Conrad Industries – OTC:CNRD

It might be time to take another look at Conrad Industries. This Louisiana shipbuilder has suffered through a string of bad years. Is there a recovery taking hold? Well….no. Thus far, 2019 looks just like 2018 and the company’s backlog has yet to show signs of a meaningful increase. But with its shares down 75%+ over the last five years, Conrad now trades below net working capital and at less than half of tangible book value. The company holds net cash equal to 40% of its market capitalization and is currently operating at just over break-even on a cash flow basis.

Conrad is one of a small number of US shipyards still in business. Conrad has operated on the Gulf Coast for several decades, building, repairing, and converting all manner of vessels in operation in US waters. The shipbuilding industry is very deeply cyclical and Conrad has always had its ups and downs. The most recent cycle peaked for Conrad in 2014. The company benefited from a wave of fleet renewals as vessels built in the 1980s reached the end of their lives and from strong demand by energy companies riding high oil prices. In the five years from 2010 through 2014, the company earned profits of more than twice its current market capitalization. In other words, when times are good they are very good. Then again, when lean times come Conrad can go years without generating a profit.

The company is well-aware of the nature of its industry and has stewarded shareholder capital well. During the high times, the company paid several special dividends and bought back quite a lot of stock. (However, the company showed discipline in avoiding repurchasing stock when shares were at record highs.) Management continued to invest in the business, including purchasing a neighboring parcel of land to expand operations, but avoided making major capital commitments just before the industry downtown set in. Conrad’s cautious approach and its strong cash position have allowed the company to weather the down years with relative ease.

Conrad has dealt with the downturn by attempting to pick up more repair work and by trying to break into the liquid natural gas bunkering barge industry. Repair work keep the company busy, but it carries low margins compared to building new ships. On the plus side, steady repair work at least keeps Conrad’s skilled labor force busy, well-trained, and ready for whenever demand picks up. Demand for liquid natural gas bunkering barges has been slow to develop, but the company is hopeful that demand will increase as more vessels are converted to burn natural gas instead of more polluting fuels.

A promotional video from Conrad on its LNG bunkering barge.

As I sit at my desk in Pittsburgh, I am in no kind of position to predict where we are in the shipbuilding cycle for Gulf operations. Perhaps the next round of newbuild orders is about to arrive. Probably not given the state of the energy industry, but ships don’t last forever. I do think that at the current price around $10, shares of Conrad are fully backed by net working capital, plus another $11.50 per share in tangible book value comprised of property and equipment. Unless Conrad’s current doldrums continue for a decade or longer, it appears difficult to suffer meaningful impairment at the current valuation.

Alluvial Capital Management, LLC does not hold shares of Conrad Industries. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. 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.

Alluvial Capital Management, LLC manages a value investing partnership, Alluvial Fund, LP. If you are a qualified investor and would like more information, please contact us at info@alluvialcapital.com or visit alluvial.capital.

Robertet Groupe – Euronext RBT, CBE

Robertet Groupe is a producer of high quality botanical ingredients headquartered in Grasse, France. Situated on the French Riviera, Grasse is known as the world capital of perfume, both for the raw ingredients it produces and the many perfumers working or trained there. In 2018, over 3,500 perfume industry workers harvested 27 tons of jasmine flowers, as well as dozens of tons of myrtle, lavender, roses, and other fragrant blooms. In 1850, François Chauvé and Jean-Baptiste Maubert built a factory in Grasse. In 1875, Paul Robertet bought the company, retaining Maubert, and hired some French guy named Gustave Eiffel to draft up a new, modern factory. 170 years later, Robertet remains controlled and managed by descendents of Jean-Baptiste Maubert. While headquartered in Grasse, the company has operations and production facilities around the world.

Robertet’s largest end market is natural materials for the perfume industry. Essences, oils, aromatics, etc. The use of natural products in perfumes has declined over time in the face of synthetic alternatives, which tend to be cheaper, easier to use, and in some cases more environmentally sustainable. But many luxury perfume producers continue to use naturally-sourced scents and essences, believing their customers prefer it. After all, much of the appeal of luxury products is in the impressions they evoke. Who doesn’t prefer the romantic thought of jasmine flowers swaying in a Mediterranean breeze in France to the idea of lab-coated scientists with test tubes and autoclaves in some dumpy factory by the interstate?

Robertet’s second-largest end market is food ingredients and flavorings. Both perfume components and flavorings have been excellent markets for most of the last century, and Robertet’s success shows it. From its humble beginnings 170 years ago, the company’s sales now exceed Eur 500 million annually and its market capitalization exceeds Eur 2 billon. Europe accounts for 36% of Robertet’s revenues followed by North America at 33% and Asia at 19%. Net margins sit at 10%. The company avoids debt. Long-term organic revenue growth can be reasonably expected to grow at a mid-single digit rate.

Now to valuation. Robertet is not exactly your prototypical “value” stock like most others that pop up on this blog. Robertet benefits strongly from its stellar operating history and the perceived quality and rarity of its assets. At a recent price of Eur 877, Robertet shares change hands at roughly 23x trailing EBITDA. Shares are up 72% in the last year. Pricy! Then again, flavorings and fragrances companies tend to enjoy high valuations based on their strong long-term growth outlooks, the competitive structure of the industry, and the recession-resistant business models they enjoy. Robertet’s closest comparable in public markets is Givaudan. This Swiss giant trades at 25x EBITDA. International Flavors & Fragrances trades at 17x, but manufactures more commoditized products in more cyclical end markets.

At least one major investor believes Robertet deserves its premium valuation. In September, private Swiss flavors and fragrances giant Firmenich took a major stake in Robertet, buying a 17% holding from long-time investor First Eagle Investment Management. Firmenich paid €683.30 per share and indicated a willingness to purchase more shares from the Maubert family or take over the company outright. It’s difficult to overstate Firmenich’s industry credentials. The company does nearly $4 billion in annual revenue and dedicates an incredible 10% of revenues to research and development, with 3,700+ active patents to show for it. If Firmenich likes Robertet’s assets, it means they are the real deal.

The market obviously believes such a combination is likely to happen and has bid shares of Robertet up 28% over Firmenich’s purchase price. In my view, the current valuation prices Robertet for perfection. I would not be rushing to buy based on idea that Firmenich would happily bid 40% or more over its initial purchase price for the the remainder of Robertet. After all, Firmenich can afford to be patient. The company can easily wait for investors to cool a bit on Robertet and come in with a much more reasonable bid in a year or two. What’s another couple years to a family firm in business since 1895?

Fortunately for anyone interested in Robertet, there is a way to gain economic exposure and avoid much of the massive premium investors have attached as they anticipate a buyout offer. In addition to its ordinary shares, Robertet has a small number of investment certificates outstanding under the ticker CBE on the Euronext. These certificates carry identical economic rights, but hold no voting power. Naturally the prices of these certificates have risen with Robertet shares, but they do trade at a 16% discount to the ordinary shares. The investment certificates are very illiquid, but they offer a substantially cheaper point of entry for investors.

While I am fundamentally bullish on the flavors and fragrances industry and Robertet in particular, I think it is worth waiting for some of the present excitement to fade before considering an investment in Robertet. I do believe traditional “value investors” systemically underestimate the intrinsic values of premier companies with unique or irreplaceable assets, but there is a point at which a company’s valuation cannot be justified by any reasonable estimate of future cash flows. Still, investors looking for exposure to high quality, globally diversified companies with wide economic moats should add Robertet to their watchlists.

Alluvial Capital Management, LLC does not hold shares of Robertet Groupe. Alluvial Capital Management, LLC may hold any securities mentioned on this blog and may buy or sell these securities at any time. 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.

Alluvial Capital Management, LLC manages a value investing partnership, Alluvial Fund, LP. If you are a qualified investor and would like more information, please contact us at info@alluvialcapital.com or visit alluvial.capital.