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Cofidur SA: A Profitable French Net-Net Stock

Summary

A neglected nano-cap stock only reporting in French trading at a net-net valuation

Has generated a lot of free cash flow during the last ten years

Management has made wise capital allocation decisions focused on strengthening the balance sheet

Has a share repurchase program in place, and a record of buying back shares

Note: All figures in EUR unless otherwise stated.

Investment thesis

Cofidur SA is active in a low-margin industry in France, which is not known for being particularly business friendly. Despite these facts, the company has a strong profitability record, and has generated substantial free cash flows during the last ten years. The stock is neglected by the market, probably since it is only reporting in French and since it has a low market cap and illiquid trading. At a net-net valuation, the company looks like an interesting opportunity. A share repurchase program is in place, which should reduce the down-side risk.

About Cofidur

Cofidur SA is a holding company with a 100% ownership in Cofidur EMS SA. This is the only holding of Cofidur SA, and Cofidur EMS SA is a leading player in the French market for electronic subcontracting. Cofidur EMS has been active in the electronic subcontracting business for over 30 years, and has 475 employees. The company has four sites in France and also offers a low-cost alternative off-shore. The products and services are aimed at sectors such as aviation, defense, lighting, medical, transport, telecommunications and oil. In 2016, 82% of the sales were made to customers in France, and 14% to customers in other EU countries. According to the annual report, the sales are concentrated to a limited number of customers. The stock of Cofidur AS is listed on the Alternext stock exchange in Paris under the ticker ALCOF. The reports are only published in French, and the company only reports twice a year. I don’t read French, so please be aware that there is a risk that I have misunderstood or overlooked something important in the company filings.

Valuation

A valuation based on the balance sheet results in a price to tangible book value of 0.66. At the current stock price, the stock is even trading at a net-net valuation with a price to net current assets of 0.87. The earnings multiples are also attractive with TTM numbers of EV/EBIT at 3.3 and EV/EBITDA at 2.4. The ten year cyclically adjusted profit multiples are EV/EBITDA at 2.3 and EV/EBIT of 3.7. EV/Operating cash flow is 2.5 and EV/Free cash flow is 2.6 on a ten year cyclically adjusted basis. The TTM cash flow multiples are also attractive with EV/Operating cash flow at 3.0 and EV/Free cash flow at 6.6. Re-investments in the business have led to a compounded annual growth rate of tangible book value of about 3.6% for the last ten years.

Financial position

The key ratios for financial stability look good, with a net cash position:

Capital allocation

The company has bought back about 10% of its outstanding shares over the last ten years. The company has also been a steady dividend payer over the last ten years, with a current dividend yield of about 2.1%. The holding company sold the subsidiary Techci Rhone Alpes SA in 2011, and since then there has been no M&A activity.

The company has used more than half of its FCF during the last ten years to pay down its debt and strengthening its balance sheet. Considering the low-margin business the company is in, I think that it has been a wise management decision to strengthen the balance sheet.

There is a share repurchase program in place. The program allows the company to buy back a maximum of 10% of the shares outstanding. There is also a purchase price cap of 400 EUR in place. The program was instituted at May 23 2017 and will run until November 23 2018. At the end of September, the company had not repurchased any shares.

Profitability history

The key ratios for historic profitability provide a positive picture:

Shareholder structure and management incentives

The company has a majority shareholder in EMS Finance, which holds a stake of more than 50% of the capital. I haven’t found much information about EMS Finance. In 2009, EMS Finance issued a tender offer after having substantially increased its shareholding in Cofidur, but only reached about 52% of the capital ownership. The CEO of Cofidur is Henri Tranduc, and he is also a president of EMS Finance.

Trend

The company saw falling revenues following the financial crisis. Even though the company hasn’t been able to reach the pre-crisis revenue levels, the revenue numbers have been fairly stable during the last several years:

The activity ratios also look stable: Even though Cofidur is clearly not a growth company, the trend is not as weak as the valuation would suggest. The company has in its annual reports stated the increased relocation of electronic production from France as a major business risk for several years, but this is not visible in the revenue numbers.

Conclusion

Cofidur is active in a low-margin industry in a country known for not being particularly business friendly. Despite these facts, the company has a strong profitability record, and has generated substantial free cash flows during the last ten years. At a net-net valuation, I view the down-side as limited enough to warrant an investment.

Disclosure: I am/we are long ALCOF.