mardi 26 juin 2012

FFP (English Version)

Version Française : voir ici

FFP is the main shareholder of the PSA Peugeot Citroen Group. The company belongs to the Peugeot family.

It also develops "a diversification portfolio, composed primarily of minority, significant and friendly holdings with a long-term shareholding approach, but also including private equity and real estate."

This porfolio is detailed in the 2011 annual report (in French only, apparently ; however their website is translated)

These diversification holdings are mostly outside the car manufacturing sector. These acquisitions have mainly been funded with dividends from the PSA group and a little debt.

Participations cotees = listed holdings
non cotees = non listed
capital investissement = private equity
immobilier = real estate

Largest listed holdings are Groupe Seb (home appliances) and Zodiac Aerospace. Zodiac Aerospace is doing very well, and the oulook for the aeronautical sector is good.

Peugeot PSA Group (ticker : UG), on the contrary, is facing difficulties. The stock is at an all-time low, and the whole sector is in crisis. The stock has lost 90 % in a few years and has taken FFP down with it.

Investment thesis (short version)

FFP calculates a Net Asset Value.

It is calculated from stock market prices at the end of the period for listed companies and for non-listed assets, a market value obtained by discounting cash-flows, or by applying different methods of multiples, mainly listed comparables multiples.

FFP last quote is under 30 €, a 50% discount to NAV.
Lets assume the Peugeot PSA group, second european carmaker (by units) in 2010 behind Volkswagen is worth 0.
NAV would still be around 36 €. FFP current price still offers more than 20 % discount in this case.

At the current price, you can buy a diversified basket of holdings and get Peugeot PSA group for free (sum-of-parts analysis).

You can also find this investment thesis here (Gurufocus article) or here (French value blog Super-Pognon, ~ Super-bucks in English !)

Investment thesis (long version)

I wanted to take a closer look at these holdings before putting my hard-earned and much-taxed savings on the table.
Sorry this is really long and tedious, but I see no other way around it.

Note that in 2008 NAV/share went down to 43 € (divided by 3 in 1 year !), which tends to show that the current NAV is not necessarily a lower value limit.
ANR par action  = NAV / share in English

Let's start with a word on Peugeot PSA group (ticker : UG)

The European market is saturated : 600 cars/1000 people and there is excess production capacity.
Buying a car can easily be postponed during a crisis ; besides there was a "cash for clunkers" program a few years ago.
Besides, Peugeot is doing poorly, caught between high-end German manufacturers and low-cost offers. Renault is doing better thanks to Nissan and low-cost brand Dacia (see articles here and here, in French).

Peugeot PSA shares are down 90 % over the last 5 years, 40 % losses so for this year.
In March 2012, PSA announced an alliance with General Motors, and carried out a capital increase (€ 1 billion, at a price of 8.27 € / share).
The company has sold its Paris headquarters, and its car-rental subsidiary Citer.

A few figures
Net income (in mio€) (excluding minority interests)
2009 losses amont to 1,161 m€.

Zoom over the last 5 years

CA = chiffres d'affaires = sales
ROP/CA = operating margin
FCF/CA = FCF/Sales
Dette nette = net debt

Stagnant sales, low operating margins (2-3%), heavy maintenance CAPEX, low FCF in good years.
When the margin is negative, the cash burning rate is impressive (~ -€2bn in 2011).

In 2011, operating income is positive, but manufacturing activities are still losing money (income comes from the car financing activity Banque PSA Finance and subsidiaries Faurecia and Gefco).
Long term debt almost doubled between 2008 and 2009, but remains (for now) limited to 25% of equity.

I calculated the Z-score of Peugeot. I get a Z-score of ~ 1.9 in 2011, the "red zone" (bankruptcy risk) is below 1.8 and that according to this website Ford Z-score is ~ 1.9. If I take the 2009 figures, the Z-score falls to 1.7. Moodys recently degraded the obligations of PSA to junk bond status.

I have a hard time imagining a bankruptcy of Peugeot PSA but the numbers are not brilliant, to say the least.

Current market cap is around €2.6bn, EV (taking into account debt and the recent capital increase) is about €5bn .
Some valuation ratios: P/B~0.2. Current PER~ 5.
EV / EBIT ~ 6. 13 year trailing PER is around 3 !

Always look on the bright side of life : for FFP, the disaster (massive depreciation of the main holding) has ALREADY occured.

The Peugeot Citroen PSA group includes :
- logistics group GEFCO, 40 % of sales outiside PSA Group. 2011 Sales 3.5 €bn and op income 223 €m. PSA has announced its intention to sell the shares, and the offers (private equity groups) range from 800 to 1200 m € (source : Les Echos, in French), so ~ 1/3rd of the current market cap of UG.

- 57 % of auto-parts (car seats, dashboards,...) maker Faurecia (ticker : EO). Only 17 % of Faurecia sales are done with the PSA Group, the 1st client is Volkswagen. Faurecia market cap is ~ 1.5 €bn, so PSA share is worth ~ 1/3rd of the current market cap.

So with FFP current valuation, you get Peugeot PSA for free, including Gefco and ~a half Faurecia.

I will not try to predict the long term future of Peugeot PSA : is it just a hiccup or the start of a permanent decline, like so many (too many ) industrial sectors in France (shipbuilding, refining, steel,...).
Anyway is Peugeot recovers, the upside on FFP stock is interesting. If not, the downside is I think limited.
The margin of safety consists of the other FFP participations, that we'll list below.

Note that some hedge funds are shorting PSA Peugeot stock (with some success, given the evolution of the price). Odey asset management (from the name of its manager Crispin Odey) : link to official AMF declaration.
See also this link from Aswath Damodoran on contrarian investing : Peugeot PSA group is among its top list of "losers" for the last 52 weeks

An article on Peugeot PSA in Gurufocus here

Diversification portfolio

There's a large number of companies in this portfolio and each one would require an entire post. Besides I acknowledge that my ressources/aptitudes are limited. So my objective is to have a look at each participation and make a conservative back-of-the enveloppe evaluation, to check that I'm not buying overvalued participations, and to better know FFP.

Lets start by listed holdings.

LISI (ticker FII) manufactures fasterners for the automotive, aerospace and medical (implants) industries. English financial report here. Sales are split equally between aerospace and automotive sectors, medical much smaller. According to the annual report, 2012 outlook is good for aerospace, ok for automative. Supplies mainly Airbus, but recent contract with Boeing. Automotive sells to all major european car manufacturers (strategic supplier of Daimler). Seems like a good business.
Mean ROE~10%. Last quote 45 €, EV/EBIT ~8, EV/EBIT (2006 to 2011 avg) ~ 8. P/B ~ 1.
Does not seem overvalued to me.

SEB group (ticker : SB) is a home appliance manufacturer. Well known brands Moulinex, Krups, Rowenta,. in Europe, I don't know if they are familiar in the US or elsewhere. Strong presence in emerging markets (acquisition of local brands and manufacturers). Only 20 % of sales in France and 38 % in western Europe.
Quote ~ 50 €. EV/EBIT ~ 8, EV/2002-2012 avg EBIT ~13. Decent margins, mean ROE ~ 20% pretty impressive. P/B~2.
The stock tanked to 20 € in 2008 and has strongly rebounded since.
Does not seem overvalued.

Zodiac aerospace (ticker ZC) makes aeronautical on-board systems, safety systems, aircraft seats,... See wikipedia article here. It's a blue-chip stock (favorable sector, niche market, probably protected with certification constraints in the aeronautical sector). Double digit margins, mid-teens ROE, sales growth. Valuation reflects this (80 €, up 40% this year, EV/EBIT ~ 14; PER ~20).
To be conservative, I'll take a much lower valuation (50 €, EV/EBIT ~10, knowing that 2011 was a record year for sales).

Orpea (ticker : ORP) is an European leader in clinics/nursing homes for elderly people (long term, especially for people needing physical/psychiatric care). English financial report here, investor presentation here. Double digit operating margins, probable barriers to entry (regulations, large investments), favorable market outlook with the greying of the European population, growth of revenue, results. But a spectacular run-up in debt to finance new buildings (~400 facilities total) and beds (~37000 beds, +10000 beds in 2 years) accross Europe.
For a last quote of 25€, 2011 PER ~17.
To be conservative, I'll take a much lower valuation (15€, PER~10). I use the PER, not taking into account financial debt because it's balanced by real-estate assets.

Ipsos (ticker : IPS) is a market research company (advertising research, opinion polls,...). Comparable to Nielsen in the US, albeit much smaller. Company motto is "Nobody's unpredictable". See wikipedia article here. English financial report here, investor presentation here. 43% of Sales in Europe. Pretty stable operating margin ~10 %. Growth, lots of acquisitions, and a major one in 2011 (Synovate, a UK company) which has sent the gearing up from 30 % to 66 %.
For a last quote of 25 €, PER = 13, EV/EBIT ~ 13, EV/avg 5 year EBIT ~13.
To be conservative, I'll take a much lower valuation (17 €, EV/ROP ~ 10).

Linedata (ticker : LIN) makes specialized sotfware for the financial/banking sectors. Linedata has launched a tender offer for 25.7 % of its shares at 16 €, and FFP has said they would sell their participation. 43% of the tendered shares have been repurchased.
For my evaluation, I take an average of 43%*16+(100-43)%*13 (last quote) = 14.3 €. FFP should receive some ~10 €mio in cash.

Let's now move to unlisted holdings

DKSH is a services company with a focus on Asia. DKSH has made an IPO this year. FFP has sold 35 % of its shares during this IPO, and made a nice profit (x3.2) on its initial investment. FFP keeps the remaining shares : see FFP press release here.
DKSH is now listed on the swiss stock exchange, and the 2011 financial report is available.
For a last quote of 51 CHF, entreprise value is ~ 3200 CHFm, for an EBIT of 237 CHFm. EV/EBIT ~ 13.
To be conservative, I take a lower valuation (38 CHF, around  30 €, EV/ROP ~ 10). If I'm not mistaken, FFP still holds around 4,360,000 DKSH shares.

Sanef operates 4 of 6 motorways providing access to Paris. Traffic is not about to plunge. FFP does not provide its evaluation of its stake in Sanef in 2011, but did it in the 2010 annual report : 135 m€. I do not have acess to Sanef accounts.

Is this a reasonable estimate?  Autoroutes Paris Rhin Rhone, a listed comparable company (ticker: ARR) has a market cap of € 4,700 m for 2011 sales of  € 2,022 m, a ~ 0.5 ratio.
If I apply the same ratio to 2011 sales of Sanef (€ 1,489 m), Sanef is worth ~ € 3 billion. FFP holds 5.1%, which gives a valuation of € 150m compared with € 135 m given by FFP end 2010.
I keep this figure for my evaluation.

Onet is a facility/multi services company (cleaning, logistics, services for the nuclear industry,..). FFP valued its stake in Onet around 97 m€ end 2010. I do not have access to Onet annual reports, but only to the data given by FFP on its website :

Onet would be worth 435 m€ for a net result of 18 m€, a PER of 24 of astronomical proportions for a company with meager margins. With the operating result, EV/ROP ~10 or 0.3x 2011 sales, more reasonable ratios.
Net margin decreased from 2.4% in 2010 to 1.3% in 2011. According to the FFP website, this is mainly due to a delay in passing through an increase in salary charges to customers.
A comparable listed company is Derichebourg (ticker : DGB), currently valued 6x its operational result and 0.3x sales. But the company is not directly comparable (DGB is mainly involved in recycling).

A direct competitor of Onet is ISS, based in Danemark. ISS publishes some figures but is a private company (owned by Goldman Sachs). Onet is 10x smaller than ISS, but apparently ISS is heavily in debt. Surfing on the net, you can find this pdf (evaluation of ISS done by Danish MBA students, with outside references). ISS would be worth between 40 to 50 DKKbn, EV/EBIT between 9 and 10.

To be conservative, I'll take an EV/EBIT ratio of 8 for Onet, a 20 % discount on FFP evaluation.

Chateau Guiraud makes wine (Sauternes). Valued 10 €m end 2010. Given the numerous and wild approximations I've already made for the other participations, it's negligible.

Private equity

IDI (ticker : IDIP) is a private equity company, listed on Euronext. Last quote is around 22 €, NAV 38 €/share according to the latest report. 40 % discount on NAV.
I take 22 € for my evalution.

Sagard, LBO France are unlisted private equity companies. Pretty opaque for me, even if I recognize some names in their holdings (such as excellent railway equiment Faiveley).
To be conservative, I'll brutally apply a 50% discount on their evaluation by FFP.

Real estate

Immobiliere Dassault owns ~10 buildings in Paris. Judging from the pictures and prime locations, seems like high-quality real estate. FFP evaluation relies on a professionnel appraiser.
To be conservative, I apply a 20 % discount on this appraisal.


The following table sums up my estimates compared to the NCAV published by FFP end 2011.
In a recent release, FFP announced that it had decreased its debt by 31 m€ (DKSH sale during IPO, but participation to PSA Peugeot capital increase).

Montant = amount
Cours = quote
Cours maintenant = latest stock quote
Cours retenu = retained (for the evaluation) stock quote

So to sum it up, FFP is still cheap even valuing its main asset for 0, and taking conservative (or so I hope) valuations for the other assets.
Besides, valuing Peugeot PSA at 0 makes little sense, because Gefco and Faurecia make up ~half of PSA current market cap).
Some hodlings are interesting for my portfolio allocation (aeronautics, exposure to Swiss Francs and emerging markets,...).

Why is FFP cheap ?

Pretty obvious reasons :
- low notoriety,
- FFP image = Peugeot + car maker + Europe France (even worse) ; I guess a fund manager normal reaction is not to touch it with a ten-foot pole ?
- lots of very different holdings => complicated valuation, risk of compound errors, holding discount
- scaring downward momentum
- no possibility of external takeover
- no control over capital allocation (the Peugeot familiy decides everything, you just ride shotgun, or more aptly in the rear trunk !)

Who is selling ?

I don't know. No signification insider selling or treshold crossing declared on the AMF website.

What's the upside potential ?

No precise idea. If the NCAV goes back to 2010 level, and the holding discount to a "normal" of 20-30 %, we're looking at a ~65 € target. That's a lot of  IFs.

Why am I publishing this ?

All right, I'm frigthened by the plunge of FFP shares. Maybe I've fallen to some psychological bias (confirmation bias, over confidence,...) or missed something vital. I'd love to hear (argumented) contrary opinions, and have an outside "reality check").
Comments welcomed. Otherwise, my email is in the contact page, thanks in advance..

Disclosure : long FFP.


4 commentaires:

  1. Great analysis and thanks for translating into English

    I see no holes in your valuations, all quite conservative.

    Another reason for the undervaluation is because its in France. Lets face it the new government's start has not really been business friendly...

    Also for any fund manager investing in Europe, especially countries in the headlines, hold a lot of career risk.

    1. Thanks Tim for taking the time to read this and answer.

  2. Caque!Great word and great reading! I had some FFP twice and got away with it twice(through sheer luck!). I agree with you, I don't think that Peugeot will go bankrupt (too many jobs are at stake, new government wants to protect and save as many industrial jobs as possible).
    I was a shareholder of two of the stocks they hold. SEB, nice positionning, good innovation but highly dependant of China (be it for growth in sales and in profits and also let's not forget a bit of production), the ROE is good but they do have some financial debt which decreases the ROTC). Columbia is a nice move (recent acquistion). The USA, France and some countries in Europe are a little difficult as far as growth is concerned.
    IPSOS has a nice positioning but ROE is weak and as you pointed out: lots (too many!) acqusitions, debt increase, increase in the outstanding shares. It is true that one of their strong points: low fixed costs as a lot of their costs are variable costs (people taking the polls) so they can decrease them really quickly. The polls done through the Internet should also increase profitability but too many external acqusitions for me.
    What do you think about Faiveley?
    Once again great work!

    1. Hi Jeremy, thanks for the kind words.
      I like Faiveley (growth, margins, technical know-how benefits from railway investments in China and elsewhere,...) but what keeps me from buying is the (relatively high) valuation.
      See these excellent articles here (but you've probably already read them)