Business model at group level: WCR management
The industrial assets are essentially new as they are updated every year. In other words the company’s industrial tools are in excellent condition with more to come on the MAC front. Fixed assets are somewhat dominated by goodwill, itself a by-product of a steady flow of acquisitions (c. 85 in total). However SFPI does not tie up much in plant (25% of capital employed) and the essence of the business is really determined by the 50% or more of invested capital going to working capital.
Tying up resources in working capital reflects the need to maintain an in-depth relationship with and a high level of servicing to professionals in the building and security (locks) sectors. Building a high level of confidence is a time-consuming process which explains why the group’s management is careful about implementing any corporate simplification measures and why acquisitions are the default growth route as they come with all the untold subtleties of a commercial/distribution network.
Obviously protecting existing set-ups is a brake to “extracting” synergies that would please short-term investors but such synergies may end up being rapidly exhausted. That being said the ongoing restructuring of the MAC operating assets is an interesting shift and shows that the group is determined not to let friction costs develop.
The management’s own path to growth is a continuous building up effort through consistent acquisitions. It thus adds to the sum of SFPI’s market shares, step-by-step. This works but hinges on the ability of the top management to create the informal glue between businesses and their managers. Owing to post-pandemic caution, acquisition decisions were postponed in 2022 and 2023 is now reopen for business. For a cautious family-driven business, acquisitions were in any case too expensive within a context of easy money, something which is now behind us.
Free cash flows, while always positive, unsurprisingly tend to swing as a function of the working capital requirements. The low €3m computed for 2022 when WC surged followed a happy crop in both 2020 and 2021.
Additionally it must be stressed that R&D is fully expensed so the FCFs are the genuine thing.
2022 lessons
After the somewhat hectic 2020 and 2021 financial years, 2022 was a good surprise from the point of view of the top line but a disappointment on the margin front as the group faced higher input costs and expensed the first wave of the MAC restructuring. The big shift came from the sharp rise in working capital as SFPI, like its peers, could not afford to miss business to supply chain hiccups. This implied a sharp contraction of its net cash position which fell €50m to €25m (company definition).
