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H1 19: P&L disappoints but cash flow generation is intact

H1 19: P&L disappoints but cash flow generation is intact

EARNINGS/SALES RELEASES

P&L figures disappointed the market. However, cash is king and investors should instead focus on FCF, which was maintained at a good level.
Management maintained its guidance for FY 19, namely revenue of €570m is expected, with 2% organic growth and a 1.5% scope effect.
Overall, we expect to lowere our target price by some 15%, but, of course, we remain convinced by the business model and the strategy of the company, so we maintain our Buy recommendation.

FACT

Key information

Revenue increased by 4%, thanks to a significant scope effect as organic growth was roughly stable.
Recurring operating income was down by €4.6m, namely some 35%.
Attributable net income at €4.4m vs €9.6m in H1 18.
Outlook stable in terms of revenues, €570m expected for FY19.



ANALYSIS

Reported figures
Consolidated revenue was up by 4% compared H1 18 thanks to the acquisitions of Cipriani, Antipanic and Eliot in 2018 and Hoberg in 2019 as, on a lfl basis, revenue was stable, which is a bit disappointing.
Recurring operating income is down by €4.6m, i.e. by some 35%.
Attributable net income was €4.4m vs €9.6m in H1 18.
On a divisional basis

DOM security (c.65% of gross assets in our NAV): this registered 2.5% organic growth, which is good and underlines that the end of last year’s buy out of the minority interests in DOM security was a compelling strategic move. As a reminder, the division is the gem of the company and accounts for some 55% of gross assets in our NAV. All eyes are turned to this division. Despite the dilutive acquisition of Antipanic in terms of gross margin (60% vs DOM security’s average of 70%) as well as some costs that can be considered as one-offs (acquisition of Unitecnic, a bankrupt company; rehabilitation of the Picard plant), the company managed to post a stable recurring operating income. Lastly, note that the DOM access control business has installed more than 500k products over the last 10 years, whereas the leader has sold some 1m units, and is in our opinion a fast-growing business to monitor: sales are expected to increase by 20% in FY19 and it seems to us that it is the business with the better growth prospects over the long term. Bottom line, DOM security’s future looks as always very promising.


MAC (c.10% of gross assets in our NAV): revenue of this division decreased mainly because the window market collapsed by some 7% due to the end of the CITE (energy transition tax credit). The store market appears to have been rather better and sales of this business increased by some 5%, but this was not enough to offset the decline in the window business. Despite the lower revenue, the gross margin was stable thanks to price increases which were more than enough to offset the unfavourable mix effect and the rise in raw material costs. Current operating income suffered from the pension impact due to the lower interest rates. The rationalisation measures and concentration of the production asset is going well, but didn’t yield significant financial improvements. We would expect a positive impact from 2020 onwards. Lstly, the digitalisation of the selling process is developing well. Whereas some big companies are happy with c.15% of distribution sales through the internet, the webstore of France Fermetures now sells 32% of its business sales online. Similarly, for Franciaflex, with 24% of rolling stores only six months after the launch of the webstore. We believe that this will help the company retain its customers and increase its pricing power: this is clearly the heart of the strategy and should have a quick payback.


NEU-JKF (c.10% of gross assets in our NAV): revenue was roughly stable. The key information for this division is the fact that the Polish subsidiary bid for bigger contracts than it used to manage and this resulted in provisions as the company seems to have tendered at too low prices. However, in view of the conservative behaviour of management and its experience, we deem that a risk of another round of provisions is low for SFPI, as management implements a provisioning policy with the greatest degree of care and diligence. Overall, the division posted a negative current operating income, which is disappointing but was mainly a result of one-offs, so that we expect a better H2 (notably in terms of revenue as the order book grew by some 6% and thanks to the operational leverage of the division, which is usually strong in a capital-intensive sector). On top of all of this, NEU-JKF’s growth trajectory in the future is sustained by cross-selling (sales synergies) as well as digitalisation.


MMD (some 20% of gross assets in our NAV): the performance in terms of lfl revenues was roughly flat. Because of the acquisition of Cipriani, which was margin dilutive by some 3pp as well as the new business in new markets for Steriflow which had a 2.4pp negative impact, the gross margin contracted by some 6pp. However, lower depreciation expenses and good cost control allowed management to maintain good profitability at the current operating income level. We share management’s view that this business should have good prospects in H2 19 (order received increased by some 31%, which is just an outstanding number).

Acquisitions

Hoberg: one of the two shareholders of this company was willing to sell the company. As Hoberg is the exclusive distributor of DOM security products in Belgium since 1973, there was a clear strategic interest of not letting the company be bought by a competitor for its customer address book. Revenues lies at €5.5m for an operating income of €1m. The company was acquired for €7.8m with a provisory goodwill of €5.4m, which on the one side seems expensive (70% of the price paid in goodwill) but at the same time seems relatively cheap: 7.8x operating income for a company evolving in the lock market. Our opinion is settled towards a very interesting and compulsory deal.

Guidance
Management maintained unchanged its guidance for FY 19, namely revenues of €570m are expected with 2% organic growth and a 1.5% scope effect.
On our side, we are a bit disappointed by the fact that the company does not issue an EBITDA or recurring operating income guidance for FY19, but we understand that this is a careful behaviour.


IMPACT

As always, management was very transparent and remained humble in every aspect of its earnings presentation. We, however, regret the absence of an earnings forecast (EBITDA or EBIT) on top of the revenue guidance.
Overall, we expect to lower our target price by some 10%, but, of course, we remain convinced by the business model and the strategy of the company, so we maintain our Buy recommendation.