dimanche 27 novembre 2011

Tessi (TES) English Version

The blog has been inactive in October, due to lack of time.

Tessi (TES) http://www.tessi.fr/

The company

Tessi has 3 areas of activity  (which I know nothing about, there goes the "circle of competence" principle of investing...)
- documents processing, particularly bank checks (No. 1 in France), and more generally the conversion of physical documents to digital (direct translation from French is "dematerialization", but apparently the correct term is "paperless transition" or something approaching. In particular I learned on this occasion that in France checks no longer move physically between banks, but only their digital image.

- relationship marketing
Now this one is tough to translate for me. How about "delayed money-off coupons" ?
Anyway it's not direct couponning, it's delayed (the consumer 1st has to send some documents : proof of purchase, name, adress,...) to receive his money ; hence the link with the "document processing" activity of Tessi.

- "Wholesale" supplier for banks of physical gold and foreign currency banknotes (No. 1 in France through its subsidiary CPR, seems like a quasi-monopolistic situation)

Bulk of sales are in documents processing.

The company has over 3400 people and sales € 237 million. It is a "big" small-cap.
It has grown rapidly (about 20% CAGR) (with a lot of business acquisitions but still within the three areas of activity above). Intro = 2001 public offering.

Chiffre d'affaires = Sales
ROC = Current Operational Result 


The company is clearly controlled by the current CEO and his family.

According to the 2010 annual report, the following funds are shareholders :

The balance sheet (1HY11)

The balance sheet is very strong: net cash of all financial liabilities of € 33m, compared with equity of € 100 million.

Valeurs mobilieres de placement = marketable securities
The report gives no details on these "marketable securities". risk-free or otherwise ?

Disponibilites bancaires = cash
Decouvert bancaire = short term debt (bank)
Tresorerie nette = net cash 

In fixed assets there is a lot of goodwill (€ 46 m) and few tangible assets. Not much to hope in terms of safety margin in the form of hidden or undervalued assets.

Income statement

The table below provides some financial data from annual reports.
As usual, sorry for the possible copy/paste errors
All figures in millions of €, unless dividend (€/share), nb of shares in millions (diluted shares).

CA = Sales
ROP = Operational Result
OCF = Operating Cash Flow

CAPEX = purchase of fixed assets (not taking into account acquistion of other companies, and not taking into account sales of fixed assets)
FCF = Operating Cash Flow - CAPEX

Double digit  operating margin, increasing for the past two years, which is rather surprising in crisis.
Double digit return on capital (ROE), more than 20% the last two years.

The company is highly profitable and rather insensitive to the crisis.

The number of shares is stable, which I appreciate (no dilution at all times, as is often the case).

If you look at the cash flow statement :

BFR = Changes in working capital
Cash flow d'exploitation = Operating Cash flow

Note that the changes in working capital is positive, even though the sales are increasing. Usually it's the opposite (increased sales=> increase in inventories, receivables, etc. ... => increase in working capital). This needs some explanation.

If I understand correctly (see table below) this is related primarily to the line "avances promo = cash advances for promotional activites" .. hard for me to go further (I'm not good enough in accounting)

Some valuation ratios

EV = market capitalization - net cash = 152 m € for a quote of € 61.9.
EV / 2010 operating income = 4, but it is an all-time high result
EV / average operating income from 2004 to 2010 = 6

EV / 2010 FCF 2010 = 4
EV / mean FCF from 2004 to 2010 = 8

Even if we forget the excess cash , 2010 PER is 7.

Clearly that''s not expensive, especially for a growing company. Is this the sign of difficulties ahead (the market correctly anticipates future problems) or a real undervaluation (the market is wrong, and I, solitary genius, is right against all the others, which is unfortunately unlikely ) ?
In short, why is TES not expensive?

Why so good results in 2009 and 2010, and can it happen again?

The 2010 annual report says this (page 7):

Loosely translated : 2009 was good because of gold transaction. 2010 gold sales are very good but slighlty less compared to 2009 ; 2010 margin is due to the docuement processing activity.

The current concerns related to the euro (currency) obviously have a positive impact on purchases of gold (safe haven).

The document processing business seems little affected by the crisis (underlying trend towards paperless transition ?).
In late 2007, the company sold its physical transport of bills/money activity , which was a source of losses.

A drawback is that TES is a leader in check processing, while the use of checks is declining in France (22% of payments in 2010 against 50% 10 years ago) and even disappeared in some European countries : see wikipedia.

I could not to find in the reports the contribution to sales and results of the check processing branch. That being said the decline is slow and the company seems to gradually adapt by diversifying through acquisitions in France and abroad (Brazil, Tunisia).

Why the recent fall of the stock price ?

I do not know. Several possible explanations:
- Relatively unknown company, low liquidity for an institutional investor,
- General decline in risk aversion since this summer,
- company seen by the market as a "back office" for banks => down with the other financials,
- forced sales by one funds at the capital  (Moneta or Amiral Gestion) to meet client redemptions, but I have not seen any statement this way on the AMF website,
- disappointing interim results ?

The last HY numbers show a slight fall of the operating margin, explained by management as related to the contribution of recently acquired businesses. Margin remains very high (17% operating margin) and in line with previous years. I see no cause for great concern.

Moreover, as mentioned above there is a strong decrease in cash, which is explained according to the management by a temporary increase in working capital. I see no reason not to believe them on that.

Ok, Tessi is not expensive, but as minority shareholder can I expect something ?

What kind of treatment can we expect to receive as minority shareholders with no chance to influence the management?
The company is controlled by the CEO and his family, no chance of takeover.
The dividend distribution shows a stable but moderate distribution policy. Most of the cash flow is invested back or used to grow the company.
Given the history of the company and management (the current CEO is in control from the beginning or almost) this cash seems to be used wisely (no foolsih acquisitions, no unreasonable stock-options plans paid by the company). 

Insider Trading

The table below shows the data copied from the AMF .
The figures marked with * correspond to the exercise of stock options.
What strikes me it is the massive purchase of the founder and CEO in September 2011 at € 55-57.

Latest news

Between the time I started writing the message and now a few days went and the 9 month Sales have been published : it is up 11% over 9 months, with an impressive third quarter up 22% (+58% for gold).
The company announces for 2011 a "strong organic growth and a high margin."

Summary and Conclusion

After this avalanche of numbers, I lack inspiration, so I'll make it simple.
Tessi is cheap, but I see really no objective reason for this undervaluation.

Diclosure: I hold Tessi shares

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