mercredi 24 février 2016

Credit Agricole Regional Banks

May 07 update
The AMF has decided (April 06) that a tender offer is not mandatory and made an answer to CCI holders : link (in French, no official translation available).

Some points of interest (rough/simplified translation from legal French, difficult for me):
- the principle of equality between shareholders is a structuring principle but not an absolute law, especially for CCI which are not shares but titles without voting rights
- the AMF judges that the operation will not adversely impact the liquidity or the dividends of the CCI, the regional banks stated that their results would be better in 2019 and the dividend distribution rate would not be reduced

Independent experts (Cabinet Ledouble, Duff&Phelps, Accuracy) have estimated that the transaction is fair. Strangely enough their reports are not available on the AMF website, which is usually the case.

In the last paragraph, the AMF makes an allusion to the next move made by Colette Neuville from the ADAM: sue the regional banks (see article here, in French).
Apparently the angle of attack is : CCI holders are entitled for a share of the net assets upon liquidation of the company, CCI are emitted for the lifetime of the company, and the lifetime of the company is unlimited. Basically the argument is that such an unlimited contract is illegal.

The ADAM will 1st make a formal request to the banks to buy out CCI shareholders who request it, then sue each regional bank if necessary.
The ADAM offers to small individual investors to do it for them, in exchange of a small fee to cover expenses.
I'm not competent to judge the chance of success but it's a situation with little to lose and a 3 bagger in case of success.

March 29 update

Latest news from ADAM argumentation: see article here (in French). Besides they encourage individual shareholders to directly contact the AMF which I've done.


If you screen the French stock exchange, you've probably stumbled on the Caisses Regionales du Credit Agricole. There's about a dozen of them (tickers : CRAP (!), CCN, CRTO, CNF, CAF, and so on...).
They trade at ridiculously low P/B and low P/E ratios.
I've owned some shares for several years now.

They're currently under the spotlight because Credit Agricole intends to "simplify" its structure ; however this simplification is also the occasion to shaft minority shareholders, as I'll try to explain.
I don't know what can be done about it, but I'll try to summarize current local events for non French-speaking investors.

For a general introduction to these banks and the investment thesis, see this article (page 54) by Paul Issac of Arbiter Partners in the spring 2013 edition of the Graham and Doddsville newsletter. I'll rely heavily on this article. It'll save me time and be clearer than my own dubious english.

Relationship between Credit Agricole Regional banks and Credit Agricole SA
Current structure:

From the Graham and Doddsville article:
The regional banks collectively own all of a holding company called Rue La Boétie, which owns 56% of the listed Crédit Agricole vehicle, which in turn controls their foreign holdings, the insurance
companies, the asset management division, and about 25% of each of the regional banks.

added personal note : Crédit Agricole vehicle, which also gets involved in all kinds of things big banks do, like investing in Greece at the worst possible moment (6 bn€), fooling around with derivatives (anybody remember Jérôme Kerviel ?) ... while the regional banks main activity is local lending, not very exciting but much safer I guess.

Capital structure of these Regional Banks
From the Graham and Doddsville article:
The regional banks needed capital in the 1990s, so they issued a class of share which is effectively a non-voting economic share that, for dividends and earnings purposes, ranks pari passu with the 25%
holding in each of the regional banks owned by the corporate and investment bank. 

Their  capital is composed of 3 classes of "shares" :
- CCA These are the shares owned by CASA in each regional bank. Generally the CCA represent 25% the a regional bank capital. These shares are not listed.
- CCI These are the listed shares you can buy on Euronext (see tickers above). Most are illiquid, but not an issue for an individual investor. These are non voting shares.
- PS or Parts Sociales. These are the only voting shares issued by each bank. They are owned by the local banks but also by the clients. They have a fixed nominal value, and get an interest each year.

Parts Sociales are a strange mix between a bond and a stock. But it's clearly not debt.
The annual report says : "Conformément aux dispositions de l’IFRIC 2, la qualité de capital est reconnue aux parts sociales des coopératives dans la mesure où l’entité dispose d’un droit inconditionnel de refuser le  remboursement des parts"
which I translate as :
"according to some obscure for me accounting standard, the PS are part of the bank capital, because the bank can unconditionally refuse to reimburse them".
Well, it doesn't make much sense to me, but that's it.

For instance here's the capital structure for CRAP (Alpes Provence regional bank)

CCA = 25 % of capital, CCI ~ 10 % of capital, the rest is PS.

Investment thesis
From the Graham and Doddsville article:
These entities are trading at five or six times earnings.
They're paying dividends of five to seven percent. Most  of them have buyback programs. There have been buybacks of whole share classes of these entities.
When they've occurred they've been at significant premiums to what these are currently trading for

Some details
2 Regional Banks (Aquitaine and Centre Loire) bought out their CCI shares in 2009.
The offer was about ~75 % of book value.
The details of the operation can be found on the AMF (French SEC) website.

Current reorganisation project
From the Graham and Doddsville article:
My hope is that these things are not entirely rational for an essentially mutual institution to have
outstanding indefinitely, and we may get some buybacks of whole issues.

Well some 3 years after his article, we do get some movement:

Translation :
Crédit Agricole SA sells its stake  in the regional banks to the regional banks at 1.05x book value
the regional banks will NOT make the same offer to minority investors. It is an "internal transfer operation" only !

Reaction from minority investors

Obviously minority investors (including me) are not pleased at all (article from Les Echos here, Investir journal here), in French only.
Some well-known local value funds are stressing the inequality in the treatment of shareholders (not exactly shares, because CCI are non-voting shares): Amiral Gestion, HMG Finance, Moneta Asset Management, Financière Tiepolo, but also our friend Arbiter Partners, Invesco and some others.
They have contacted Collette Neuville, a well known advocate of minority investors (association for the defence of minority investors, ADAM).
I've done likewise, I don't have the legal backround to argue my case and I suspect that the legal status of CCI shares is probably very special.

Let's see how this plays out.

dimanche 3 janvier 2016

2015 review

Best wishes to all.

My portfolio is up 15% vs 11% in 2014 and 35 % in 2013 (internal rate of return, including dividends and broker fees).
Although 15% looks good, it's not brilliant compared to my benchmarks:
- the mid&small caps index (MS190) is up ~17 %
- my favorite investment funds with the same universe (value, small caps)
- Amiral Gestion Sextant PEA up ~22 %
- HMG Decouvertes up ~28 %
- Moneta micro entreprises up ~27 %
- Independance et expansion up ~36%

I draw no conclusions from this year underperformance, given the noise/randomness component that affects these results.
My biggest positions end 2015 :
Tessi (blog article here), Precia, Installux (value and opportunity article here), Gevelot (blog article), Gérard Perrier (value and opportunity article)

Tops: SII (see my 2014 article), up 70% this year. FFP had a good year also, following the recovery of Peugeot.
Flops : ITS Groupe (ITS), down 15%, company in the same sector as SII. I'll make an article on it because I've not given up yet on this idea.

Generally speaking, I find relatively few investment opportunities at the moment.
I'm thinking about opening an account at an international broker (Interactive Brokers ? any feedback ?) to widen my investment horizon at a reasonable cost but the amount of taxes paperwork required by the French administration for an international account makes me hesitate.

mercredi 2 septembre 2015

CNIM (ticker: COM): too good to be true ?

CNIM has released yestersday its HY2015 results (in French only, for the moment, but CNIM has an english version of its website).

HY results are good and valuation is rather attractive on the basis of trailing earnings (EV/2014 EBIT ~ 4).
Stock is up 5% in 2 days, notwithstanding Monday declining overall market.
However I'm not convinced that the valuation is so attractive, considering the outlook, and would prefer a larger margin of safety.

CNIM is an industrial company operating in 3 sectors:
- environment: mainly construction of waste to energy plants (WTE), operation of WTE plants, some moves towards solar energy (thermal conversion, not photovoltaic)
- "systems": defense (missile launch, sea landing,..), nuclear components, engineering (Bertin subsidiary)
- energy: industrial boilers (maintenance,..)
~ 2800 employees, 2014 sales ~ 800 m€. Market cap ~ 220 m€

A good overall presentation of CNIM has been made here (Value uncovered 2012 post, in English)
See also fininfohub 2014 post on the annual results analyst presentation (in English)

The stock currently trades at a low valuation (76€ when article was written, EV/2014 EBIT ~ 4, ~7% dividend yield) and shows a good historic record of profitability. Strong balance sheet (excess cash 46 m€).
FCF varies a lot because of the changes in working capital requirements linked to the construction contracts payment terms.

Why is it cheap ? Is it a real undervaluation ? Link to value and opportunity recent post on the exact same topic : "Cheap for a reason".

Several possible answers :
1. Forgotten sector/company, etc...
CNIM is not followed by any analyst , as far as I know.
However, liquidity is reasonnable. CNIM is not a "micro-cap" at least on French market standards, and I think that some small cap/value funds are certainly well aware of CNIM.

2. Bad outlook
"Systems" activity suffers from governement budget cuts. Among other things, CNIM makes landing barges for Mistral-class military ships. I'm not sure if the cancellation of the Russian purchase has not affected indirectly CNIM.
Business journal "Les Echos" made this summer an article (in French) on technical unemployment for 510 people (2/3 of the total) in some CNIM plants (mainly in the "systems" division)  due to reduced activity. Translation of the title: "CNIM group suffers from an unprecedented reduced backlog in defense and environment".

Sales and backlog (data from annual reports) illustrate this:

What bothers me is the environment sector, the only one making serious money currently.
I've made some (not enough) research on the WTE market.
Some articles of interest :
An article from Johannes Martin of Martin GmbH which supplies key components (moving grates on which the waste is burned) and a long-time (50 years) industrial partner of CNIM. We'll get back to Herr Martin later.
Summary: saturated market. British market was strong recently.

Another article from "Waste management world"
Explains that EU law on landfills (higher standard for landfill sites) is the driving force behind the construction of WTE plants. Overcapacity in Germany and Northern Europe (some countries import waste to be burned!), dynamic UK market, some distant prospects in South/Eastern Europe. Some perspectives on modernization of old units.
I've noted that recent CNIM contracts for WTE plants are in the UK so it is consistent with this article.
The article also states that southern Europe (including France) "have not yet involved into major markets for WTE" but this is inconsistent (at least for France) with this 2012 map of european WTE plants.

This presentation from J. Martin is also intersesting and gives a worldwide perspective (warning: 8 Mo pdf file).

Scuttlebutt: I currently live not far from Marseilles. The implantation of a much-needed waste incinerator has been met with a fierce opposition from local associations and associated legal battles (NIMBY syndrome). In the above article of "Les Echos", it is also noted that CNIM had been awarded the contract for the modernization of a 40 year-old WTE plant in France, but the contract has been suspended after locals have opposed it.

So to sum it up my interpretation is that the recent good results for CNIM are mainly linked to the UK WTE market, and that it is not reasonnable to extrapolate these recent results.

3. 2014 Buyout
In 2014 CNIM made a tender offer :
- 30 € special dividend
- 75 € tender offer (after the special dividend)
Some major shareholders sold their share, including Martin GmbH (10% of capital) and CNN, a shipowner company (20%) previously associated with CNIM.
So CNIM is now fully controlled by the Dmitirieff family.
I've found no explanation why Martin GmbH or CNN sold their shares. So I must conclude that the price offered was judged fair by these sophisticated investors, and the current price offers no discount.

The tender offer documentation is available here (in French).
I found the following information interesting in the independant auditor report:
- according to the business plan, for the environnemnt division, weaker sales are expected (end of UK orders), with a rebound later (hypothesis of sales in the middle-east), EBITDA margin higher in 2014, lower in 2015 and 2016
- innovation and systems division: better margins are expected, tax rebates (CIR) for R&D expenses is a key point for this division (but will this tax rebate be maintained ?)
- "fair value" (DCF, comparables) : around 125 € (before 30 € special dividend), so around 95€. This figure means little by itself, but I guess it offers some kind of "protection" against a lowball buyout.

Recent information
CNIM has released its HY 2015 figures yesterday.
Backlog is somewhat better compared to end 2014.
Sales are down compared to HY 2014 but operational margin is suprisingly good (8%).
CNIM offers no guidance, other than "orders will be in progress in 2015".
CNIM stock went up ~5% as a result.

Putting it all together
What kind of earnings can we expect.
CNIM is not selling coke bottles or candies, but is mainly a contract-based business so predicting future activity is fraught with uncertainty, and as we've seen the outlook is not so rosy.

Based on baklog orders and HY figures, I think it is reasonnable to expect around 720-730 m€ sales.
I'll use a relatively conservative hypothesis of 5% operational margin instead of the 8% operational margin of the 1st HY 2015 which I don't really understand (the full HY report is not yet available).

I get a "normalized" EBIT of around 37 m€, and a EV/EBIT~ 6 (EV taking into account net cash 46 m€ from the 2015 HY report and 27 m€ retirement liabilities, no correction for negative working capital*).

Not expensive, but not dirt cheap either.
I'll wait for a bigger margin of Safety (if it comes !) before adding to my existing position. Anyway I hate chasing stocks when they go up and prefer to buy on dips.

Disclosure: long CNIM

*One point that bothered me is that CNIM benefits from pre-payments from the client on its contracts and shows a significant negative working capital (for instance almost ~100 m€ negative working capital in 2012). I was unsure about how to account for this excess cash in the EV calculation . However this negative working capital is only 7 m€ in 2014, so I neglect it.

mardi 26 mai 2015

Gevelot (ALGEV)

- Gevelot (ALGEV) makes auto parts and pumps
-  illiquid stock, trades 1 time/day (fixing) 
-  97 m€ net cash on the balance sheet vs 131 m€ market cap (at 145 €/share). EV/2014 EBIT~5
- Management shows no sign of  returning this excess cash to shareholders, a situation quite similar to GEA ; cash will be used for investment
- low valuation but the easy money has been made ?

1) The company
The company has 2 main activities :
- parts manufacturer for the automotive industry (Gevelot extrusion and Dold GmbH)
- pumps for industry, oil/gas, food processing (PCM pumps)

They have posted several videos on youtube about the production sites (plants in France and Germany). So it's industry, presses, cold forming, heat treatment, machining and lots of CAPEX.

Pumps (PCM)
Apparently their technological specialty is PCP pumps, used for instance in oil and gas. PCM was founded in the 1930's by the inventor of PCP pumps.

Carburators (Gurtner)
Division sold at a loss in 2014.

2) Why is it cheap ?
Gevelot owned a 45% stake in Kudu, a canadian pump supplier using this same PCP technology.
Gevelot bought the remaining 55 % from its main shareholder, and sold it right back in 2013 to Schlumberger. Kudu (45%) was valued at 10 m€ in 2012 Gevelot books and Kudu (100 %) was sold for 168 m€ to Schlumberger. Nate at oddball stocks made an article about it in 2014.

3) Where will the cash go ?
Not in the minority shareholders pocket for sure. No special dividend, no announcement for a major buyback program. There's not even an increase in the usual dividend. The company has a modest share buyback program running though.
The last annual report gives an indication about how the cash has/will be used :
- sale of Gurtner division (at a loss), which seems a good move to me (loss making division, not a great outlook on carburators...)
- investment (CAPEX) in Extrusion (13 m€), I'm not sure the return on this invested capital will be great given the historic profitability of this branch (see below)
- acquisition of AMIK Oilfield Equipement and Rentals (Canada). I'm not sure it's the best timing given the evolution in oil/gas prices but I'm not an expert and I don't know if the price paid is right.

The capital is entirely controlled by the family.
A notable shareholder is the fund "Stock picking France", with a deep-value style.
Another fund present at the capital is William Higgon's Independance et Expansion fund, that I've mentioned in some previous article.
However these funds  have bought a long time ago and at a much lower price (years ago for the 1st one).

4) Financials
CA (Chiffre d'Affaires) = Sales
ROP/CA = EBIT margin

Breakdown between Extrusion and Pumps sectors
ROC = current operational result. MOP = current operational margin. Invest= investment
All figures (sales, results) are excluding intra-company transactions (more on that below).

The extrusion division is certainly not a "great" business: no competitive advantage, cyclical, heavy CAPEX, about 4-5% average (median value in the above table to be precise) operational margins. The outlook for the car industry seems recently better than the very difficult post 2008 years though.

The pump division has better margins (~10 %), less CAPEX requirements, but I've been unable to find the contribution of the oil/gas sector. Given the recent slump in oil prices, I wonder how to normalize earnings to account for the oil investment cycle.

5) Valuation
I've tried a sum of parts valuation, but one point that beats me is intra-company transactions (see table below). Just adding the estimated value of the extrusion and pumps branches without taking into accoung this internal transactions (-3 m€ in 2014) would lead to an overvaluation.

To get some idea, here's a very simplified  DCF calculation, with conservative assumptions (no growth, average 4% margin, 12% cost of capital).

6) Conclusion
So yes Gevelot is cheap, but operates in a difficult business with no competitive advantage.
The lack of liquidity, and indifference to minority shareholders probably explains some part of the discount.
In any case it will take patience to see if the excess cash is used wisely and will produce results. Given the recent historical performance I doubt the return on this capital will equal its cost for a company like Gevelot.
Link to a very recent relevant article (Investing in bad businesses Damodaran).

Disclosure : long ALGEV

mardi 27 janvier 2015

GEA 2014 results (short article)

GEA presented today its 2014 annual results.
Sorry for the telegraphic style.
See Fininfohub article here (analyst presentation in English, with lots of interesting information from management).

Compared to my HY2014 worst-case scenario (9 to 10 m€ op result), the 2014 results (EBIT = 12 m€, net result 8 m€) are better than I expected.

GEA apparently cut its costs (outside purchases, interim jobs) quickly, without reducing its permanent workforce.
Backlog seems stabilized, good news.

Dividend cut (constant 33% distribution ratio), rather stingy given the huge cash position.

Tecsidel deal is not finalized. No info on the purchase price.
Net cash is down 57 m€ 2014 vs 60 m€ end 2013, compared to 8 m€ net profit. Why is net cash down ? Some increase of working capital requirement ? Strange because I would expect working capital to decrease when sales are down. Or maybe some investment that's not mentioned in the news release.

Stock closed down 8% today @ 77 €, which surprises me.
Let's assume that GEA pays 1x sales for Tecsidel (about 14 m€ ?)
EV = 92 (market cap) - 57 (cash) +14 (tecsidel ?) = 49 m€
EV/2014 EBIT = 4

Anyway today's drop leaves me rather cold, because I halved my position this summer/fall after :
- Amiral Gestion announced (this summer I think) that they had sold their position at a loss because they had underestimated the decrease in the toll equipment market in France
- Kapsch relased earlier a rather bleak outlook "no invitations to tender...are in the near vicinity" "strategic adjustments to changed market conditions"
- liquidity was super low
- I was getting scared and unable to remain rational because the position was too big in my portfolio.

I'm prepared to start buying again if price drops to silly levels.

lundi 12 janvier 2015

2014 review

Given how this new year has started in France, I guess it can only get better. Best wishes to everybody anyway.
I will refrain from making comments on the recent events, as this is an investing blog.

My portfolio is up 11% in 2014 vs 35 % in 2013.
I have no real benchmark, but I invest primarily in French small caps, so it makes sense to compare with the following benchmarks :
- the mid&small caps index (MS190) is up 8.4%
- investment funds with the same universe (value, small caps)
- Amiral Gestion Sextant PEA up ~12-13 %
- HMG Decouvertes up ~12 %
- Moneta micro entreprises up ~8 %
- Independance et expansion up ~16%
So my performance is more or less in line, but certainly not spectacular.

I do track my operations/porfolio on Excel but one issue I have is that I'm not able to quantify which positions/decisions have contributed the most to a given year performance (if I understand correctly this is called performance attribution).
I think the most positive contributions went from my biggest existing lines (Precia and Installux), but certainly not from the stocks I talked about in 2014, namely GEA and SII. I'll do an update on those later.

The place to be in 2014 for French small caps was biotech (Cellectis +430 %, Genfit +322 %, Adocia +709 %, Innate Pharma +60 %, DBV Technologies +305%...), way outside my (admittedly narrow) circle of competence anyway.
On the other side, some companies in the oil service sector (Technip, CGG, Vallourec,...) have been trashed. I have the feeling that all this is a little silly and temporary, but will not venture further.

I've spent most of the year with a quite important cash position ~20%, because of insufficient opportunities. A short window opened mid oct when the market went down but I still have a large cash position.

The creation of the PEA-PME seems to be rather unsuccessful, which is fine for me (less money inflow, so less competition).

I'm heavily invested in French stocks for good reasons (tax deferred account, less broker fees, probably much less domestic/foreign competition than, say, the US market, less efficient market) and bad (domestic bias, lack of time,...) reasons.
One of my new year resolutions is to diversify more, which means investing in an area relatively decoupled from the Eurozone. 

mardi 28 octobre 2014

IT and engineering consulting services companies AKA, SII

1) Intro
The blog as remained silent for a few months, reflecting what I viewed as a relative lack of opportunities.
However small/mid caps have gone down recently.

I want to make an article on IT service companies (acronym: SSII in French).
As usual, I suppose that many readers will think that the article is too long.
However I'm not in a position where I need to pitch my ideas to a time-pressed fund manager.
I'm just running down my checklist.

See wikipedia article on SSII here (in French).

I'll focus this article on SII (SII: the company, not to be confused with SSII), because I have the impression that it's currently one of the cheapest (EV/2014 EBIT~6 for a quote of 7 €, well actually less since I started writing this article, it's now around EV/2014 EBIT ~5)
Is it a real opportunity or a value trap ?

2) Business model
Nate from Oddball stocks has nicely summarized it in a previous article:
"Technical consulting is a very straight-forward business model. A consulting company places a consultant at a client and bills them out at an hourly rate. The consulting company takes a large cut and pays the remainder to the consultant. As long as a consultant is billing a client both the employee and consulting company are earning money. If a client cancels a contract often a consulting company will let the employee go saving the ongoing expense."

Also the Value and Opportunity blog published a few months ago an interesting article on AKKA (AKA), a direct competitor of SII.
These companies are asset-light, so a potentially interesting return on capital.
They directly benefit from the heavy regulations on the French labor market ; it's long to fire someone, so client companies don't hire and prefer to outsource to these service companies, especially for relatively quick changing technologies such as IT.

On the other hand, they are directly exposed to business cycles; the client company can and will quickly cut the contract, especially new projects or if the service company provides a "commodity"-type service, as pointed out on the Value and Opp blog.

I don't work in this sector, so to get an idea I've spent some time exploring French blogs of people working for such companies (not specifically SII) to get an idea. Of course the more vocal are the displeased ones (a common derogatory nickname is 'meat sellers'), so all this needs to be taken with a grain of salt.

Common complaints:

- hiring mainly young engineers, they indirectly benefit form a relatively bad job market for some young graduates (translation: low pay, around 30-35 k€ starting salary)

- no investment (training) in their consultants. Turnover is high. No capitalization of knowledge or know-how
- consultant is left to himself (no or low follow-up) when working at the client site 
- when a consultant has no contract, company loses money. So the temptation is high to push this consultant on an available project even if he's not really qualified. Some reports of companies reverting to dirty tricks to pressure consultants to resign to avoid the costs of firing (i.e. repeated missions far from home or much under qualification, pressure to take unpaid vacations between contracts,...).

On the other hand these companies hire a lot, and can offer a variety of professional experiences in different sectors to a young graduate.

Competition and comparables
SII lists itself is main competitors in the annual report:
- divisions of big generalist IT companies (Steria, Sopra,...)
- "big" actors: Akka (AKA), Alten (ATE), Altran (ALT), Assystem (ASY)
- mid size actors: Alyotech, Astek, Ausy (OSI), Segula, SII itself
- small actors: hundreds on local markets or specialized applications.
The global market in France is estimated around 8.8 MM€, very fragmented.
SII estimates its market share around 1%.
I don't think that SII possesses any competitive advantage over its peers.

SII clients are mainly in Aerospace, Telecoms and banking+insurance.

SII hired 1400 people last year, on a total of 4400. Mean age is 34 years, almost nobody over 50. Around 200 job offers on their site when I looked.
Pretty high turnover, see above discussion on business model. Also points out on the vital importance of correctly anticipating new staff requirements in function the business outlook.

3) Financials
Balance sheet
SII finishes it year on 31 march.

LT debt 6 m€; short term debt 10 m€, around 28 m€ cash => 12 m€ net cash

Asset light (only 7 m€ fixed tangible assets vs 81 m€ equity ; 17 m€ of fixed intangible assets -mainly goodwill  and capitalized R&D costs).

Working capital
114 m€ receivables + 14 m€ other receivables - 62 m€ operating debt (suppliers, social security,...) = 66 m€ working capital, quite significant (66 m€ /294 m€ annual sales => 80 days).
Consultants are paid monthly but I guess that clients are much slower to pay.
SII operates not only on hourly rate contracts (technical assistance) but also on fixed price projects ("forfait", around 22% of 2014 sales). These projects carry an additional execution risk.
For instance working capital requirement has increased in 2014 even though sales are almost flat. SII explains that they haven't billed yet 5.4 m€ on a project in Spain.

2014 return on capital = 21 m€ operating result (after non recurrent items) x (1-34% tax rate, more on that later)/ (66 working capital + 7 m€ fixed tangible assets) ~around 20 %.
Pretty good, especially if trading at ~6 times trailing EBIT.
(Market cap 135 m€, using 18.5 m shares)

But why is it cheap ?

Income statement
Sales and EBIT (after depreciation) margins.

Operational margins went down in 2009-2010, just after the crisis. SII attributes this to the price pressure on technical assistance contracts, and the time needed to adjust its hiring to new conditions.
Since 2010, SII faces a slow business environment in France (pressure on prices in telecoms, reduced defense spending, end of Airbus A350/A380 program development,...), but operational margins seem to be stabilized.

Around 12%-13% annual growth over the last years, and going back to SII IPO in 1999, growth is pretty impressive.

What is the source of this growth ? Organic or based on acquisitions ?
Unfortunately SII does not provide this information in its annual report (or I've missed it) so I've used what I've found in the analyst presentations.

A recent external acquisition is Rücker Aerospace in Germany. AKKA is also investing in Germany, I wonder if it's a coincidence or if there's some underlying common reason.

SII has a opened a number of branches and international growth seems impressive (double digit).

To sum it up, it does not seem to me that SII is a "serial acquirer" with the associated risks. There's about 11m€ goodwill, compared to 183 m€ total assets.

Taxes and CVAE
I've learned my lesson with my Group Crit failure on this one.

Here is a graph giving the "apparent" tax rate (income taxes/EBIT).

The CVAE tax was deducted from the operational result before 2012. Recently the CICE has made its apparition. Messy. I'll take an average tax rate of 34%.

Where goes the cash ?
CAF = capacite d'autofinancement = cash flow
BFR = variation du besoin en fonds de roulement = change in working capital
flux exploit = cash flow from operations, taken from statement from cash flow
CAPEX = investment in fixed assets
FCF = cash flow from operations - CAPEX

The big drop in 2012 is linked to taxes.
What to make of this ?
Well my interpretation is that these companies are maybe asset and CAPEX-light, but need a large (and growing) working capital. So SII growth is not accompanied by a very large FCF generation.

Capitalized R&D costs
Apparently there's 7 m€ capitalized R&D costs on the balance sheet, mainly linked to software developped by a subsidiary named Concatel in Spain. I'm unsure and wary about the effect of capitalized R&D costs on the operational result, but in SII case it seems relatively secondary.

4) Shareholder structure and management

Who owns the capital
The founder family (Bernard Huvé) owns 55%, Fidelity 8%, Oddo Asset Management 5 %. Only 16% float. Fidelity had previously declared to have crossed the 10 % treshold in september 2013, so they've apparently sold some shares ?
Bernard Huvé stepped down from its operational functions in 2007; the current manager is Eric Matteucci, an internal promotion.
Theoretically, as a minority investor my interests are aligned with the founding family (no excessive risk taking, no major dilution, no excessive stock options for managers), except for the risk of squeeze-out at a low price. The presence of Fidelity and Oddo is quite reassuring on this point.
Another potential issue is when the main shareholder manages to catch a good part of profits before it gets to the bottom line. The founder salary is around 70 k€ in 2014, quite low. No other indirect compensation found in the "conventions reglementees" (regulated agreements and comitments) section.

Is the management renumeration aligned with the shareholders interests ?
The 3 top managers earned around 400 k€ each last year. No golden parachute or retirement package. No "special conventions". The determination of the variable part is not disclosed for "confidentiality reasons".

Dilution due to stock options
20 m shares, around 300 k shares in stock options and free shares for managers, minus 1.8 m shares owned by the company itself.
If I understand correctly, around 150 k free shares + 150 k performance related shares have been issued this year => 300 k shares => around 1.5% annual dilution.
However looking into the past dilution was more significant (up to 800 k potential shares in 2010...).

There is no apparent dilution, because SII buys back and cancels shares to offset stock options and  free shares.  If I understand correctly the annual report, 700 k€ have been charged in 2013-2014 to shareholders to offset this dilution, which is not unsignificant relative to FCF.

5) Valuation
Relative valuation
Comparison table (I'm not sure about my Assystem numbers because of the recent financial operations, convertible bonds and the associated potential dilution)

 At the beginning of this year, Assystem offered a buyout to minority shareholders.
The following table is extracted from the independent expert report.

So SII appears to be somewhat cheaper than its competitors.
This discount can maybe explained by some size effect, maybe in combination with the relatively low liquidity of the stock.

Also SII sales/people ratio is the lower of this sample. I have no explanation for his and wonder how they manage to have an operating margin in the mean.

Historical valuation
I've used approx high/low prices for each year. Looks that SII valuation has always been quite low.

6) Tying it up all together

I don't think that SII has any competitive advantage over its peers.
Likewise, we're not talking about a high-quality or a "moat" business situation. I don't think that SII clients can incur high switching costs.

On the other hand, SII valuation appears quite low in absolute terms, given the respectable return and growth, the robust balance sheet, and an apparent resilience in the crisis years.

SII is also somewhat cheaper than its comparables (especially around 5x EBIT).

Historically, SII valuation has always been quite low.

So maybe SII is doomed to remain eternally cheap, for some reason that escapes me but not Mr Market (maybe I'm underestimating the cyclicality of the business, or the liquidity/size effect).

I bought my 1st shares around 4 € in feb 2013 and some more during the recent downturn.
Maybe it's yet another value trap I've fallen in, however I'm willing to take this risk, which seems moderate to me.

As usual , feedback welcome.