Cofidur SA is a France based company that specializes in electronic sub-contracting services for sectors such as aviation technology and defense, multimedia and networks, transport, telecommunications and industry. The group’s activity is divided into a) equipping, assembling, and integrating electronic cards and b) design and manufacture of printed circuits. The company has been in business since the 1980s. Cofidur SA is listed in Paris (Alternext stock exchange) under the ticker ALCOF. Note that the company file their financial reports in French, so please be aware that there is a risk that I have misunderstood or overlooked something that might be of importance.
Background
ALCOF entered the Liquidation Oxymoron’s portfolio in November 2017 at an average price of 368 EUR. As I write this the shares are currently trading at a price of 286 EUR. Although the price has declined quite a bit I believe that the margin of safety has increased since I first entered the position. As will be evident below, ALCOF is a prime example of a Liquidation Oxymoron – a company that is worth more dead than alive (i.e. selling below liquidation value) although it’s are very much alive (i.e. it has solid going concern characteristics). Also, ALCOF has a few seeds of potential catalysts in place that could unlock current undervaluation.
Margin of safety
1) Selling below liquidation value?
ALCOF is a nano-cap (11 MEUR market capitalization) company with shares that are highly illiquid and overlooked. At current levels, ALCOF is trading near historical lows and selling at one of the cheapest price-to-liquidation multiples that I know of. At the current share price of 286 EUR, the company is selling at a 0,5x multiple in relation to its net current asset value (NCAV) of 22 MEUR. Of the total amount of net current asset about 22% consists of cash and cash equivalents. The rest consists of about equal amounts of inventory and accounts receivables. Historically the NCAV has been growing steadily (i.e. positive NCAV burn-rate) mainly as a result of decreasing total liabilities (see more about this decrease in the comments on criteria 3 below).
There are some PP&E on ALCOFs balance sheet (3,8 MEUR) but nothing major to take into consideration for the calculation of liquidation value. The price-to-net-tangible-assets multiple is currently 0,4x. However, one should know that ALCOF sold one of their four factories (Cherbourg) last year for a price of 3,6 MEUR. A price well above the value on the books back then. As they own another site in Montpellier it’s not to far fetched to think there could be some hidden value on the books for that site as well.
2) Proven business model?
When a company sells at such a low multiple in relation to its liquidation value one would expect that profitability has been and continues to be a big concern for the company. That is not the case here as ALCOF has recorded positive net earnings for the last eight years while simultaneously generating good amounts of free cash flow. Also, retained earnings currently amount to 22 MEUR. Furthermore, the level of profitability has been more than just fine as ALCOF have continuously posted net profit margins in the range of 2-4% and ROIC in the range of 10-16% during the time period mentioned.
3) Sound financial position?
During the last eight years, shareholder equity has increased from 13 MEUR to 26 MEUR while the company’s total debt has simultaneously decreased from 18 MEUR to 4 MEUR. In other words, the financial position has not only been improved tremendously but is currently at a level that in absolute terms is to be considered very financially sound. Debt-to-equity has decreased from 1,3x to 0,1x. Final, a key ratio that also demonstrates the financial soundness of ALCOF is the Altman Z-score which is currently at 3,2. According to the formula, with a Z-score > 3 ALCOF is in the “safe zone” as it relates to the risk of bankruptcy.
4) Responsible management?
Added on top of the capital allocation decision to aggressively pay down its debt positions, ALCOF has also paid a dividend to shareholders for each year during the last ten years. The current dividend yield is 2,8%. The company has also made some share repurchases historically (about 10% of the shares outstanding during the last ten years) and there is currently an active share repurchase plan (active until 24 November 2019) in place for another 10% of the shares outstanding. One should here note that the share repurchase plan has a price buyback limit set at 400 EUR. Although the current share price is 286 EUR and the company is sitting on a big pile of cash, ALCOF has yet used the current share repurchase plan. In sum, although I think it’s fair to state that ALCOF’s management has not historically maximized shareholder value I also think it’s fair to state that management have neither been fraudulent nor have they been unthoughtful in their historical operational and capital allocation decisions.
Other factors and characteristics
ALCOF is not only cheap from an asset valuation perspective (i.e. trading well below liquidation value) but from an earnings power valuation perspective as well. For example, the company is currently trading at a P/E of 3x. However, one should note that ALCOF is not a clear mean-reversion-candidate, as low valuations (both in relation to assets and earnings) has been a recurring theme for the company historically.
During the last year, insiders have been selling shares on the open market (last time was in February 2019). On that note, one should know that a company called EMS Finance owns +50% of ALCOF. The majority ownership can be dated back to 2009 when EMS Finance tried to buy ALCOF but failed. The CEO of ALCOF (Henri Tanduc) is also the CEO of EMS Finance. On the shareholder list of EMS Finance, we also find other insiders of ALCOF. Insiders that have been selling ALCOF shares on the open market. I have yet to figure out why they have been selling their personal shares on the open market. Also, I have not found anything that would indicate that EMS Finance has simultaneously increased or decreased their position in ALCOF. Insiders selling on the open market is obviously a concern with the ALCOF idea going forward. However, as long as EMS Finance don’t decrease their position I will try not to read too much into it.
Disclosure: The author is long Cofidur SA (EPA:ALCOF).
Liquidation Almanack 