G.E.A: Small And Illiquid And With Limited Downside

by: European Deep Value Research

Summary

Small illiquid french company.

Huge net cash balance and profitable operating business.

Insufficent margin of safety right now but keep an eye on it.

Grenobloise d'Electronique et d'Automatismes Société Anonyme (G.E.A., Ticker: STAL, quoted in the Euronext Paris) develops, installs and maintains electronic and computerized toll collection systems.

It has a dominant position in France being the supplier of 80%+ of installed equipment. It also is present in 36 countries.

It is a small illiquid french company with huge net cash balance and a profitable operating business.

The company is controlled by the Zass family that owns 38% of shares and 50% of votes.

The Business

The operational performance in the last 3 years has been weak. Sales and operating income have dropped 26.5% and 37%, respectively.

9/30/2017

9/30/2016

9/30/2015

9/30/2014

Total Revenue

40 841,89

50 580,88

57 942,69

55 578,98

Operating Income or Loss

7 076,33

7 977,55

11 402,73

11 204,88

Operating Margin

17,33%

15,77%

19,68%

20,16%

Net Income From Continuing Ops

6 199,67

6 889,52

7 768,83

8 131,67

Sales variability is related to the fact that the vast majority of sales are equipment sales. Only 9.4% of total sales are services.

Performance in 2017 was again weak, with sales falling 19%. Management blamed the continued poor activity (less newer projects) in France and sales declined 26,7%. Internationally, it also was a down year with a decline of 4.6%.

France represents 60% of revenues and 40% are international.

But, despite a decline of 26.7% of sales in the last 3 years, the company’s operating margin only declined about 2.8 p.p. This is a good testament to management’s cost control ability. In 2017, G.E.A. was able to sustain margins by managing personnel costs (-4.5%), temporary work (-65%) and subcontracting (-41%).

Prospects

The company isn’t expecting an improvement of its French business anytime soon. This is a matured market and is expected to be maintained in a renovation mode, supported by long-term contracts. Tolls have to be upgraded every 5 years and replaced every 10 years.

But the company will persist in its efforts to increase international exposure. The company’s backlog was a 50.5 mln EUR at the end of 2017, up 18% from the former year. International backlog represented 76%. Countries like Russia, Morocco, Tunisia, China, Mexico, have better growth prospects, and G.E.A. can take advantage of it.

In fact, this strategy is starting to produce results. In the first quarter 2018, gross sales registered a sharp rise (+84%) to 14.66 mln EUR, as several international contracts closed in the period. This result cannot be extrapolated for the rest of the year as it is the consequence of non-recurring signings, but is a good indication.

Net Cash Balance

G.E.A as a 114 mln EUR market but, has a net cash position of 74 mln EUR:

9/30/2017

9/30/2016

9/30/2015

9/30/2014

Cash And Cash Equivalents

73 948,20

68 086,32

66 580,23

54 600,59

Short-Term Investments

93,14

194,58

1 952,82

1 938,97

Short/Current Long-Term Debt

8,07

5,96

38,15

4,87

Long Term Debt

0,00

0,00

0,00

0,00

Cash Balance

74 033,28

68 274,94

68 494,90

56 534,68

According to the company’s notes, the cash is invested in money-market SICAVs or term accounts with no capital risk. It has no restriction of use.

The other current assets categories are in balance with other short and long-term liabilities:

9/30/2017

9/30/2016

9/30/2015

9/30/2014

Net Receivables

19 466,03

18 771,94

14 549,00

23 305,67

Inventory

7 357,73

8 047,08

9 920,90

10 288,76

Accounts Payable

8 495,92

7 438,30

9 682,32

7 137,96

Other Current Liabilities

17 367,77

15 948,96

15 579,62

19 900,89

Other Liabilities

808,64

1 736,53

2 218,56

1 934,61

Current Assets Balance

151,42

1 695,22

-3 010,60

4 620,97

Valuation

For the valuation of the operating business, we will start from the 2017 operating income (7 mln EUR), assuming this is a base for the company from where it can grow from.

If we exclude the cash for the invested capital calculation, the denominator of ROIC is close to zero, making the company’s ROIC extremely high. If we assume a 10% WACC and a long-term growth rate of 2%, it is compatible with a fair EV / EBIT of 9x (using a derivation of the perpetual DCF formula: EV / EBIT = (1 - Tx Rate) x (1- g / (1-RONIC)/(WACC-g)), although competitors trade at similar to higher valuations:

EV / EBIT

KAPSCH TRAFFICCOM AG

9

Q-FREE ASA

16

So, a fair value for the operating business is:

= 2017 EBIT x 9 =

= 7 x 9 =

= 63

Adding the net cash balance, the equity value of G.E.A. is:

Operating Business Value + Net Cash Balance =

= 63 + 74 =

= 137 or 114 per share

Conclusion

Going into this research, I thought it would turn out a clear buy signal. With G.E.A trading at about 95 EUR right now, there isn’t a sufficient margin of safety for an investment. Although I think there is a good chance that the company will present growing net sales and operating income for the next following years, there isn’t enough basis to assume that. This is a cyclical company too much dependent on equipment sales.

If the stock would decline to 80 EUR per share, it would be an attractive company to own with very limited downside.

Disclosure: I/we 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.