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Cofidur: A Profitable French Electronic Subcontractor Trading at a Negative Enterprise Value

Investment thesis



Cofidur SA (XPAR:ALCOF) is active in the low-margin electronic subcontracting industry in France. The company has a strong profitability record and has generated substantial free cash flow over the last 10 years. The stock is neglected by the market, probably since it is only reporting in French, has a low market cap, a high share price, a controlling shareholder and illiquid trading on a minor stock exchange. With a negative enterprise value, the company looks like an interesting investment opportunity.


Basic facts about Cofidur

Cofidur is a holding company with a 100% ownership in Cofidur EMS SAS. It is a leading player in the French market for electronic subcontracting. Cofidur EMS has been active in the electronic subcontracting business for over 50 years and had 390 employees at the end of 2019.

The company has three sites in France and offers a low-cost alternative to off-shore operations. The products and services are aimed at sectors such as aviation, defense, lighting, medical, transport, telecommunications and oil. In 2019, 90% of the sales were made to customers in France. The sales are concentrated to a limited number of customers, but the company doesn't provide any further details as to the specifics of the clients. The stock is listed on the Euronext Growth stock exchange in Paris. The reports are only published in French, and the company only reports twice a year.

Valuation

A valuation based on the balance sheet results in a price to tangible book value of 0.4. At the current share price of 278 euros ($313.19), the stock is even trading at a net-net valuation with a price to net current assets of 0.46. The enterprise value is at -2.5 million euros.

With a negative enterprise value, enterprise value-based cash flow multiples don't make sense. The market cap is about 10.8 million euros, which can be compared to free cash flow of 7.1 million euros for 2019. The average free cash flow over the last 13 years is 3.9 million euros per year. Looking at sales, the price-sales ratio is 0.16.

Whichever multiple is used, the stock looks really cheap.

Financial position

The key ratios for financial stability look good, with a substantial net cash position:

Dec. 31, 2018

Dec. 31, 2019

Quick ratio

1.19

1.46

Current ratio

1.90

2.11

Total debt/equity

0.94

0.78

Equity/total assets

0.51

0.56

Net cash position

6,536,000 euros

13,319,000 euros

Debt / free cash flow

0.70

0.36

OCF / current liabilities

0.11

0.38

Altman Z-Score

3.07

3.05



The bank debt on the balance sheet is small, and the company is in compliance with the covenants.

Capital allocation

The company has bought back about 10% of its outstanding shares over the last 10 years. The buybacks were done in 2010, 2011 and 2013. There is still a repurchase program in place, but for some reason, management hasn't utilized it lately. The company has also been a steady dividend payer over the last decade, with a current dividend yield close to 3%.

There hasn't been much merger and acquisitions activity throughout the years. The company sold its renovation and repair business located at the Cherbourg site on Nov. 1, 2018 for 10.6 million euros. The reason for the sale was Cofidur wanted to focus on its core business. The company sold the renovation and repair business to Cordon Electronics, which resulted in an extraordinary profit of about 3.3 million euros in 2018.

The company has used more than half of its free cash flow over the last 10 years to pay down its debt and strengthen its balance sheet. Considering its low-margin business, it was a wise management decision to strengthen the balance sheet.

Convertible bonds were issued in 1998, with the redemption period ending Dec. 31, 2024. Around 99% of the bonds have already been bought back by the company, and conversion of the remaining bonds will lead to marginal dilution of equity holders.

Profitability history

The key ratios for historic profitability provide a positive picture:

Retained earnings

21,752,000 euros

Net income (13 years)

20,880,000 euros

Operating cash flow (13 years)

52,684,000 euros

Free cash flow (13 years)

50,751,000 euros

Positive net income [years]

11/13

Positive OCF [years]

10/13

Positive FCF [years]

10/13



Shareholder structure and management incentives

The company has a majority shareholder in EMS Finance, which holds a stake of more than 50% of the capital and two-thirds of the voting rights. There isn't much publicly available information on EMS Finance. In 2009, it issued a tender offer after having substantially increased its position in Cofidur, but only reached about 52% of the capital ownership.

The investment company Socodol holds a stake greater than 6% of the capital and less than 7% of the voting rights. The entity is controlled by the Raboutet family. Socodol is also invested in the semiconductor industry equipment company Riber, which is listed on the Paris stock exchange. Socodol has held at least 5% of the capital since 2013.

The CEO of Cofidur is Henri Tranduc. He is also a president of EMS Finance. The annual report doesn't provide any information about his investment in the company.

Trend

The company recorded declining revenue following the great financial crisis. Even though it hasn't been able to reach the pre-crisis levels, the revenue numbers have been fairly stable over the past several years. The drop in revenue seen in 2019 is related to the sale of the renovation and repair business located at the Cherbourg site in late 2018.

Even though Cofidur is clearly not a growth company, the trend is not as weak as the valuation would suggest. The company has for several years in its annual reports stated the increased relocation of electronic production from France as a major business risk, but this is not visible in the revenue numbers.

Risk factors

The most important factors which could lead to a poor result if investing in the company today are:

  • Customer concentration risk: There is a customer concentration risk according to the annual report. This risk is not quantified. If Cofidur were to lose a key customer, it could definitely lead to poor returns for investors.
  • Covid-19 impact: The company's production levels dropped significantly in March, and production was practically nonexistent in April. The company has implemented measures to adapt to this decline in activity (e.g., partial unemployment). To limit the impact on the cash position, postponement of social charges, bank deadlines, etc. have been implemented. Revenue for the first half of 2020 will be significantly down compared to 2019. The company said in its annual report for 2019 that it is still too early to quantify the impact of the pandemic. Management said the current level of cash on the balance sheet allows it to remain confident when entering the second half of the year.
  • Low-ball buyout offer: With a depressed share price, EMS Finance might make a new attempt to take Cofidur private at a low price.



Potential return drivers

The most important factors which could lead to a good result if investing in the company today are:

  • Valuation mean reversion: The company is trading at a depressed valuation, irrespective of if looking at earnings, sales, cash flow or balance sheet multiples. The valuation is also on the low end compared to the company's own history. Mean reversion of the valuation could deliver substantial returns for the investor.
  • Crisis-proof: When looking back at the great financial crisis, the company managed to navigate the crisis well. From 2007 to 2009, earnings and cash flows were positive in aggregate. Maybe the company can come out of the Covid-19 crisis stronger. The supply chain disruptions experienced around the world during the shutdown in China in early 2020 could also be a driver for more local outsourcing in France over the long run.



Conclusion

Cofidur is active in a low-margin industry, but has still managed to deliver strong profitability over the past decade. At a negative enterprise value, the downside is limited enough to warrant an investment.

Disclosure: The author is long Cofidur.

Disclaimer: The article is provided for informational purposes only. The content is not intended to be a personal recommendation and should not be construed as investment advice. The investment referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser. The author does not guarantee the accuracy or completeness of the information provided in this article.

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This article first appeared on GuruFocus.