Is Groupe SFPI Safe For Investors?

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Includes: ALLE, ASAZF
by: European Deep Value Research
Summary

Groupe SFPI is a French small-cap industrial company.

The strong balance sheet makes the downside limited.

Profitable operations and solid prospects are reasons for upside.

Groupe SFPI is a French small-cap industrial company, well-managed and with a strong balance sheet and good prospects. Its shares have dropped 35% in the last year for no apparent reason other than the market correction at the end of 2018.

Company history and business

Market Cap

€211.94 million

Enterprise Value

€170.41 million

Trailing P/E

5.99

Price/Book (mrq)

1.12

Enterprise Value/EBIT

5.18

Shares Outstanding

97.22 million

Total Cash (mrq)

€132.52 million

Total Debt (mrq)

€90.99 million

Trailing Annual Dividend Yield

2.76%

SFPI Group (“Safety for People and Industry”) was created in France in 1985 by entrepreneurs led by Henri Morel, who wanted to engage in the area of specialized industry safety solutions for people, goods and the environment.

In 2017, SFPI Group generated a turnover of more than €504.5 million in the safety industry. 38% of revenues are generated outside of France. SFPI Group has 3,820 employees, 40% of whom are based outside of France.

The company operates 4 businesses under 2 units.

Construction is the security and safety for buildings unit. €364 million in sales (72% of group revenues). It includes MAC (Windows, blinds, awnings, shutters, garage doors for residential and non-residential buildings) and DOM security (locking and access control equipment and systems).

Industry is the air treatment and energy control unit. €141 million (28% of group revenues). It includes MMD (heat exchanger and sterilization equipment and systems) and NEU-JKF (air treatment solutions for the industry).

The sales breakdown is the following:

These businesses have large installed bases, where aftermarket revenues are relevant and very profitable. Acquisitions are essential to keep building a solid market position in the construction and renovation sectors.

SFPI has made several acquisitions over the years, and in 2018, completed the acquisition of the 30% it didn’t own of DOM Security.

In the last few years, the company bet significantly on its internationalization, new product development and on its digitalization strategy. That has materialized in R&D investments (4.5% of payroll expenses) and in an increased production capacity (+37 million in the last 3 years) that have contributed to reinforce organic growth.

Financial strength

1. Balance Sheet

The company has a net cash balance of €41.5 million:

(in million)

2018-06

Total cash

132.52

Short-term debt

15.81

Long-term debt

75.18

Net Cash

41.53

Its shareholder equity is €188.80 million.

2. Earnings

In the last 3 years, SFPI has generated an average of €28.8 million in earnings and has paid an average of €3 million in dividends (10.4% payout ratio). The free cash flow average was €15.65 million, lower than earnings due to the purchase of investments in the period.

2015-12

2016-12

2017-12

Average

Sales

508.88

475.44

504.5

496.27

EBIT

27.25

31.58

32.89

30.57

EBIT Margin

5.35%

6.64%

6.52%

6.17%

Net Income from CO

8.78

20.78

23.18

17.58

Dividend paid

-2.00

-2.63

-4.38

-3.00

Free cash flow

13.23

8.42

25.31

15.65

3. Returns

In term of returns, in the last 3 years, the company has registered a solid average return on capital employed of 16.84%:

2015-12

2016-12

2017-12

Receivables

111.61

115.93

119.15

Inventories

64.76

65.26

72.36

Net property, plant and equipment

64.16

65.78

72.62

Accounts payable

-62.01

-63.62

-64.15

Taxes Payable

-3.53

-1.73

-0.61

Capital Employed

172.99

180.62

199.37

Operating income

27.25

32.98

32.90

Return on Capital Employed

15.75%

18.26%

16.50%

Management

  • Henri Morel, CEO
  • Damien Chauveinc, Deputy CEO
  • Nicolas Loyau, CFO

Henri Morel is the founder of the group. The French entrepreneur has created and developed several businesses, and consolidated them in the holding company SFPI. He controls 67.7% of SFPI shares.

Outlook

Groupe SFPI presented its sales performance for 2018 last February. Total sales grew 9%, with all units contributing positively to it. Organic growth (excluding acquisitions and divestitures) was 3%.

The company continues presenting solid numbers, meaning its prospects are intact.

Valuation

For a business with consistent operating conditions, strong balance sheet and stable management, a P/E multiple of 12 is well-deserved. The company has traded between €2.90 and €3.30 (€281 million and €321 million in market cap) since 2016 until September 2018. That meant an average P/E of 12x, or 14x excluding cash. In October, it broke down to €2 per share without any relevant news other than the conclusion of its DOM Security acquisition.

Note also that other big competitors like Assa Abloy (OTCPK:ASAZF) or Allegion (ALLE) trade on average at a P/E of 20x+.

Net Income from CO 2017

23.18

@ 12 P/E

278.16

Net Cash @ Jun 2018

41.53

Total Value

319.69

No. of. Shares Outstanding

97.22

Value per Share

3.29

Current Market Price

2.36

Price-to-Fair Value

0.72

Risks

  • The economic conditions in France and internationally.
  • The company’s use of its huge cash reserves. Criteria for acquisitions will continue to be a key component of success.
  • Prices of raw materials.

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.