfr. Belgium and Germany. All this leads to a bearish sentiment of French investors on anything related to cars. And as stated above, all communication is in French. If not for French investors, who is left to buy Burelle SA?

    Well hidden synergies between subsidiaries

    1. Sofiparc rents office space to Plastic Omnium, providing a stable income for Sofiparc.

    Sofiparc's stable income is sufficient to fully cover operational costs of the holding.

    1. Placing real estate in separate entities increases tax deductibility: restoration costs are not deductible unless real estate and enterprise are brought in separate entities.
    2. Plastic Omnium and Burelle SA split management expenses

    What could fire up stock price

    There are some hypothetical scenario's that could trigger a price increase. There is no reason to suspect the company will make such a move in the near future.

    1. Free float increases: CEO has sold a large chunk of shares in past twelve months. He could sell more as he's getting closer to retirement.
    2. Company does a stock split, causing liquidity to increase
    3. Burelle SA gets an upgrade to a larger equity market
    4. Communication to shareholders continues in English
    5. Burelle SA uses cash from dividends to buy its remaining shares off the market

    Conclusion

    A European growth stock with a p/e lower than 4 is quite unique. I've seen fraudulent Chinese micro-caps trade at less attractive multiples at this time. The company has an excellent outlook for the next four years and an outstanding history of profitability. Stock is priced brutally cheap as market clearly fails to valuate this stock properly. The purpose of being listed remains a great mystery to me. A once in a life time for investors seeking value.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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Comments (3)
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  • the western european car sales effect should apply to both burelle and plastic omnium? so the main driver of the discount should be something else?
    19 Mar 2013, 04:38 AM Reply Like
  • I believe the discount is due to the very small float in BUR shares as it is about only 0.3M shares. But it is still illogic to have such a discrepancy between the two
    19 Mar 2013, 04:38 AM Reply Like
  • Author’s reply » Undoubtfully the illiquidity plays an important role but this can't be the only reason for the enormeous discount. I've seen holdings (even when liquidity is limited) go at a discount of max 20% peak.

     

    I stand by my argument that discount is most likely caused by the limited transparency:

     

    1. The consolidated report the three subsidiaries makes it harder to interpret. The earnings statements are pretty clear but the contribution of assets on the balance sheet are not traceable.

     

    2. The reporting language of Burelle is in French, while French investors are bearish on any stock related to car manufacturence. Plastic Omnium does not share this problem: it reports in English and can rely on foreign investors demand for the stock to keep price at a reasonable levels.

     

    Anyways

     

    Even after the 80% stock increase I'm not hasty to sell ...

     

    Based on the price of plastic omnium: the stock is worth 560€ at the moment.
    Based on a conservative DCF model (12% discount rate; growth rate of 14% for the next 4 years; 0 % growth after) the stock is worth 650€
    Based on a technical analysis price could go to 440€
    20 Mar 2013, 06:02 PM Reply Like
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