Devoteam, Groupe Guillin: Two Well-Run, Small-Cap Bargains in France

Alejandro Estebaranz of True Value presented his in-depth theses on Devoteam (France: DVT) and Groupe Guillin (France: ALGIL) at European Investing Summit 2019.

Thesis summary:

Devoteam is one of the leading it services companies in France. They operate in high tech sectors like Cloud computing, cybersecurity, analytics and mobile. We expect them to grow organically more than 7% complemented with M&A. They don’t have any debt and management owns 20% of the company. The shares have been falling recently due to 3 factors. Number 1 is the tight labor market in France for IT engineers; we view this as a transitory problem until the sector attracts new talent. Number 2 they lowered the EBIT guidance for the year from 11% to 10% (caused by raising salaries which tend to be 70% of total costs ). And Number 3, the French small cap market is down 30% from the most recent peak in May 2018. This year we expect them to do 85m EBIT which turns out to be around 50m FCF, so the shares are inexpensive at 13x FCF and 7x EV/EBIT ). For the next 3 years until 2022 we expect them to grow up to more than 1B€ in revenues and more than 100m EBIT and 70m FCF. If we value the company like other European competitors like Cancom or S&T we arrive at a fair value of more than 160€ in 3 years ( today is trading at 75€ ).

Groupe Guillin is the leading European plastic company for the food industry. It is a very good niche to operate because it is very stable and they have built the best platform in Europe for this type of business. Packaging companies tend to be local monopolies due to transport costs, Groupe Guillin also has some cost advantage due to their scale in this market. It is family run business, they control 65% of the shares and they have created enormous value for the shareholders in the last 20 years. Insiders have buying shares recently. The shares are down from 42€ to 18€ for 3 reasons. First, plastics costs went up and they have long term contracts with annual revisions so this factor compress margins in the short term ( it has happened before in 2011 and 2007 ), once there’s a price revision margins tend to the historical average ( EBIT margins tend to fluctuate from 6% to 13% ). Second, the French small cap market is down 30% from the most recent peak in May 2018. Third, France introduced a new regulation in the plastic sector where they banned some items like plastic cutlery, straws, plates… ( but it is only 1% of their total revenues and only 37% of the revenue comes from France ), it is very difficult to replace Guillin’s product because there’s no organic substitute to pack fresh food. Even is depressed margin scenario we expect them to do 60m EBIT and 40M net income, shares are very cheap at 3,5x EV/EBITDA and 8x PER. We expect them to grow in the future like they did in the past consolidating their niche. Organic growth is low at 2-3% a year. It is a very stable business in recessions and it has no debt.

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About the instructor:

Alejandro Estebaranz has served as the co-investment advisor of the True Value fund (ISIN: ES0180792006) since its inception. True Value, based in Spain, is a long-only equity fund founded in 2014. It focuses on underfollowed small- and mid-cap public companies, seeking good businesses with good management teams. Prior to True Value, Alejandro worked as an analyst for private investment partnerships. He holds a degree in mechanical engineering and a degree in industrial engineering.