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From an industrialist to a luxury player?
Upside 101%
Price (€) 12.72
Market Cap (€M) 319
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 to leverage existing industrial assets to unlock new potential avenues for growth.

Looking at Chargeurs’ 2020 performance, we recognise the feat achieved by the group’s management, which was capable of turning 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 that Chargeurs exits a turbulent 2020 with a more solid financial standing, 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 an industrial group is primarily making a case about a management philosophy. Chargeurs’ is about keeping a firm hand on growth plans devised by imaginative younger 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 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 comes as the next step from the previous “Game Changers” plan that put a greater focus on strategic bolt-on acquisitions to enter new niches and pursue further diversification.

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

Protective Films

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. 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. 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.

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 through 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 to believe 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 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. With the integration of PCC being fully realised in 2019, the division saw another strong year, with profitability at a solid 8.5% in spite of 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. Due to the high exposure to the fashion sector, hit hard by lockdown restrictions 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 tensions 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 transition year, with a material recovery arriving by 2022.

Museum Solutions (ex-Technical Substrates)

In its fourth year as a separate operation, the previously named Technical Substrates’ business model shifted first with the integration of Leach. What was an industrial act – producing technical substrates in the right quality – moved onto 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 grouped Leach and the company’s subsequent additions (Design MP, MET Studio) to be later turned into a fully-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.8.9% 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 met 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 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. 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.

Healthcare Solutions

Chargeurs’ newest division is no less than a feat achieved by the group’s management, which was capable of turning an adverse context into an opportunity to create a novel business line that will now stand as the fifth pillar behind the group’s newfound organic growth ambitions. While the commercial success of its line of PPE products was facilitated by the unprecedented sanitary 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 of 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.

For 2021 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 efforts. With the available offer, pricing should also normalise which should gradually lead to a lower, but more sustainable, recurring operating income margin of 18.5% by 2022 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.€100m in revenues by 2023.

Change 23E/22 Change 24E/23E
  12/22A 12/23E 12/24E 12/25E €M of % total €M of % total
Total 45.4 47.9 65.8 90.8 3 100% 18 100%
Advanced Materials (ex Protective Films) 22.8 22.4 28.8 39.1 0 -16% 6 36%
PCC Fashion Technologies 17.0 16.6 21.2 24.9 0 -16% 5 26%
Personal Care (ex Healthcare Solutions) 4.30 2.24 2.24 2.24 -2 -82% 0 0%
Museum Solutions (ex Technical Substrat... 5.20 10.1 15.4 24.3 5 196% 5 30%
Luxury Fibers (ex Luxury Materials) 2.00 2.36 3.30 4.07 0 14% 1 5%
Personal Goods 0.30 0.44 1.12 2.39 0 6% 1 4%
Other/cancellations -6.20 -6.20 -6.20 -6.20 0 0% 0 0%
6.08% 7.55% 9.45%  
Advanced Materials (ex Protective Films)
7.00% 8.50% 11.0%  
PCC Fashion Technologies
7.00% 8.50% 9.50%  
Personal Care (ex Healthcare Solutions)
35.0% 35.0% 35.0%  
Museum Solutions (ex Technical Substrat...
8.00% 9.50% 12.0%  
Luxury Fibers (ex Luxury Materials)
2.60% 3.30% 3.70%  
Personal Goods
5.50% 7.00% 10.0%  
Changes to Story : 26/05/2023, Changes to Forecasts : 26/05/2023.