AlphaValue Corporate Services Fundamental Analysis FR
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Chargeurs

CR
Bloomberg   CRI FP
Holding Companies  /  France  Web Site   |   Investors Relation
2025 objectives raise organic growth ambitions
Target
Upside 31.6%
Price (€) 26.42
Market Cap (€M) 643
Money Making

Year after year, the Chargeurs mantra of doing better through staff training, premiumisation and branding appears to be paying off. In addition to quick-witted management enabling the leverage of existing industrial assets to unlock new potential avenues for growth.

Looking at Chargeurs’ 2020 performance, we acknowledge the feat pulled off by the management, which managed to turn an adverse context into an opportunity to create a novel business line that now stands as the fifth pillar behind the group’s new-found organic growth ambitions, as it turns the page from the previous Game Changers strategic plan. It is also an accomplishment for Chargeurs to have exited a turbulent 2020 in a more solid financial position while funding two tactical acquisitions adding the final flourish to complete the group’s “one-stop-shop” Museum Solutions division.

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 since 2016. This will be tested further by the ambitions set out in the Leap Forward 2025 strategic plan, targeting €1.5bn in revenues and €150m in recurring operating profit through a combination of nurtured and acquired growth. This is the next step following on from the previous “Game Changers” plan which put a greater focus on strategic bolt-on acquisitions to enter new niches and pursue further diversification.

The idiosyncrasies of the five 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 incremental turnover on must-have equipment but also offers an insight into the ways in which clients are using protective films. Providing extra insight into consumption will permit Protective Films to expand its service content. This higher service component is a slow build-up process but creates the conditions for improved client stickiness and securing lasting high margins.

Where the upper limits stand for EBIT margins is rather hard to gauge as the business is a mixture of an oligopoly and no serious barrier to entry for a chemical group willing to have a go. To date this has not really happened. Growth and subsequent margins are more determined by the flow of acquisitions aimed at locking market share here and there.

We see the Ebit developing as follows:

Source: Company reports, AlphaValue estimates.

Fashion Technologies

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

Since the division is driven by the apparel market and its tendency towards boom-bust economics, recovering historic 5% peak margins had looked to be an aggressive target. 2016 confounded non-believers by posting 6.1%, only partly helped by the disposal of a loss-making Chinese operation, 2017 managed 6.2% with only flat sales (up 1.3% lfl) and 2018 shot the lights out with 9.2%, only partly helped by the booking over 4 months of the excellent margins at PCC. With the full integration of PCC in 2019, the division posted another strong year, with profitability at a solid 8.5% despite increased opex related to the premiumisation strategy.

This positive momentum was brought to a halt in 2020 due to the effects of the Covid-19 pandemic. Owing to the high exposure to the fashion sector, which was hard hit by lockdowns worldwide, CFT-PCC saw its revenues shrink by 35.3% lfl to €132m, with margins falling to 3.9%, although the performance towards the end of the year showed improving conditions in some key end markets. These strains should ease over the course of 2021, particularly in Western markets, which are progressively lifting restrictions as vaccination efforts advance. Nonetheless, we expect 2021 to be a transitional year (5.6% recurring operating margin), with a material recovery in 2022.

Museum Solutions (ex-Technical Substrates)

In its fourth year as a separate operation, the previously-named Technical Substrates’ business model first shifted with the integration of Leach. From an industrial act – producing technical substrates in the right quality – the focus shifted to a final product (image displayed on a box) but with new unexpected markets such as museums. This niche market later became the key focus for the division, driven at first by the creation of Chargeurs Creative Collection, a banner that had grouped Leach and the company’s subsequent additions (Design MP, MET Studio) and which subsequently become a full-fledged solution in museum servicing with the addition of Hypsos and D&P in 2020.

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. We expect the company to reach a c.8.0% recurring operating margin by 2022, supported by a healthy order book, as cultural spaces flourish in regions like the Middle East and Asia, and extensive renovations take place in the US, offsetting the momentary hitches encountered in 2020 due to the pandemic.

Luxury Materials (ex. Wool)

The wool industry is a world apart to which the group is applying its recipes of enhanced 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 wherein branding as a quality warranty generates revenues independently from volumes changing hands. This will take time.

Note that the market risks associated with the wool markets have been capped at 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. The risks have been reduced 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.

Healthcare Solutions

Chargeurs’ newest division is no less than a major feat by the group’s management, which managed to turn an adverse context into an opportunity to create a novel business line that will now stand as the fourth pillar behind the group’s newfound organic growth ambitions. While the commercial success of its line of PPE products was facilitated by the unprecedented public health context, the fact that management was able to draw significant cash generation (recurring EBIT of €63.5m in 2020) out of existing assets should be applauded. Moreover, the division was built up with a minimal need for capital employed, as the latter remained basically stable compared to the group’s 2019 level.

Already expanding the scope and niches of this novel division, CHS has entered into the “wellness” space with the acquisition of the French-based hairbrush company, Fournival Altesse. While small in scale, this acquisition shows promise as management enhances the group’s diversification efforts.

We expect revenues to decline to a normalised level of c.€115m in FY21-22 as the demand for PPE tapers off with no ‘shortage scenarios’ in sight with the pandemic being brought under control by the global vaccination roll-out. With the available offer, pricing should also normalise. leading to a lower recurring operating income margin of 12.7% compared to 20.9% in 2020. CHS is still a remarkable asset that has helped the group leapfrog its diversification ambitions; organic expansion and potential acquisitions in the “Wellness” space should help the division reach c.€133m in revenues by 2023, with a strong 13.7% recurring operating margin.

Change 21E/20 Change 22E/21E
  12/20A 12/21E 12/22E 12/23E €M of % total €M of % total
Total 79.3 47.8 59.2 69.4 -32 100% 11 100%
Protective Films 17.0 25.0 28.9 34.6 8 -25% 4 34%
PCC Fashion Technologies 5.10 5.17 10.2 15.1 0 0% 5 44%
Museum Solutions (ex Technical Substrat... 1.90 5.41 6.72 8.39 4 -11% 1 11%
Luxury Materials -2.30 1.00 1.62 2.37 3 -10% 1 5%
Healthcare Solutions 63.5 19.0 17.0 14.1 -45 141% -2 -18%
Other/cancellations -5.90 -7.73 -5.20 -5.10 -2 6% 3 22%
 
12/20A
12/21E
12/22E
12/23E
 
Total
9.65%
6.78% 7.70% 8.27%  
Protective Films
6.29%
7.54% 8.50% 9.90%  
PCC Fashion Technologies
3.87%
3.70% 6.10% 7.70%  
Museum Solutions (ex Technical Substrat...
3.68%
8.74% 8.90% 9.10%  
Luxury Materials
-3.56%
1.25% 1.90% 2.60%  
Healthcare Solutions
20.9%
20.6% 16.9% 12.8%  
       
Changes to Story : 13/09/2021, Changes to Forecasts : 13/09/2021.