AlphaValue Corporate Services Fundamental Analysis FR
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AlphaValue Corporate Services
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Chargeurs

CR
Bloomberg   CRI FP
Holding Companies  /  France  Web Site   |   Investors Relation
Carrying on with strategic acquisitions
Target
Upside 65.6%
Price (€) 16.16
Market Cap (€M) 461
Money Making

After a brilliant 2017, 2018 earnings slowed down on a combination of slowing global growth and well-flagged opex efforts to ramp up the long-term growth potential. 2018 managed a commendable lfl top-line growth of +2.6% and underlying operating profit up 6.5% and thus slightly improving margins, propped up by a rising mix.

Year after year, the Chargeurs mantra of doing better through staff training, premiumisation and branding appears to be paying off.

Defining a business model for a holding company/conglomerate is primarily making a case about a management philosophy. Chargeurs’ is about keeping a firm hand on growth plans devised by imaginative younger managers. It seems to be about investing in human beings rather than flipping assets with a bunch of private equity style asset managers. Genuine no-nonsense value creation has its benefits: a build-up of real, palpable assets that minority shareholders can hope to share through a rising stream of dividends.

The above has produced convincing growth and earnings growth over the last four years. It may be tested further by the stated ambition to hit a €1bn target in revenues by 2021, i.e. through acquisitions. The foundations are here but the build-up will be an interesting one nevertheless.

In the next few paragraphs, we address the idiosyncrasies of the four current business lines:

Protective Films: hopefully less cyclical

Protective Films has been working hard to make itself a must in processing industries where it is needed. The culture is one of continuing investment in making the product ever better, thinner, more silent, greener, etc. Going upmarket is aimed at avoiding the boom-bust nature of chemical-related products.

Adding capacity in the right geographies also helps smooth cycles. As a de facto speciality chemicals business (polyethylene is the main base input), Protective Films is all about capacity usage, productivity gains, passing on higher input costs through ad hoc price revisions and pass-through contracts, in addition to upgrading the product on a continuous basis.

Like so many industrial firms, Protective Films has been making a dash for more with the acquisition of three small firms supplying thin-film application machines. This not only captures an extra turnover on must-have equipment but also offers an eye on the actual ways clients are using protective films. Providing extra insight into consumption will permit Protective Films to expand its service content, so far limited to delivery timeliness. This higher service component is a slow build-up process but creates the conditions for improved client stickiness and securing lasting high margins.

The near-term earnings outlook for Protective Films is one when new capacity will come on stream, then ramped up and marketed as part of a holistic effort to raise the value proposition. This means EBIT margins gaining a few blips.

Where the upper limits stand for EBIT margins is rather hard to gauge as the business is concentrated on a small number of players but faces no serious barrier to entry for a chemical group willing to have a go. That has not really happened so far. Growth and subsequent margins are more determined by the flow of acquisitions aimed at locking market share here and there, and organic growth through innovation, quality and services.

We see the Ebit developing as follows:

Source: Company reports, AlphaValue estimates.

Fashion Technologies

Fashion Technologies is driven by the apparel market and its inclination for boom-bust economics. Recovering historic 5% peak margins looked an aggressive target. Well, 2016 reached 6.1%, only partly helped by the disposal of a loss-making Chinese operation, and 2017 managed 6.2% with flat sales (up 1.3% lfl) and 2018 shot through the roof to 9.2%, only partly helped by the booking over four months of the excellent margins at PCC.

The hunch that structural pressure due to competition from low-cost countries and fast-changing tastes could be dealt with a close collaboration with fast-fashion and strong-fashion brands proved correct. Designing the right type of high tech interlinings, helping clients, setting up capacity next to client plants and, above all, move into partnership/servicing type of business model has paid off. Indeed, clients need dependability and a high level of confidence in their suppliers due to their extra short turnaround times. So that beyond the fact that price competition is bound to remain, there is a case in believing that margins may be partly defended by the higher level of service that Fashion Technologies is cultivating.

2018 showed a pickup in recurring EBIT margin that does not look sustainable in the near term as the business integrates PCC and invests in moving further upmarket. However, the clear message is that margins should no longer see the volatility of the old “interlining” business.

Museum Solutions (ex-Technical Substrates)

In its fourth year as a separate operation, the previously named Technical Substrates’ business model has shifted with the integration of Leach. What was an industrial act – producing technical substrates in the right quality – has now moved onto a final product (image displayed on a box) but with new unexpected markets such as museums. The growth ambitions with €100m planned by 2021 presumably mean acquisitions and most likely changing business models so that our 16% EBIT margin is more a stab in the dark than a substantiated guess. The recent acquisition of US market leader D&P Incorporated sheds some light on the profitability of the business, expecting a c.10% recurrent operating margin, although potential synergies unlocked from Chargeurs’ roster of museum servicing companies may allow for improving margins in the mid-term.

Luxury Materials (ex. Wool)

The wool industry is a world apart to which the group is applying its recipes of raised mix and branding. Moving toward the luxury end of the market by acting as a quality guarantor certainly involves a shift in the business model where branding as a quality warranty is generating revenues independently from volumes changing hands. This will take time.

As a reminder market risks associated with the wool markets have been capped to the equity held (50% stakes worth about €11m as close 2018) in the wool-transforming associates with no additional commitment. The business thus no longer ties up any significant capital so that ROCEs are actually not bad at c.10%. The risks have fallen but significant growth will hinge on a combination of demand shifts in favour of natural fibres and the ability of the division to charge for its effort to structure the industry along quality obligations with the help of modern tracking technologies.

Change 20E/19 Change 21E/20E
  12/19A 12/20E 12/21E 12/22E €M of % total €M of % total
Total 41.4 40.9 74.7 86.1 -1 100% 34 100%
Protective Films 23.6 23.0 34.6 39.0 -1 120% 12 34%
PCC Fashion Technologies 17.5 14.3 18.0 19.5 -3 ns 4 11%
Museum Solutions (ex Technical Substrat... 2.80 8.32 12.1 14.6 6 ns 4 11%
Luxury Materials 2.70 2.00 2.70 3.00 -1 140% 1 2%
Other/cancellations -5.20 -6.80 7.30 10.0 -2 320% 14 42%
 
12/19A
12/20E
12/21E
12/22E
 
Total
6.61%
6.35% 8.43% 8.84%  
Protective Films
8.49%
8.81% 11.5% 12.0%  
PCC Fashion Technologies
8.31%
8.00% 9.00% 9.00%  
Museum Solutions (ex Technical Substrat...
7.51%
8.50% 10.5% 11.0%  
Luxury Materials
2.69%
2.22% 2.70% 3.00%  
       
Changes to Story : 17/04/2020, Changes to Forecasts : 17/04/2020.