Cofidur - Trading at a significant account to hard assets

Large real estate values not reflected on the balance sheet

Cofidur (ALCOF), established in the 1970s, is a French contract manufacturer of electronic components, such as circuit boards and product integration, active within the segments of "Industrial & Professional" (58%, 2022), "Aeronautics, Rail and Military" (23%), "Lighting" (14%), and "Telecom" (5%). The company has about 400 employees.

ALCOF released a "trading update" on February 2. Over the last three years, revenue has developed as follows: €52m (2021), €56m (2022), and €74m (2023) with a gross margin of 38%, 35%, and 37%, respectively. This year's growth (32%) is primarily explained by the development of new markets driven by the AMBITION 2025 project and improved availability of components. The 2023 result is positive but was affected by increased production costs. The 2023 report will be released in April.

The last complete report was as of June 30, 2023. A simplified balance sheet then consisted of PPE €3m, NWC €34m, and net cash €4m. This is financed with tangible equity of €26m and €15m in "other". The latter is a net item that includes on the asset side €10.5m (€5m per FY22) in "Other receivables and regularization accounts" (mainly advances and taxes) and on the liability side €24.1m (€10m FY22) in "Other debts and regularization accounts" (mainly advances and "social debt").

The stock is priced at €340, with a market value of €13m, EV €9m, and P/TB 0.51. The sum of the parts could be worth €750-1100/share. A margin of safety could advantageously be applied to adjust assumptions for each part.

- Properties €395/share. PPE was about €3.3m in June 2023, of which buildings and land €0.1m. In 2020, ALCOF utilized the option to buy back (sale-and-leaseback with "rent-to-own" arrangement since 2010) the properties in Laval (30,000 sqm) and Périgueux (5,000 sqm) for €1 per facility. The building in Laval is 30,000 sqm. The property in Perigueux looks a bit “tired”, but the property in Laval is modern, well-located, and has a significant amount of land. At a rent of €40/sqm, we get €1.2m per year and leaseback-basis market rent a value of about €15m (€500/sqm) or €395/share. Lowering assumptions for yield, rent/sqm results in a value of €10m, giving about €250/share.

- Operations €395/share. The business could be worth €15m (in the right hands) which corresponds to an EV/S of about 0.20x, 0.8x NWC-other, and 5x EBIT if EBIT is 4% (including rent of €1.2m). Based on ttm figures as of June 2023, EBIT was 3.4%, but only 1.5% if we add rental costs. Therefore, to leverage the value of the operations, a margin expansion is required. Within the french market 2-3% EBIT seems to be the average. But it should be mentioned that there are several Scandinavian and European players with significantly higher margins than that. The strategy is growth (development of existing customers and new customers in new markets), communication (develop brand), digital conquest (Industry 4.0, modernize machinery, digitize processes), and human capital (identify and develop skills).

- Net cash €107/share. Since 2021, net cash has decreased from €12m (€313/share) to €4m (€107/share). This is explained by €1.75m in dividends (€45/share), capex, but mainly because NWC has increased from €17m to €34m. As of June 2023 (BS figures), the ttm revenue was €65m, which gives NWC/sales 0.51x. If 2021 levels, NWC/sales 0.32x, are the run-rate, then NWC (FY23 sales) could decrease to €24m – which could release €10m (€256/share) without necessarily decreasing the value of the operations per se.

The largest shareholders are DM Development (management) with 49.8% of the shares (50.4% including own shares), followed by Peter Gyllenhammar AB with 14.5% and the Raboutet family with 7.5%. Low to non-existent IR and, or as a result of, unclear agenda from majority owners is our best guess as to why the price does not reflect the value. One reason for the scant information provided could be that the company has a certain "classified" operations with military customers.

We think that DMD should buy out ALCOF from the stock market or let the group be acquired by a larger player. Positively, in an "as is" scenario, the dividend should be decent moving forward since the major owner DMD likely has a significant amount of debt that needs to be paid off/down (see below). This should also be a motivation to drive operational improvement.

The ownership situation

In 2021, we could start to see that something was underway. The repair business in Cherbourg was sold to Cordon Electronics in 2018 for €11m (book profit €3m). In 2019, the facility in Montpellier (2,000 sqm) was shut down, and in 2020, the properties in Laval and Périgueux were "bought out". The group's strong man, Henri Tranduc (71), CEO of Cofidur and president of EMS Finance, then left his position in April 2020. An unorthodox proposal was submitted to the meeting to remove 2x voting strength on the shares. With this, one could speculate about preparation to sell the ownership block, or to make repurchases, without triggering a bidding obligation. Indeed, in July 2021, EMS Finance's share of 49.5% of the shares was sold to Dordogne Mayenne Development (DMD), which is 100% owned by Cofidur EMS operational management (seven people). At the time, the stock was at €350, the market value was €14m, and EV -€1m. We do not know at what price the shares actually changed hands.

A "generational shift" has thus occurred. The company's key personnel are now Laurent Dupoiron (President and MD, 62 years), Charlotte Path (CFO, 44 years). The BOD is elected for five-year terms, and both of the aforementioned individuals, as well as all in the board, sit until the AGM 2026 except for Daniel Thuvin (75 years, sits until AGM 2025). Likely, the individuals behind DMD intend to ride this structure "into retirement".

To finance the acquisition, DMD likely borrowed from banks and / or with promissory notes towards the previous owners. At the meeting in May 2022, a dividend of €30/share was proposed and approved, likely to repay parts of the financing. ALCOF has 38,675 outstanding shares, and DMD owns 19,272 shares, meaning that €578k went up to DMD.

As of June 30, 2023, DMD owned 49.83% of the shares, and the company owned 231 of its own shares (0.6%), which means that DMD has 50.4% of the shares. ALCOF had an 18-month mandate to repurchase 10% of the shares until November 17, 2023, and at most €450 per share. Additionally, there is a 38-month mandate to issue shares or purchase options for 10% of shares (until July 2025), as well as to offer "free shares" in the form of incentive programs or similar (until July 2025).