A Trio of French Bargains

Six years into a bull market in nearly all productive assets, “traditional” value stocks are a rare breed. By traditional, I mean obvious opportunities like profitable businesses with solid balance sheets trading at very low multiples of earnings and cash flows. Most of the value opportunities still out there require some real digging to discover. However, there is one market where I still routinely find perfectly good companies trading at 4-7 times earnings: France. I am not exactly sure why so many small French companies trade at these tiny multiples. It does seem that continental investors are loathe to invest beyond large, well-known companies, and the liquidity of many French micro-caps is extremely limited. The resulting neglect may be responsible for the plethora of value opportunities. Today I’d like to present brief profiles of three of these companies.

Docks Petroles D’Ambes: DPAM

“Docks” has operated a storage terminal at the port of Bordeaux on the west coast of France since 1934. The location and function of the terminal have long been considered strategic; the RAF bombed the facility in 1944 to hamper the Nazi supply chain.

Actual mission photo. Bombers from the RAF’s No. 514 Squadron attack the oil storage depot at Bec d’Ambes on August 4, 1944.

The business model is as simple as it sounds. The company collects fees for storing hydrocarbons, plus grain and wood products. Docks links refineries with consumers in the region. Docks also owns a petroleum pipeline. Results do vary somewhat as storage volumes change, but the company is consistently profitable and carries only modest debt. Docks generates a solid return on capital, but unfortunately its opportunities for reinvestment are quite limited. More than half of Docks’ shares outstanding are owned by a larger petroleum storage company, Entrepots Petroliers Regionaux. Another 30% are owned by various refiners and pipeline companies, leaving only 12% of the shares in the public float.

Docks has a market capitalization of Eur 23 million. At a share price of Eur 235, Docks’ P/E is 7.0 and its dividend yield is 6.4%. The high dividend yield is actually a drawback for many foreign investors, because France withholds dividend payments at a 30% rate. It is unlikely that Docks Petroles d’Ambes will experience any significant earnings growth, but it could be an attractive holding for those looking for a low-risk income stream.

Installux SA: STAL

Installux manufactures metal building components. Working mostly in aluminum, the company produces pieces for use in windows, doors, awnings and many other structural elements. Installux’s results depend on the level of construction activity, and on the prices of its aluminum and steel inputs. 50% of the company’s shares are owned by CEO Christian Canty, with another 15% owned by the respected French value investing firm Amiral Gestion.

Installux is not a fast growing company, but it has managed to increase revenues and profits at a modest pace. Nearly all of the company’s revenues are earned in France. Installux’s balance sheet is strongly over-capitalized, to the point where 27% of assets are cash and the current ratio is 3.5.

Installux’s market capitalization is Eur 74 million. The P/E ratio is 9.0. But, the company carries over Eur 20 million in excess cash. Net of that cash, the company’s P/E is just 6.0. Installux shares last changed hands at Eur 244, and the company has a dividend yield of 3.3%. While Installux’s core business is profitable, stable, and efficient, future returns will be strongly influenced by the company’s use of its huge cash reserves.

Graines Voltz SA: GRVO

Graines Voltz is a grower and distributor of seeds, mainly bulk ornamental flower seeds, but also some fruit and vegetable seeds. The company sells its seeds in continental Europe, plus the Middle East and Asia. The company offers hundreds of different varieties, many suitable for mass planting in public parks and landscaping.

As an agricultural business, Graines Voltz experiences large swings in its margins. Unpredictable factors like weather, pests and disease will always influence results. But the company has managed to increase its revenues at a respectable pace, from Eur 46.4 million in 2009 to Eur 73.1 million in 2014, a growth rate of 9.5%. Earnings per share reached a record Eur 4.22 for the twelve months ended March 31, 2015, up dramatically from Eur 0.95 per share in 2009.

The company’s striking success makes its valuation that much more of a shock. At a share price of Eur 16.40 and a market capitalization of Eur 22.5 million, Grain Voltz’s P/E is just 3.9. Its price to book value ratio is 0.8. The company does carry debt, but the majority is low-cost seasonal borrowing used to finance inventory. 2014 EBIT was over six times interest expense in 2014, and greater for the trailing twelve months. Return on equity has exceeded 15% each year since 2010.

It’s possible that Graines Voltz’s results are unsustainable, the result of temporarily decreased competition or unusually benign growing conditions. But I suspect the actual causes of Graines Voltz’s extraordinarily low valuation are its tiny float and practically non-existent liquidity. As of 2013, 10% of the company’s shares are owned by American grower Ball Horticultural, another 10% for European grower Florensis, and 64% by Voltz family members and company employees. In all, only 16% of Grain Voltz shares with a market value of Eur 3.6 million are freely-floating. Average trading volume rarely exceeds a few hundred shares per day, making accumulating a worthwhile position a difficult feat.

While I view each of these companies as distinctly undervalued, please be aware that my French is rudimentary and I made heavy use of translation services in evaluating their financial statements and press releases. It is entirely possible that I have missed some important bit of information that is material to the value of these companies. As always, please do your own in-depth research if you are considering purchasing any of these stocks.

Alluvial Capital Management, LLC does not hold shares of Docks Petroles d’Ambes, Installux SA, or Graines Voltz for client accounts or those of principals. Alluvial may buy or sell shares of Docks Petroles d’Ambes, Installux SA, or Graines Voltz  at any time. 

OTCAdventures.com is an Alluvial Capital Management, LLC publication. For information on Alluvial’s managed accounts, please see alluvialcapital.com.

Alluvial Capital Management, LLC may buy or sell securities mentioned on this blog for client accounts or for the accounts of principals. For a full accounting of Alluvial’s and Alluvial personnel’s holdings in any securities mentioned, contact Alluvial Capital Management, LLC at info@alluvialcapital.com.

 

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7 Responses to A Trio of French Bargains

  1. About DPAM: in Ambès in 2007 there was an oil spill when a crude oil tank failed. There is an ongoing legal case about this. The latest update about this is on page 4 of the H1 2015 report. I think you really need to know and understand all the legal details here and the language barrier prevents that for me.

    I really like Installux and have owned it for a few years.

    • otcadventures says:

      Yep, that’s exactly the kind of thing that really keeps me from pouring money into these sorts of stocks. I just know there are factors out there I haven’t accounted for. If I eventually did decide to purchase these statistically cheap French stocks, I would take a basket approach.

  2. Did a little bit of work on Graines Voltz, but doesn’t look that cheap to me. Net debt is ~E40 million and as a result it is currently trading at an EV/EBIT ratio of 8x. At the end of the fiscal year net debt was lower at ~E23 million, so perhaps using the number from the latest interim report is too unflattering since it will probably revert back. But no matter what, it is still a large amount of debt compared to the market cap and I think we should still use a metric that incorporates leverage in the valuation.

    PS. The revenue numbers you quote are the unconsolidated figures.

    • otcadventures says:

      Yep, the company’s leverage is high. But like I said, most of it is seasonal inventory financing. It will definitely revert in the next financial filing, which will be for the period ended 9/30/2015. This pattern is consistent from year to year. I don’t think it’s fair to use peak debt levels to compute enterprise value, just as it wouldn’t be fair to a domestic retailer to assume Q3 inventory levels are indicative of working capital intensity. Rather, I’d average the use of debt throughout the year. Using that approach, the enterprise value would be 54 million and the EV/EBIT would be 6.9. That’s a reasonably good value for a growing company. I would actually argue for a normalized free cash flow yield approach to valuation. Assuming a cost of debt of 3%, normal taxation of 33.33%, and capex equal to depreciation, the free cash flow yield would be just over 20%.

      And yes, there are issues with revenue comparability between years because the company has purchased interests in so many subsidiaries in recent years.

    • otcadventures says:

      On another note, I would argue against comparing net debt to market cap. Graines Voltz’s market cap could double or triple and the debt/market cap figure would look a lot better, but the company’s financial risk would be unchanged. Instead I’d compare interest expense or average annual net debt against unleveraged cash flows. That gives a much clearer picture of financial health, and I think Graines Voltz looks acceptable from that perspective.

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