Tuesday, February 26, 2019

B&S Group intrinsic value

Assumption: This year's earinings 2019 will be significantly higher than 2018 due to full year of Fragancenet.com sales, fewer problems (2018 new DC opening was a nightmare), less currency headwind. EPS of 1 EUR?

SECTOR:  [PASS]   B&S is in the wholesale/retail sector. Technology and financial stocks were considered too risky to invest in when this methodology was published. At that time they were not the driving force of the market as they are today. 

SALES: [PASS] The investor must select companies of "adequate size". This includes companies with annual sales greater than €260 million. B&S's sales of €1 746 million, based on 2018 sales, pass this test.

CURRENT RATIO:  [FAIL] The current ratio must be greater than or equal to 2. Companies that meet this criterion are typically financially secure and defensive. B&S's current ratio €640m/€431m of 1.5 fails  this test.

LONG-TERM DEBT IN RELATION TO NET CURRENT ASSETS: [PASS] For industrial companies, long-term debt must not exceed net current assets (current assets minus current liabilities). Companies that do not meet this criterion lack the financial stability that this methodology likes to see. The long-term debt for B&S is €92 million, while the net current assets are €209 million. B&S passes this test easily.

LONG-TERM EPS GROWTH: [PASS] Companies must increase their EPS by at least 30% over a ten-year period and EPS must not have been negative for any year within the last 5 years. Companies with this type of growth tend to be financially secure and have proven themselves over time. B&S's earnings have increased by 300% ? over the past ten years.

Earnings Yield: [PASS] The Earnings/Price (inverse P/E) %, based on the lesser of the current Earnings Yield or the Yield using average earnings over the last 3 fiscal years, must be "acceptable", which this methodology states is greater than 6,5%. Stocks with higher earnings yields are more defensive by nature. B&S's E/P of 7,7% (using this years adjusted Earnings of €0,9) passes this test.

Graham Number value: [FAIL] The Price/Book ratio must also be reasonable. That is the Graham number value must be greater than the market price. B&S has a Graham number of (15 x €0,9 EPS x 1,5 x €2,8 Book Value) = €7,7  (See book value discussion below in notes) 

Dividend: €0,29/€12 = 2,4% and is 40% of profit.

Conclusion 2019: B&S has a strong balance sheet, longterm management and is growing. Seems like a good pick for the Defensive Investor at a price of around €12

Return on Capital Employed: 27%

Rough notes August 2018 @EUR 16.

"Distribution of consumer goods" based on taxfree imperium, parallel/grey import, etc.

B&S Group is an interesting holding of 3 companies with a central back office. The Annual Report is worthwhile reading: https://www.bs-group-sa.com/investors/
The founder Willem Blijdorp is a cowboy and understands how he makes money and doesn't mind explaining it. He still owns 51% of the shares after the IPO. No kids? The CEO since 2004 Bert Meulman has an HR focus on his own team, promote from within, longterm loyalty, slightly resembles Fastenal?

84 million shares, 30% sold in the IPO at EUR 14,50 a share, the price dipped to around EUR 13 and is now at EUR 16. Missed the IPO because of two other more "sexy" companies IPO-ing in the same week.

Earnings EUR 1 per share? x 15 = EUR 15, but business is going well, earnings are increasing and profits can be re-invested in robot DCs and improved software. Also expansion to other countries, airports.

Book value: 242m equity / 84m shares = EUR 2,88 book value per share (but high return on equity)

Current Assets EUR 500m / Current liabilities EUR 293 = 1,7 = good

Long-term debt only 28m compared to Net Current Assets = 500-293 = EUR 210m

Sales: EUR 1 500m focus on Gross Profit EUR (but now GM% focus due to financial advisors? Not a good sign)

Compounder checklist: Chuck Akre 3 legged chair

1. Great business; Check great understanding of what they are doing, >30% ROCE

2. Great management: Check, shareholder friendly?

3. Ability to re-invest profit: Check

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